Oil prices and housing bubble
October 4, 2006 8:06 PM   Subscribe

The Specter of Recession in 2007. With the US housing bubble falling for the first time in over a decade, oil traders are dumping inventories (and driving down prices) in fear of a US-led global recession brought on by the end of the biggest housing bubble in history. Previous.
posted by stbalbach (40 comments total) 2 users marked this as a favorite
In other news...
posted by aburd at 8:12 PM on October 4, 2006

There is one person I talk to who -still- refuses to believe there is a bubble at all. He lives in Chicago, and just because his particular neighbourhood hasn't been showing any signs of price drops, then it must be not real.

That being said, he also drinks deeply of the Republic Kool-Aid, so I don't put much stock in his logical processes.
posted by Kickstart70 at 8:19 PM on October 4, 2006

Republican, that is.
posted by Kickstart70 at 8:19 PM on October 4, 2006

I still suspect the decline was somehow negotiated by the administration for the elections.
posted by gsteff at 8:20 PM on October 4, 2006

Oil prices go up, it's bad because peak oil is coming!

Oil prices go down, it's bad because a recession is coming!
posted by smackfu at 8:23 PM on October 4, 2006

Yes, that's all nice and good, but how can WE profit from it?
posted by furtive at 8:24 PM on October 4, 2006

How can we profit from it? Simple. Wait until the bubble crash is in it's second year and then start buying houses that have been sitting on the market forever. Make very low offers on lots of houses and see who takes them.

The secret to buying low and selling high is the buying low part. Most people want to buy when the price is high. Which is why the price is high in the first place.

Of course interest rates will be higher and you'll have to set on the property for a few years to make that money, but that's business.
posted by nyxxxx at 8:53 PM on October 4, 2006

Except that it's really not so.

Inventories shot up because of a discrepancy between the spot and futures price. Basically, you could buy oil at $70 on the spot market and turn around and get a $75 futures contract on it. You'd make a locked-in $5 a barrel (minus storage fees). Lots of institutional investors were dumping money into the oil market over the summer because of the guaranteed money (e.g. the people that run mutual funds). As storage filled up and the Israel-Hezbollah war let up, the spot price faced downward pressure, and the optimism about Israel and Iran helped push the future contract price below spot. The price drop increased as the Atlantic hurricane season turned out to not be anything like 2005.

Brent and Cushing spot prices aren't that much different from 50 weeks ago or so, around $58/barrel. Now, prices could plummet this winter with an El Nino setting up and a mild, dry season predicted for the West, but honestly, $40/barrel oil (or lower) would actually help the oil-dependent American economy. Think back to the 1980s when oil dropped as low as $9/barrel -- the American economy soared (at the expense of the oil-producing states).

All this to say that investors running from oil because of a housing bubble makes as much sense as cashing out on hog bellies because US Steel declared bankruptcy. I'm really starting to think that the housing "bubble" will be more like what happened to the post-9/11 DJIA -- stagnation -- than like the post-9/11 NASDAQ -- collapse.
posted by dw at 9:01 PM on October 4, 2006

How can we profit from it? Simple. Wait until the bubble crash is in it's second year and then start buying houses that have been sitting on the market forever.

The problem is that it's not easy to tell when "the bubble crash is in its second year." What does that mean? No price increases? Prices decline by 5%? 15% And what's so magical about the second year? What if prices continue to decline? You're certainly right that there are profit opportunities in a down market, but it's far from simple to determine exactly when those opportunities arise.
posted by brain_drain at 9:05 PM on October 4, 2006

Soft landing "No Longer In The Cards." Also, "Moody’s has this report. 'Housing prices, slumping after a five-year boom, are projected to decline in more than 100 of the nation’s metropolitan areas, with the Northeast, Florida and California among the areas hardest hit.' The forecast, ‘Housing at the Tipping Point,’ by Moody’s Economy.com, presents one of the starkest views yet of the housing [...]" (Both via.)
posted by salvia at 10:51 PM on October 4, 2006

There are still a lot of people in denail about the bubble. For example, one guy I know who still confidently claims he could sell a house now for more than it was purchased for back in March, despite the fact that there is an overall decline in prices in his neighborhood (both year over year and month to month for the last few months).

