Illinois Mortgage Rates and News

Oil prices are up to record highs. Last week the price went as high as $135 per barrel, and I’ve seen predictions that it will be $150 or even $200 per barrel by the end of the year. We’ve all seen how this spike in prices has affected gas prices at the pump. Yesterday I filled up at $4.20 per gallon, about $15 a tank higher than what I’ve gotten used to paying (which already seemed too high). Depending on how much you drive, this extra cost is taking a nice sized bite out of your disposable income. Add that to the effect of higher gas prices on the economy as a whole, everything that needs transportation (both goods and people) now costs more, as does anything which is made with oil (fertilizer, plastics and so on). This means that prices in general are going up. So the question of the day is how does this affect our housing market here in Chicago and throughout the Chicago area?

The people who are feeling this the most are the people who have the longest drives to work. Over the last years the Chicago suburbs have spread out further and further. New roads have opened up and areas that used to be farm land, like Plainfield, Oswego and Huntley, are now booming suburbs. On the good side you can buy a lot more house for your money in these areas. The bad side is long commutes and now, with higher gas prices, much higher transportation costs. The growth in these areas has already slowed down because of the soft housing market. Will the high gas prices slow development in the far suburbs long term? Maybe. But only if gas prices stay high.

Part of the increase in oil prices is speculative. When ever a market starts moving in one direction, speculators jump on for the ride, magnifying the move. High speculation can lead to a bubble, and when the bubble pops prices fall. With the economy slowing down the natural effect of higher prices will lower demand. Also, the high prices will lead to more oil production, maybe in areas which were cost prohibitive before, but will now make sense with the higher price per barrel. So over time the supply will increase. After the Iranian revolution in 79 and through the early 80s the price of oil surged to record highs, and then dropped back down to the same level it was at before. It could be different this time though. India and China are growing and using more oil and some think we are nearing peak oil, which means the oil that is left will be harder to get to and harder to get out of the ground. These trends point to higher prices long term.

So if oil prices do stay high, how will this affect the real estate market? The conventional wisdom says -

• Demand will be higher for houses in the city and close to public transportation.
• Energy efficient housing will go main stream and there will probably be more tax breaks.
• Interest rate may move higher long term, as higher fuel prices feed inflation.
• Suburban sprawl will slow down over the long term.

I think these are all accurate predictions – if oil keeps going higher – but if history is a guide, I think it will be a while before we see any of these predictions come off in a major way. Oil prices were around $90 per barrel at the beginning of the year, so we have had almost a 50% increase since then. The question is whether the prices will continue to climb and, how far will they go. My guess is that we will have higher gas prices long-term, but there are reasons to think that prices will come down some first, and that we will get used to higher prices.

• The economy is slowing down and with consumers having less money in their pockets, or feeling like they have less money in their pockets, demand for energy will naturally slow down.
• People are driving less because of the high cost of gas. Travel was down considerably over the Memorial Day weekend.
• People will not only change their driving habits, they will also change what they drive. SUV sales have been circling the drain all year, and Hybrid sales have gone through the roof.
• Over time people get used to higher prices, and it will take a big increase before people change their habits for good.
• A lot of the increase in oil prices is due to speculation, and what goes up fast will often come down just as fast.

So my opinion is that oil prices will make people feel poorer for a while, but I don’t think they will make a huge difference in their home buying decisions. At least not for a while. I do think the far suburbs are going to take longer to recover, and high gas prices are part of that, but over building and high commuting times are bigger factors.

Illinois Mortgage Rates and News