Gas prices around the country have been steadily increasing and the probability of $5.00 per gallon is a real possibility. Is it a big deal? Some people think so.
According to HUD, people still want to buy homes, particularly the “Y Generation” (those ages 18 to 35). But this group has seen the most precipitous drop in home ownership.
First, these people often enter the work force at a lower pay scale, and this may lead them to believe that higher gas prices will make home ownership prohibitive. Second, they may not look for homes farther away from their jobs (like the suburbs) where they may find lower purchase prices, and third the higher cost of gas may make it too difficult to save up for the down payment and closing costs.
According to Answers.com the average person drives 12,000 miles per year. If your car gets 20 miles per gallon, and you’re paying $2.50 per gallon, that’s a cost of $1,500 per year or $125 per month. But at $5.00 per gallon that’s $250 per month, or $125 more. To help put this in perspective, the cost of gas at $2.50 per gallon is the equivalent of a 10% pay-cut to someone working full time at $8.00 per hour.
CNN Money says that the median down-payment has been rising and is now close to 15%. So, in addition to the larger down payment, the increased cost of gas will certainly be problematic.
So are higher gas prices affecting real estate?
The increased cost of living along with rising down payments is making homeownership seem less attainable – perceived or otherwise. Along with tighter credit, the nation's homeownership rate fell to 66% in the fourth quarter of 2011, continuing a seven-year drop from a fourth-quarter peak of 69.2% in 2004.
While homeownership drops, more people rent. Almost 34% of occupied homes in the fourth quarter 2011 were rented, according to Census data. That's up slightly from the same quarter a year earlier.
Meanwhile, landlords across the country are boosting rents while rental units continue to fill up. And economists say that higher rents are expected as more people rent.
Gas prices are certainly affecting the real estate market in more ways than one. While we see increasing rents and a higher cost of living, the fact is that more and more people are moving into rentals. If you’re a real estate investor, or you’ve been waiting to get into the market with your first investment property, than higher gas prices may be another reason for you to add real estate to your portfolio this year.
[AUTHOR'S NOTE: I happen to be a little biased towards higher gas prices since I manage an oil & gas investment fund for qualified investors. Feel free to request information if you’re thinking about diversifying your investment portfolio beyond investment real estate.]