However, by this time next year, I doubt anyone will still be in denial.
posted by Potsy at 11:15 PM on October 4, 2006

Buttonwood in this week's Economist looks at the possibilities of a recession and how the Bond market indicates that there will be one.

And it has a cool quote:
“Ashes to ashes, dust to dust, if the Fed doesn't get you, then housing must.”
posted by sien at 11:59 PM on October 4, 2006

People have been predicting a property crash in the hugely overlued UK market since the early 2000s and it hasn't happened yet. I'm not saying it won't, although there are some factors here like supply side constraints which probably mitigate against it.

This site is always worth a read simply because so many of its contributors really, really, really want a crash. And despite their increasingly shrill polemics, it, err, hasn't happened. Still, you've got to admire the way that they seize on any piece of remotely bad news as a harbringer of property armageddon.
posted by rhymer at 3:38 AM on October 5, 2006

Cool beans. I'm looking forward to being able to purchase a home for pennies on the dollar. I'm happy I paid attention to the news about this issue.
posted by owenkun at 3:50 AM on October 5, 2006

No two ways about it, a housing price crash would be supper cool beans, especially in the UK. Me, I just hope the speculators who buy & rent for an investment fail to beat inflation for 10 years or so.
posted by jeffburdges at 4:59 AM on October 5, 2006

I like The Housing Bubble Blog for my housing bubble news. Much fun and hilarity.

Flippers and those who got "exotic" mortgages are in for some interesting times. ARM resets should also prove interesting.
posted by beth at 5:16 AM on October 5, 2006

gsteff, regrading Oil Prices in the run-up to the 2004 Election (Bob Woodward shilling State of Denial on 60-Minutes):
Prince Bandar enjoys easy access to the Oval Office. His family and the Bush family are close. And Woodward told 60 Minutes that Bandar has promised the president that Saudi Arabia will lower oil prices in the months before the election - to ensure the U.S. economy is strong on election day.

Woodward says that Bandar understood that economic conditions were key before a presidential election: “They’re [oil prices] high. And they could go down very quickly. That's the Saudi pledge. Certainly over the summer, or as we get closer to the election, they could increase production several million barrels a day and the price would drop significantly.”
Regarding the current drop in oil prices:
It turns out that this latest severe drop in the price of oil may be due to some phinagelry of Goldman-Sachs, as reported in Running on Empty by Rob Kirby:

What this means folks, is that hedge funds and institutional money that “TRACKS THE INDEX” were FORCED TO SELL 75% of their gasoline futures to conform with the reconstituted GSCI. And if anyone hasn’t noticed the timing of the price of the gasoline price collapse…just in time for November’s Mid Term Elections!

So don’t be fooled into believing that potential energy shortages have “magically been solved.” In all likelihood – much of the recent decline in the price of gasoline we have all “welcomed” has been the result of paper tricks being played on what amounts to a wealthy flock of sheep.

But in the meantime, filler up!"
The American people aren't wrong, they're just looking in the wrong direction. Corporate interests ARE effecting the election. They know that a Congress switching hands will be painfull. So in addition to hedging their bets, some "old money" is betting heavily on incumbents, while others throw money at challengers.

I suspect that the 42% of Americans who think the price of oil is cooked are simply learning that there is ALWAYS a reason for oil to go up or down, and if there's a reason, it can be manipulated.
posted by rzklkng at 5:22 AM on October 5, 2006

Can a mod trim my eggregious linebreaks?
posted by rzklkng at 5:23 AM on October 5, 2006

One thing to look for, with all of these ARM loans, is the amount of re-financing that is certain to go on right now. There is something like $500 billion worth of ARMs resetting in the second half of 2006 and into the first half of 2007 (sorry, no citation, but I've seen that figure several times).

The big question is this: will those people be able to re-finance and lock into a fixed rate, and if they are able to do this, will they be able to acquire a rate that is at least affordable?

For people with relatively small mortgages, if they were to refinance and lock into, say, a 5.85% or even 6% rate compared to the 4.75% or 5.25% they got on their ARMs, the pain may not be much (especially if they've been able to pay down some principal and avoid taking out large home-equity loans).

