Housing Recovery Complicated By Oil Prices

The high price of oil has brought many negative views into the U.S. outlook. One consequence being more double dippings in housing on the table.

January’s home sale perfomance fluxuated as purchases of existing homes saw a surprising gain of 2.7% up to 5.36 million while sales of new homes plummeted 12.6% to just 284,000. Both sections were at historic lows that are being kept down by the high unemployment rate, strict mortgage standards and the unctertainty of future trends in home prices. That being said, housing in 2011 was supposed to benefit, if only diminutively, from the U.S. recovery that has seen traction being gained and from government policy remaining very accomodating.

Although housing wasn’t anticipating a surge in 2011, there was also not expectation for this large of a drag on growth, that is along the lines of the past 3 years. Household formations should increase as the national unemployment rate continutes to drop. Affordability should also benefit from the Federal Reserve’s focus on keeping mortgage rates low.

The outlook has changed in response to the rise in oil prices that correspond with the protests in the Middle East. All of a sudden businesses and consumers are uncertain where their energy bills are going, but if the trend continues we can only surmise that going up will stay the norm.

Higher bills for fuel have made this Winter even more harsh for many homes. The Energy Information Administration has estimated that the average household in the Northeast, which has been wracked with storm after storm this year, will spend $2,431 on heating oil along this Winter which is an increase of nearly 24% from last year’s total. The rise in price is also affecting many airlines and chemical making businesses.

Most economics believe the rise in fuel costs will slow output growth rather than boost inflation. These thoughts are based on higher energy costs leave less money available to be spent on other goods. Given the slack in labor markets and capacity, higher fuel costs won’t translate much into wages rising or prices that would, consequently, push up core inflation.

The oil-related drag on output, however, means fewer jobs. And faster job growth was a key support for housing in 2011. Every $10 rise in oil prices, if sustained, subtracts a one-half percentage point from gross domestic product growth. Every 1% increase in GDP translates into about one million new jobs. So, if oil prices don’t reverse, the drag on GDP growth could mean 500,000 fewer new jobs created over the course of 2011.

Of course, fewer jobs mean fewer new workers going out on their own. Household formation is the main determinant of housing demand. Curb formation and you curb home sales. That is why the housing outlook looks more precarious than it did just a few weeks ago.