Energy Costs + U.S. Housing Market = Trouble

Soaring energy prices have — literally — started to hit home.

It wasn’t always the case in the past, but crude-oil and gasoline prices, along with higher financing costs of Florida home loans and decreased home price affordability have pushed the state’s housing market into a palpable decline. And, according to Bloomberg Media columnist John Wasik, the worst may be yet to come.

With crude-oil prices leaping past $77 a barrel, a conflict escalating in Lebanon, domestic supply concerns exacerbated by constant hurricane threats, a sabotage of the Nigerian pipeline and a civil war in Iraq, an end to global energy anxiety doesn’t seem anywhere in sight. Will a substantial decline of the housing market follow?

Rising fuel costs often translate into higher Florida home loan rates as the Federal Reserve raises short-term rates to squelch inflation. Already approaching rocky levels, the market is imperiled by gasoline prices that have risen 6.3 percent in the producer price index last month alone.

As energy prices spook consumers, Federal Reserve Chairman Ben Bernanke has noted how higher household spending on gas is slowing the overall economy.

“One likely source of this deceleration was higher energy prices, which have adversely affected the purchasing power of households and weighed on consumer attitudes,” Bernanke said to Congress on July 20.

The triple whammy of higher energy and financing expenses combined with a six-month inventory of unsold homes has thrown the U.S. home market for a loop. U.S. home builders‘ confidence, as surveyed by the National Association of Home Builders, hit a 14-year low last week, while housing starts fell 5.3 percent in June.

But at what point do rising energy prices start to directly depress home sales? An analysis going back to late 2004 shows a modest trend developing.

THE BREAKING POINT

Comparing the price unleaded regular gas, via AAA, and the prices of pre-existing single-family homes, makes for an interesting comparison. This index, provided by the National Association of Realtors, covers 85 percent of all U.S. home sales.

When gas prices surge, home sales dip.

This trend surfaced in September of last year. You could see the inverse again when gas prices rose from November 2005 through January of this year. As gas prices dropped slightly from January through February, home sales perked up. Then, a jump in fuel costs from February through April correlated with another housing decline.

Those who are furthest from their jobs are most vulnerable to energy-cost run-ups. As home prices rose in the frothiest areas, home buyers have done two things to battle back against declining housing affordability:

• They financed with risky, interest-only loans
• They moved farther out from big cities, where prices are lower.

THE MOST AFFECTED AREAS

It’s not unusual for commuters to drive more than 60 miles one-way in areas such as SoCal or New York City. This has happened where houses are already priced well above the national average. Four-hour commutes are no longer all that unusual around several large cities.

If gasoline remains at $3 a gallon or climbs even higher, it will certainly make properties less attractive for those commuting from outlying counties into Los Angeles, San Diego and Silicon Valley, or those driving all the way from southern New Jersey into New York.

It’s also possible that you’ll see pronounced buyer reluctance in the far-flung collar counties in the Florida housing market, and that the Orlando, Tampa and Miami-Fort Lauderdale prices that have soared so high will come down a significant ways. Same with Atlanta, San Francisco and Denver.

THE BIG PICTURE

With a few notable exceptions, the vast American automotive industry has made few strides in improving fuel consumption.

The average 2006-model car achieves 21 miles per gallon, while many SUVs favored in suburbia get less than half that, according to the Environmental Protection Agency. When you consider 21 miles was roughly the average per- gallon rate in 1982, this is pathetic. Especially when you consider that this year’s models are the heaviest and most powerful on record.

But rather than pointing fingers at soccer moms, more ire is to be directed toward Congress, which has failed to mandate and enforce improved vehicle-efficiency standards, even as fuel efficiency is brilliantly manufactured and marketed by Japanese automakers with their hybrid gas-electric engines and by Europeans with their cleaner diesel. Now is the time for tougher U.S. laws on engine efficiency.

THE WILD CARD

It’s also costing more to own a home if you don’t have a fixed-rate, and are therefore playing the increasingly stressed bond market through your Florida home loan.

Homeowners with the shortest-term, adjustable-rate loans are on the edge. One in three respondents in a recent survey by the Realtors association said that rising monthly payments — especially property taxes and energy costs — will force them to sell their home and buy a less expensive one.

The interest rate on one-year adjustable loans has risen 2 percentage points in the past two years, climbing from a low of 3.41 percent in March 2004. The average 30-year mortgage rate has jumped 1.4 percentage points since bottoming out at 5.23 percent more than three years ago, some of the lowest rates in a generation.

Even with rates rising, home prices have seemed to defy gravity in the past two years. Now, rising Florida home loan costs and mounting energy concerns are unwelcome residents under the same roof. The fallout could be wide-ranging. Something’s gotta give.