The big problem comes in with people who took out large home equity loans, interest only loans, or who have $1 million ARM mortgages.
posted by tgrundke at 5:28 AM on October 5, 2006

People have been predicting a property crash in the hugely overlued UK market since the early 2000s and it hasn't happened yet.

Here's what to look for. Prices increasing, inventory increasing. That's when you are topping.

The UK hasn't reached a top, because houses are still selling. When they stop selling, inventory increases. Prices keep increasing for a bit, because of pricing inertia, but if inventory is low and prices are high, that's supply and demand.

The problem in the US -- I don't know if this is an issue in the current UK market -- is a combination of...

1) Evil loans. There are way too many people out there who can only afford their current home in the best of times. Worse, there are way too many people out there who simply cannot, thus, they're not really buying a home, they're paying interest until they sell for profit.

We're already seeing ARMs starting to hurt people. My advice here is probably too late -- if you have an ARM and less than 20% equity in the house, you really need to sell *right now.* Exception -- you have enough other assets that you could concievably up your equity stake to 50%. If you can manage to refi into a fixed loan, go for it, but I'd be surprised if anyone will write the paper under those circumstances. A year ago, sure, but not now.

Smart cookies have already refi'd into fixed loans.

Very dumb cookies are running interest only loans on their primary residence. If you are one of them, you need to sell now. If you cannot, well, I don't know what you do.

2) Household debt -- in the US, it is way too high. This means that there's no slack room for interest rate hikes on ARMs.

If you can only afford to make minimum payments on your credit cards, you are already in too deep. The right answer is to sell your house (not get a second mortgage, sell) pay off the credit cards, and use the remaning money to rent until the bubble pops.

If you can't do this -- if selling the house and paying off the rest of the debt leaves you underwater, you are screwed. Why?

3) The new bankruptcy rules, which will make it far harder to escape debt.

The next recession is going to gut the middle class of this country. They're going to find themselves wiped out by housing and credit debt, and with no other recourse, they're going to find whatever retirment savings they have wiped out to service that debt.

It is going to be amazingly ugly.

Oil prices go up, it's bad because peak oil is coming!

Oil prices go down, it's bad because a recession is coming!

Oil prices went up on a combination of demand, the threat of another nasty hurricane season, and the Israel-Hizbullah war. The first hasn't changed. The second was moderated by El Niño, which historically has kept Gulf hurricanes to a minimum. The last was moderated by people getting a clue.

As long as everyone limits the shooting to Iraq, oil should stay around the $58/bbl mark, mod demand changes.

As to gas prices? Wondering about that $1/gal drop? Easy. The Goldman Sachs Commodity Index changed. In July, they announced that they were changing the allocation of energy, in particular, gasoline futures in the index.


Any fund tracking that index would have to change positions to match it -- that's how a tracking fund works. When Kodak was delisted from the DJIA, they were hammered -- because every fund based on the Dow Index had to sell off the Kodak shares, and there was a bunch of them.

There are a bunch of funds (Oppenhiemer's Real Asset Fund is one, I think a couple of the major CA pension funds do as well.) that track the GSCI. When Goldman Sachs decided to reduce the gasoline futures percentage of the GSCI, that meant that a bunch of contracts that would have been rolled over by the funds were not, since they would change their positions to match the index.

In particular
, note how the index only rolled half the HU (Harbor Unleaded) contracts in the September contracts (which expired in august) and didn't roll the other half for October, which expired in September.

So, a huge amount of HU (read, regular gas) contracts that would have been bought by the tracking funds were not. If this had been a change to favor RB (reformulated blends, read, Ethanol and E15) it would have been one thing, but RB contracts didn't change.

The net effect? The GSCI used to have about 7% of its value in gas. Now, it has about 2.5%. Any fund tracking that index would have stopped buying a large number of futures contracts. That removes demand on the futures markets for those commodities.

Demand drops, prices drop.

So, despite the fact that spot oil prices haven't moved much at all, gasoline futures dropped dramatically, after a large number of buyers stopped buying and amazingly enough, gas prices fall.

