Are high gas prices helping kill the suburbs?

Here's a long report arguing that gasoline prices played a large role in deflating suburban real estate: Download cantor.pdf

I think it overstates the case a bit. While it's true that home prices fall as you fan out from the city center, a lot of that has to do with relative land scarcity and commuting times. In the Tampa area, suburban home prices stink because that's where every speculator and his cousin were playing real estate tycoon.

The source of the gas report is Joel Cantor, a developer who's building the Signature Place condo tower in St. Petersburg. Cantor's a friendly guy with a keen eye for a promotional opportunity. He figures that expensive gas = equals more sales for his tower.  

Comments

[k]

"While it's true that home prices fall as you fan out from the city center, a lot of that has to do with relative land scarcity and commuting times."

Maybe add the fact that outlying 'burbs existing homes are in closer competition with deeply discounted builder inventory? (lately)

[James Thorner]

Good point, K. That's what's killing sales in suburban 'hoods around me. Builders are undercutting all the resales.

James...I see no reason to be so cynical about Cantor's motives. Gas prices will continue to climb. Consequently, homes that are centrally located like those in downtown Saint Petersburg or Old Northeast will be increasingly attractive to sensible buyers.

In light of 4 or 5 dollar a gallon gasoline, what is the value proposition for living in the suburbs?

If a property is located where you cannot walk, take public transport, or ride a bike to essential services and entertainment venues, it is going to be a tougher sell, Prius or not.

[James Thorner]

I'm not cynical about Cantor's motives. I've met him several times and like him. I'm just pointing out the reason for his interest in the subject.

[Fuzzy Bear]

In light of 4 or 5 dollar a gallon gasoline, what is the value proposition for living in the suburbs?

I do not believe the economy and the consumer will be able to withstand a prolonged period of 4 or 5 dollar gas.

What I believe is going to happen by the fourth quarter of 2008 is the dollar will continue to decline, long term interest rates will increase, the stock market will look more attractive to the investor and oil and gas will fall back to sustainable levels.

Oil and gas in my opinion is being inflated beyond fundamentals and has formed a bubble that will pop in due time.

[Tino]

I have to disagree with you there, Fuzzy. The futures market expects gasoline prices to decrease only by 25 cents in May 2011. Oil prices in June 2016 are priced at $117 a barrel.

I believe that if a windfall profits tax or any other horrible ideas are put into place (additional restrictions on drilling, etc, oil is going to take another big leg up as oil firms start reducing their capital budgets.

If you feel strongly otherwise, you can make a LOT of money.

{Disclaimer: I am a long-term investor in oil, gas and refining company stocks.}

A typical driver who drives 10,000 miles a year in a 20 mpg car burns 500 gallons of gas annually. A $1 increase in gas is $500 a year, or $42 a month. That is not causing housing prices to fall.

Having deserted, foreclosed homes all over your neighborhood? THAT causes prices to fall.

I will let you two fight it out with numbers. I seems to me that buying in the burbs is imprudent given the current trends. I see no advantage in terms of relative costs.

If you guys feel that gas prices will fall or that another 500 bucks a year (surprising, no mention of correlated cost increases everywhere else) will have no impact on where people choose to live then you are smarter than I am.

I will live downtown, you guys can live in your cars.

[k]

One thing I can't stand is some oil pundit trying to tell me "increased demand" is to blame for the current oil glut. Come on! The'd have you believe there are 3X the amount of cars and drivers than just a few years ago? BS!
Nominal inflation, sure, but a 3X jump over 10 years?...not buying it.
RECORD... OIL... PROFITS.
Good for Tino!

K...I don't know what the truth is but keep in mind that oil is also a basic component of many things unrelated to autos, like plastics. The stuff they say about China, India, Singapore, Dubai, etc and other emerging economies is not a fabrication. While our infrastructure falls apart, these countries are making huge investments in infrastructure. All of that building requires enormous resources of many kinds.

[john]

Poorly planned roads are what is killing the florida suburbs. The commute is horrible because of the stop lights and traffic. Pinellas is especially lacking a good west side north south expressway. And rapid transit is simply not an option. The buses stop every 10th of a mile.

Sometimes I wonder if the pain of increased fuel costs are mostly psychological.

The difference between $3.00 and $4.00 per gallon is 11 dollars a week for my commute in a diesel guzzling truck. Those who can't withstand this are probably not in the RE market...and shouldn't be anyway.

[Frances]

"Nominal inflation, sure, but a 3X jump over 10 years?...not buying it.
RECORD... OIL... PROFITS.
Good for Tino!"

Pick up the latest issue of National Geographic before such comments, or any international business press. There are 3x as many drivers, only they're not American but Chinese and Indian. Our outsourcing and their economic policies have fostered an exploding middle class that 2 decades were living in huts, riding donkeys and now are finally able to buy cars and need energy to run skyscrapers, factories, build their own burbs ect. Unless they return to their primitive lifestyle allowing us to retake our oil market share, oil will be in over demand. Damn progress!

Certainly newer emerging technologies will provide us some transportation relief. There are many now in the pipes setting up the infrastructure for release.

It'll be painful until then.

John...I would rephrase that. It is not poorly planned roads. It is poor urban planning.

I will agree that the road quality here is terrible. Going any further in this discussion with lead to a complaint about what I getting for my enormous property tax bill.

