The surprising correlation between gasoline prices and housing starts

Rick Santorum has recently been mocked by the Left for suggesting that the 2005-2008 spike in gasoline prices was the real force that drove the housing bubble to collapse.  The Atlantic’s Derek Thompson looked at Santorum’s claim and found that the former Senator really was onto something:

Here’s a one-paragraph theory of the Great Recession that begins with gasoline. Cheap gas ruled in the 1990s. This encouraged families to settle down farther from the cities where they worked. In the 2000s, super-low interest rates, declining lending standards, and an appetite for mortgages on Wall Street (among other factors) further encouraged sprawl and residential development in the ‘burbs. As the price of gas went up, families stopped buying homes 30 minutes from the city. For folks shacking up in the exurbs, higher gas bills ate into mortgage money. For companies, higher energy bills shocked productivity. Classic oil-shock + housing development arrested + financial crisis = Great Recession.

There appears to be pretty strong correlation (if not causation) between national gas prices, which accelerated after 2005, and housing starts, which declined after 2005.

To illustrate this point, Thompson included this chart, with housing starts plotted in green and gasoline prices plotted in blue.  You’ll note that housing starts began dropping precipitously in 2006, before the bubble offically burst, but right in step with rising gas prices.

As for Thompson’s theory, I can say that it fits pretty well with what happened in the Oklahoma City metro area, where I live.

Beginning in the mid-1990’s, there was a lot of expansion north of town in areas that had formerly been crop fields and cow pasture.  Wealthy residents built swank new homes in gated residences, some of which still relied on dirt road access.  A lot of land was bought up by developers who sought to cash in on this trend.  Neighborhoods sprang up miles to the north of where they had previously existed.  People thought nothing of driving 25 to 45 minutes to get to work.  My wife and I even fell victim to the trend after we came across a great deal on 5 acres of land about 12 miles north of town; it was put on the market again and quickly sold after we found our current mid-town home.

Friends of ours still live in these neighborhoods and occasionally I wonder if they still enjoy their homes as much now that they are spending $400 a month on fuel for the Explorer or the Suburban.

I’ll give the final thought to Thompson’s commenters, who smartly pointed out that the real bubble-bursting pin prick came as a result of price shock from the sudden increase, and not the absolute price of the fuel.  Had fuel trended steadily upward over the last 20 years to where it is today, we would have re-thought the concept of urban sprawl and probably invested more heavily in urban renewal and renovation of existing housing units or housing locations.

Oh, one more thing – speaking of spikes, gasoline here in the OKC metro area has gone up 30 cents a gallon (roughly 10%) in just 7 days.  Anyone else seeing that kind of sudden increase?  Are we seeing an early manifestation of the 60 cent per gallon increase that was forecast to hit before summer?

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