Why would they do this? You tell me.
posted by eriko at 5:32 AM on October 5, 2006 [2 favorites]

I wonder what will happen in cities like Buffalo and Cleveland, where the housing bubble was non-existent. It's possible to buy a single family house in desirable upscale neighborhoods of either city, like the Delaware District and Elmwood Village in Buffalo, or Shaker Heights outside of Cleveland, for less than $200,000. Will prices remain stable because they weren't overvalued to begin with, or will the median home price slip into the five digit range?
posted by elmwood at 5:34 AM on October 5, 2006

Is this where we get to crow about the mortgage we currently have? 'Cause I've got a dandy...

Housing prices have already started decreasing near 10% in my neck of the woods. There's 12-16 houses for sale in my neighborhood and the big news two weeks ago was that "one of them sold".

Of course, we live 45 minutes or so from a metropolis, so we took in quite a few commuters in the past 3-8 years and the rise in gas prices will be a death knell for the local RE market. There will be a lot of upheaval, but most of the long-timers will weather it just fine.
posted by unixrat at 5:45 AM on October 5, 2006

Real Asset?

*puts on goggles*
posted by hoverboards don't work on water at 5:48 AM on October 5, 2006

Speaking of energy prices, the price for gas in Britain reportedly went below zero the other day as a new pipeline went to "full capacity for testing purposes." Not that it's relevant to any housing bubble that may or may not be about to deflate, but I found that news quite amusing.

hedge funds and institutional money that “TRACKS THE INDEX” were FORCED TO SELL 75% of their gasoline futures to conform with the reconstituted GSCI.

The main reason to suspect that the GSCI change doesn't explain it all is that it wasn't just gasoline futures that fell in price. Crude oil and some metals prices also fell dramatically at the same time. Could be that the GSCI thing was the event that started things off, but it wouldn't have happened if market conditions hadn't been ready for a big decline. And yes, I think part of the reason that they were is the growing acceptance of the view that house prices are past their peak, and that this will potentially have some serious consequences for the famously profligate US consumer.
posted by sfenders at 6:05 AM on October 5, 2006

Is it possible that oil, housing, and consumer debt are the new molasses, rum, and slaves?
posted by rzklkng at 6:23 AM on October 5, 2006

I have a feeling that the "bubble" bursting or losing steam or whatever will have more of an effect on higher-priced housing ($500 K and up) than modest housing like mine (bought for $150 k two years ago - and it's in one of the largest cities in America).

We (my wife and I) have noticed, over the past six months, that the "luxury" stuff and the houses in the "nice" neghborhoods have flattened or even dipped a bit, while move-in condition homes in our area have actually continued to creep up. I think interest rates have driven people to look for lower purchase prices, so they can afford the payments, generating competition for these lower-priced houses.

On teh other hand, I think the market is going to impose a cap on our asking price if we decide to sell in the next couple of years - the way things were going, we thought 250 K for the house in 2008 was a possibility; now I think it will take a long time for residential real estate in our neighborhood to go over $200 k. But if we can sell this house for $200 that would be super! Note: We have done some significant improvements, so we've got some sweat equity going...

So anyway, not trying to crow, just pointing out that the "bubble burst" or what have you will have a different impact on people in different financial situations. In any case, next year is a buyer's market for sure, save your winkles!
posted by Mister_A at 7:18 AM on October 5, 2006

Why do people still pretend like housing is some sort of short-term investment? You buy a house, so that you can live in it. If you live in it long enough, you can sell if for more than you bought it for. Your house is not shares of Google.
posted by ninjew at 7:29 AM on October 5, 2006 [1 favorite]

Seconding what eriko said.

As some of you mention, a lot of people are in denial about that housing bubble bursting, which means that there has not been a capitulation in the market(people absolutely needing to sell now), which means it's too soon to buy.

On the oil front, everybody relax, crude oil prices always decline in the fall because there is less demand for oil, not just for gas, but also for manufacturing, etc. If it hovers in the low sixties in the fall, what does that mean for next summer? Spikes over of 80, the way it hovered over 70 this summer?

The fact is that you still have the sollowing unchanged institutional forces driving the price of oil up over the long term

1. - Scarcity of cheap oil - new sources (tar sands, etc) and new reserves (deep sea floor, etc) are all costly source in terms of extraction. Saudi oil costs around $5/bbl to get out of the ground, oil from tar sands costs over $20/bbl.