[k]

Frances, 6:10 -
I read a TON of legitimate news sites, webzines (Wired, etc.), other media outlets, national and international, EVERY DAY. (Not Salon or NewsMax - the conventional networks...CNN, FOX, BBC, and papers such as WSJ, NYT, SPT, Tribune, News Press, Herald, etc. You have to take as many as possible to get the true objective picture).
I'm quite familiar with the "explosive" eastern growth and the economic implications. The fact is, the USA has been and still is BY FAR the largest consumer of OIL and just about everything else on this planet. To have this nation's people believe that the number of oil consumers (cars, plastics, and other oil-based goods) grow by over three (really four) times in just 10 years is simply laughable. You'll get a comment from someone about futures speculation probably, but remember the point I am making is the constant "demand" excuse mantra. The oil companies use this in the past and present tense, not to describe futures - that's the traders' justification. Tata is just *now* beginning production on their affordable compacts - not 10 years ago. China is not a huge *importer* (yet). Take a look: http://tonto.eia.doe.gov/country/index.cfm

You get OPEC constantly saying, "we see no need to raise production..." at every meeting. Well DUH. Why should they when they are making the most voluminous amounts of profits in their entire history. There's absolutely no way the world's inventory of oil consumers grew that much in 10 years. Do you realize how many USA-sized economies would have been needed to be created to support such a claim? Show me the hard numbers!
You can believe the repetitious paid-by-oil media if you wish (Who's one of the biggest sponsors of National Geographic?). I choose to see the simple truths and make my own independent conclusions. Saudi-friendly administration with strong oil connections... Occupied oil country... no increased supply, just more CONTROL over it. ...Pretty simple to put together.
I suppose you've read that W would veto any legislation that took government R&D money from oil to alternative energy, right?

I do not believe we should be paying 90c a gallon like 10 years ago...don't misuderstand me here. Like anything else, it should inflate....peak oil considered. Should we be paying european prices? They use less, tax it much higer and have a higher value currency. I love when I read these guys saying "stop whining yanks! We pay $7 a gallon!"...and then get reminded that their currency is worth twice ours. I also want to point out that I don't blame investors like Tino for making a logical investment decision. What I don't like about it is that the investments' success comes at the pain of the general public, which seems rather sadistic.
(not that they go around praying for another hurricane to hit Galveston or a war with Iran)

To drill the point home (pardon the pun), I distinctly recall paying around $1.35/gal regularly at the Sams in Brandon back in spring of 2003. That was just five short years ago. Five....(sigh)

[Fuzzy Bear]

What I believe is going to happen by the fourth quarter of 2008 is the dollar will continue to decline

My mistake, I meant the dollar will improve, not decline against the euro.

[Frances]

"...and then get reminded that their currency is worth twice ours."

This has little baring on local economies. It's not like they're converting their monies into dollars and having 2x as much. A Brit making 50K Pounds has to live on the economy like an American being paid 50k$. Now if the Brit travels and utilizes those pounds against our dollar, well now he has advantage. At home...no. It's like saying if you measured our dollars in pesos, we'd be rich...only nothing sells in pesos here.

Based off of Nat Geo's ads. I'd say they have a variety of sponsors. In fact, if anything, they tend to be anti-oil, pro-environment.

The only reason I mentioned Nat Geo is that it's the most well written piece I've seen yet on China's economy. They actually used the entire mag to thoroughly discuss China's economy...200pages...lots of meat.

The consumption info on your website was over two years old. Things have worsened for us, improved for the Chinese/Indians since then.

Here's some stats according to Nat Geo:

When China will become the world's largest market: 10 years
Cars in China: 11,500,000
When China will surpass US in car ownership: 2025
Additional cars added per day: 1000
Chinese oil import GROWTH between 1996 to 2006:+600%

And they've only just begun. It's only been in the past few years they've even owned cars privately. Besides transportation, they're consuming petreoleum through plastic manufacturing...

Bottom line, we may get some relief if the dollar strengthens which will probably be offset by increased demands as these countries further industrialize. But, prices dropping back to the good ole days...doesn't seem likely...unless subsidies kick in.

Sooner or later, it had to catch up to us. We have lived in enormous houses that seem to get bigger with each decade, farther and farther away from work, larger and larger cars...ect. Either we have to change our lifestyle or pay for it.

The fat lady has sung.

[k]

"It's not like they're converting their monies into dollars and having 2x as much."

For comparison purposes, yes, it is! Why do you think Orlando is choc-full of Brits?
(not that I mind...Cheers and all that)
Your point about the weak dollar is fully valid. It's probably my largest campaign issue. One gets older, thinks about all the traveling they'd like to do and a weak dollar + poor respect hurts. Shameful, really.

"When China will surpass US in car ownership: 2025"

The key world is "will". They haven't yet, but the oil pundits would have you think they did twice over in the past five years...and while importing all their oil, which they don't. They charge you for the future and blame the past.
If you have fresher, non-biased projections than the DOE that states otherwise, I'd be happy to take a look...really!...no closed mind here.

[Tino]

Frances, excellent post.

I believe that one of the next "crises" to hit the big suburban homeowner is going to be the rapid runup in electricity prices in the next decade. Utilities are going to be raising rates to recover the massive amounts of capital needed to 1. fortify a transmission system pushed to its limits 2. add renewables to achieve government mandates 3. build additional capacity to meet demand growth and 4. pay for rapidly increasing natural gas and coal prices.

Retail electric rates are up, on average, about 30% nationwide in the past five years. Florida has been spared so far. Since most of the capital spending has not even occurred yet, retail rates are going to be ramping up quickly. I foresee rate escalation at 2-3 times the rate of inflation for the next decade.

[k]

I rest my case (rant!).
http://news.yahoo.com/s/ap/20080516/ap_on_go_pr_wh/bush_mideast