When it comes to oil and the future of the housing market, it’s a slippery situation that’s only getting slicker as supply chain issues and Russia’s invasion of Ukraine drive prices higher.
The direct effect on the market will depend on how high prices go and for how long. We do know the general direction of travel—in the last quarter of 2021, crude oil reached a near-decade high.
It only went higher from there, reaching $123.20 in early March for a barrel of West Texas Intermediate and hovering above the $100 range since. That’s double the trading cost in August.
Higher oil prices can affect already elevated construction costs at a time when the Producer Price Index for construction materials is 28% higher than last year.
The range of products impacted is wide—everything from toilet seats to select roofing and flooring depends on oil somewhere in the production process.
There are also indirect challenges to the housing market.
- The increase of monthly bills, such as gas and utilities, may cause some buyers to reevaluate their budgets. Add in higher mortgage costs, and buyers may be less willing (or able) to stretch the share of their monthly income to housing.
- Those who moved farther from their offices to work remotely may find themselves called back as the economy normalizes. A longer commute paired with higher gas prices could be bad news for suburban housing markets far from employment hubs or things to do.
Oil-Dependent Markets
There’s even uncertainty in oil country, where higher oil prices tend to be associated with booming economies. Lawrence Dean, Zonda’s senior vice president of advisory in Texas, said this time around the traditional boom has been a bit of a bust.
Oil companies are running extremely lean and aren’t rushing out to hire as they have in the past when prices started to climb. Rather than hire, they are asking their existing workers to double up their responsibilities as they wait to see where things go.
“Historically, between $60 and $90 [a barrel] is the sweet spot in terms of encouraging builds and starts,” he says. “Too low, and it suppresses demand. Too high, and it pushes costs and stretches affordability, also suppressing demand.”
Geopolitical Influence
It’s impossible to forecast where prices will settle, particularly when world events are so chaotic.
The United States imports only 10% of its oil from Russia, and that supply has been banned by President Joe Biden in response to Russia’s invasion of Ukraine. It will need to be replaced with oil from other jurisdictions such as Canada, Saudi Arabia, and Venezuela.
Meanwhile, China has imposed new restrictions on some of its busiest manufacturing districts to halt the spread of COVID-19, which could lead to a temporary lull in demand from a region that is a heavy importer.
Warning Lights
The one thing we do know is that higher oil prices increase the risk of recession both from the impact on consumer spending and the Federal Reserve’s efforts to curb higher prices through rate hikes.
Another ominous warning comes from the St. Louis Fed, which said in 2010 that “an average-sized shock to WTI oil prices increases the probability of recession in the U.S. by nearly 50 percentage points after one year and nearly 90 percentage points after two years."
There are no guarantees in any economy, but the downward pressures on housing are increasing. Supply chain issues are driving up construction costs. Workers are defecting to the highest bidder. Mortgage rates are inching higher.
Will oil tip the balance? Demand is holding up, but higher oil prices certainly puts the housing market on a more slippery slope.