Some Economists Believe High Gasoline Prices Set Off Housing Crisis

A Recent Study by Oregon State University and U.C., Berkeley Economists
Suggests that the United States housing crisis that began during 2007 and subsequently led to a global financial catastrophe was sparked by rapidly rising gasoline prices. Economic bubbles have long histories, from a Dutch tulip craze in the 1600s and to this most recent housing bubble and numerous facets can set them off, researchers say.

However little is understood about what actually prompts a bubble to erupt. One of the several authors of this new paper, JunJie Wu, an economist at OSU has a theory which recognizes the relationship of subprime loans and lenient lending practices escalating the housing bubble, however high gas costs was the trigger that erupted the bubble."

Wu along with his fellow authors, David Zilberman and Steven Sexton, both U.C. Berkeley economists concur, there is general consensus that the breakdown of the real estate market caused the 2007 financial situation to escalate. Although there is no one agreement as to what exactly prompted the real estate market to collapse .

The authors illustrate in their study how minimal gas prices throughout the housing boom, combined with easy credit access and new loan products, made houses in the suburbs affordable to an entirely new category of homeowners typified by low incomes, low credit worthiness, long work commutes and high leverage, .

"As a consequence," Wu said, "housing was at risk." As oil price increases more than doubled from the later part 2006 to 2008, increasing gas prices over $4.15 per gallon, changing the calculus of living in the suburbs, the researchers said that high commute costs decreased the value of suburban homes and loans less affordable for lower-income homeowners. Several households were no longer able to make their monthly mortgage obligations while others just walked away from mortgages that exceeded the sudden deflated market home values.

"The real-estate song has always been ‘location, location, location,’" said Wu. "If you're in an area that is far away from your job and transportation costs are suddenly rising, the location can reduce your home's value."

The housing boom set in motion during the late 1990s, along with 50 years of suburbanization which preceded it, created a housing supply that into 2006 was especially vulnerable to gasoline pricing shocks, concurred the authors. Easy and reduced cost credit made buying a home feasible for more households with limited assets than at any single period in the history of the United States.

Numerous suburban homes were remotely located from centers of business and they were inclined to be an excess supply. Exurban areas had grown twice as quickly as metropolitan locations and consequently, commute durations got longer. From 1970 through 2006, miles traveled by average vehicle increased 177 percent.

The researchers assert that doubling of gasoline prices in relationship to historic price averages made for unaffordable house payments for many, particularly for lower-income households, while loan default rates were significantly higher in commuter areas.

The researchers only took into account the impact within the U.S on rising gasoline prices in their analysis, and they were quick to acknowledge there are numerous complex influences on gasoline prices, including global increases in the middle class along with political unrest in nations which produce oil.

Does their research show implications over the current increase in gasoline prices? "I would expect that higher gas prices will diminish any overall economic recovery and any recovery of real estate markets in particular," said Wu. "Particularly in those communities high commutes and transportation costs."

The paper, “How High Gas Prices Triggered the Housing Crisis: Theory and Empirical Evidence,” published February 2012 by the University of California Center for Energy and Environmental Economics.

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