2. The growth of India and China. China's oil consumption is growing at 9% annually. By comparison, US oil consumption is growing between 0%-2%.

3. Conflict/Uncertainty. Iran continues to enrich uranium, even as the UN prepares sanctions. Iran is the world's 4th largets oil exporter. Iran's president promised $100/bbl oil if sanctions are imposed. You do the math. That part of the world is only going to become more unstable in the future.
posted by Pastabagel at 7:47 AM on October 5, 2006

In resposne to the question of "what about Cleveland and Detroit", I'll give you my anectdotals for Cleveland: The past 15 years have seen a massive buildup in McMansions on the far east and west sides of town. Particularly in the east where people are fleeing Cuyahoga County like rats on a sinking ship, they're moving out to Medina, Geauga, Summit and Stark counties.

What I am finding right now is that prices for starter homes are staying pretty consistent...but that may be changing, fast. You can still buy a very nice starter home in the Cleveland suburbs of Cleveland Heights, South Euclid, University Heights for $90,000 - $150,000 (1300 - 2000 st. ft.). Having said that, I'm seeing in the last month a *lot* of homes sitting up for sale longer than the owners would like, and on my street, three homes that were sold ultimately fell through due to financing issues. Perhaps the banks are finally tightening up?

Where I think the real pinch is these days is in the $300,000 and up market, particularly anything above the $500,000 mark. I grew up in a neighborhood in the far eastern suburbs where the number of large estates and homes above $500k is very large. Those homes are not moving at all. People are taking serious baths on those properties.

I think in these areas the problem is less of a bubble and more based upon fundamentals:

1) Stagnant and declining job opportunities in Northeast Ohio;
2) A massive buildup in newer housing stock within a comfortable commuting distance into counties that have far lower tax rates.

Taking these two positions into account, this is where the majority of the problems in Northeast Ohio are centered right now.
posted by tgrundke at 7:53 AM on October 5, 2006

They are still throwing up McMansions on the west side of the DFW TX area where I live,--but I've noticed construction slowing down, and I keep wondering where they're going to find people to live in these monstrosities, that are a good 45 min drive from downtown Ft. Worth...which is not exactly a mecca of high-income job opportunities itself. Californian and Northeastern expats have kept our economy growing for a while, but I don't know if global warming + higher gas prices + economic slowdown would put an end to that or not.
posted by emjaybee at 8:19 AM on October 5, 2006

This will be very interesting to watch unfold where I live. mid-sized city in Indiana. Former factory town. A barely-breathing economy for over a decade now.
The local developers, realtors, and upper-class buyers have been playing a rather sick shell game with new homes for many years...

• Developer clears a cornfield and tosses-up a new crop of McMansions
• Doctors, lawyers, etc. abandon their current homes and buy into the new "desirable" addresses.
• Pause 3 or 4 years
• Begin cycle again on a new cornfield

During that time, you might see a plot of moderately-priced apartments pop-up, but those are mainly aimed at student housing. There is no development of moderate-priced family housing going on in the area...despite the fact that the need for such housing far outweighs the need for McMansion-style housing. But I suppose this is typical anymore. Chase the money, not the need.
The upshot, and dirty secret that the local realtors are loathe to talk about, is that there is a rather large number of over-priced properties lying fallow all over the county. This in a county where the median income is below 50k and around 15% of the county population is at or below the poverty line. Oh, and the population has been steadily declining over the past 25 years or so.
Someone is going to be taking a very nasty bath if things get even worse.
posted by Thorzdad at 8:24 AM on October 5, 2006

rhymer writes "People have been predicting a property crash in the hugely overlued UK market since the early 2000s and it hasn't happened yet. I'm not saying it won't, although there are some factors here like supply side constraints which probably mitigate against it"

Which just means the readjustment will last longer. Look at Japan. They had a huge run up in prices then falling prices for the past 14 years. For a while you could get a 0% mortgage in Japan, it was that bad.
posted by Mitheral at 8:25 AM on October 5, 2006


> 3) The new bankruptcy rules, which will make it far harder to escape debt.

