Crashing Oil Prices Lead To Real Estate...

Editor’s Note: Dennis Fassett is a former corporate finance executive turned real estate investing “Cash Flow Mercenary.” Dennis specializes in single-family and multi-family cash flow properties and thoroughly enjoys assisting his fellow investors with their own strategies, including how to buy your first apartment building.

As an ongoing contributor to Mogul’s “Market News Updates,” Mr. Fassett provides us with his own unique, lively, and thought-provoking commentary on the timely industry news and events of today that are impacting our industry. And be sure to check out his other super-helpful Market News Updates. For now, enjoy...

From Dennis Fassett, Cash Flow Mercenary...

Since OPEC declared war on U.S. oil producers several months ago, I’ve been wondering about the impact that declining oil prices would have on real estate.

Well, we know that the almost 50% drop has yielded one clear benefit for homeowners and car owners, and that is lower bills and more money in our pockets.

One article I saw recently talked in some detail about how it’s impacting the real estate market.

He wrote that, from 1980 to present day, the year-over-year trends in oil prices, jobs, and home prices have consistently followed a pattern. In oil-producing markets, home prices tend to follow oil prices but with a lag.

I was more than a little surprised when the author went to the CEO of Trulia for an opinion, because in my opinion Trulia is probably worse that Zillow when it comes to knowing what’s really happening in the real estate market.

Shrinkage from Captain Obvious

Not surprisingly, the CEO’s opinion, while completely accurate and reasonable, was also overgeneralized and so completely obvious that it was completely useless. He said that Trulia found that "the effect of oil on the market depends on how much a region relies on the oil and gas industry for employment."

Gosh, really?

He also opined that:

"In areas where the industry is prevalent, a drop in oil prices can lead to a corresponding drop in home values. For example, Texas, Montana, and North Dakota are predominately oil- and gas-focused regions. If oil prices are declining, the need for employment also declines."

And that:

"In places like Texas, where much of the economy is based on the sale of oil, there has been a trickle-down effect from the recent record-low oil prices. This doesn’t just affect the big oil rigs — it also affects the companies selling the oil, attorneys, accountants, and so forth. Without this income going into all of these pockets, there is less money overall being spent in these regions, causing economic shrinkage."

See what I mean? Hell, my 8th grader knows this. Instinctively.

But if that wasn’t enough, he had more to say.

His newsflash – "In other areas, the opposite holds true."

He went on to say that:

"While home prices and oil prices move in the same direction in oil-producing markets, they tend to move in the opposite direction in other markets."

And that:

"Cheaper oil lowers the costs of driving, heating a home, and other activities, boosting local economies outside of oil-producing regions."

Brilliant analysis, right?

Bargain Hunting

The author of the piece did, however, tear himself away from Captain Obvious long enough to do dig into this a little deeper.

He wrote that:

"While the value of real estate in these areas is increasing, it's not increasing at a rapid rate."

And:

"The drop in oil prices has led to an overall slowdown in home price increases throughout the nation. Asking prices for real estate rose 9.5% in December of 2013, and the month-over-month increase in December of 2014 was down 0.5% after large gains in the three months prior."

According to analyst Ruth Mantell, this overall slowdown in price growth is due in part to an increasing inventory, as more people have listed their homes since the end of 2013. The annual price growth has not risen by 10% or higher since March of 2014.

And in areas with fewer oil and gas jobs, the main benefit of falling oil prices is the increase in household incomes. Trey Garrison, writer for House Wire, says this trend might spur a decrease in mortgage rates to make homeownership more affordable to more people.

We do know this trend won’t last forever, so how do we prepare for the next step? How will this affect you?

This, of course, depends on the part of the country in which you reside.

If you live in an area where you're benefiting from this decrease, prepare for a slight hiccup.

However, that also means now is a great time to buy. Since many indicators are saying oil is about to go back up, for those of you in Texas and North Dakota, it might just be the perfect time to go bargain hunting.