Obsolete information, please update your files. The new rules are now in effect and they didn't work out the way the credit grantors (or the scare-mongers) expected.

Bankruptcy attorneys and many consumer advocates worry the counseling requirement will allow agencies to divert potential filers into debt repayment plans that the debtors can ill afford. But Keating said her agencies, which currently represent 80% of the counselors approved by the Justice Department, aren't seeing many clients who have the ability to repay their debts.

"The conversion rate of customers who are eligible to go into an alternative, a debt-management plan, has been very, very low," Keating said. "These customers are really in serious financial trouble and have no alternative other than filing for bankruptcy."

Consequently, bankruptcies are headed right back to their pre-new-rules level and beyond.
posted by jfuller at 9:12 AM on October 5, 2006

throwing up McMansions

That's just great. Kind of like Einstürzende Neubauten ("Collapsing new buildings").
posted by stbalbach at 10:22 AM on October 5, 2006

I sure wish I'd been paying attention to real estate when I moved to LA 8 years ago. I would probably have been able to buy a house in my neighborhood for about $350,000 (which of course seemed outrageous then) and would have sold it about 6 months ago for about $1.25 million... and retired.

Ah well. I'm paying attention now, you can be sure, and this time I'll actually have some capital when the market hits bottom, and I'm practically debt-free.

jfuller, that's quite interesting; nice to see the cards don't always respond to an attempt to load the deck. Even so, I'm going to stay as debt-free as humanly possible.

stbalbach: so that's what that means!! :) See you on TOD...(lurker)
posted by zoogleplex at 10:39 AM on October 5, 2006

Well, this is nice. Charts with unlabeled axes, unsupported analogies between the housing bubble and Gravity ("What goes up, must come down." There's an insight for you.) - and an irrelevant photo of Kurt Vonnegut. And my browser suggests I'm only about 10% of the way into the article.

Wake me up when the discourse reaches the level of my high school Ec class, please.
posted by ikkyu2 at 11:08 AM on October 5, 2006

That's just great. Kind of like Einstürzende Neubauten ("Collapsing new buildings").
I had more in mind the image of a thick steaming beige stream of mediocrity issuing forth from a great yawning maw. With new BMWs parked in front.
posted by Thorzdad at 11:10 AM on October 5, 2006

Oh, thank goodness, it was mostly comments.

You'd think that someone who discussed the falling dollar and the recent runup in oil prices in such close proximity would have taken a moment to adjust the one for the other. But that implies the capacity for critical analysis of the arguments being made.
posted by ikkyu2 at 11:10 AM on October 5, 2006

ikkyu2, how would adjusting oil price for the dollar make any difference to the arguments there? The price of oil rose by 100% since 2003 in euros, 140% in dollars. So what? The recent decline in oil futures has coincided with some strength in the dollar, but not anywhere near enough to put it among the most important factors. Besides that, the writer is mostly just reporting on other people's research there. Only the conlcusion at the end, that "lower demand over a significant period of time (a few years) masks the global production peak but does not help solve it" is novel, and though it seems very unlikely to me that global demand will actually decrease like that, there is still some truth in the idea that a well-timed recession could delay the full effect of slowing oil production.
posted by sfenders at 3:54 PM on October 5, 2006

Look, people, there's a distinction between "interest only" and "ARM".

We have an interest only loan, and it's a fixed rate for the entire life of the loan. Our's has been fantastic, and I'd use the same arrangement again in a heartbeat.

For an interest only loan, anything paid over the interest amount in the opening "interest only" phase comes straight out of principal, and the remaining payments are adjusted accordingly month by month. Think of any payment over the interest level as a delayed down payment. The more principal you pay, the lower every future payment gets.

That is in contrast to a traditional mortgage, where overpayments shorten the loan instead of lowering payments.

We chose interest only so that we could pay down the mortgage to a level that we could afford on the lower of our two salaries. We're getting close. After 18 months, we're at greater than 50% equity and have passed the point where we can live comfortably on the higher of our two salaries, with the mark for the lower of our salaries in sight.

There's nothing categorically irresponsible about interest only loans, and pretending otherwise doesn't make it so.
posted by NortonDC at 12:38 PM on October 6, 2006

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