6 oil states had record home prices in November. Can it last?

Question

No.  It might for a short time, but oil has fallen from $115 to $49, companies are already cutting back on projected production spending.  They will cut back more unless oil suddenly rallies.  In four of these states, Wyoming, South Dakota, Oklahoma, and North Dakota the  increase in home prices over the last few years has been largely due to vastly increased oil exploration and production.  It can be argued, that Colorado and Texas are diversified enough to withstand a prolonged drop in oil prices, but I believe they'll still be affected heavily by it, especially in oil rich areas.

Core Logic Report on home prices NOV 2014

Note this is only showing the states where peaks occurred, you have to register to get the report.  Marketwatch has more.  Crashing oil prices to hit house price appreciation

This may take a while to filter down, but at some point soon the strong price appreciation that has been going on in oil rich states will almost certainly halt. The question is will they stay flat or decline?

The last bet I would be making right now is on continued strong price appreciation in oil rich areas.

Jerry W. · Answer

This is a very important topic for me since I live in the middle of Wyoming even though the boom is centered over 150 miles away.

I have seen 2 very harsh boom busts in my state in the last 40 years as well as a  few small ones.  In my area we now have half of the folks in the oil field related businesses than we did in the 1980s, the  problem is that huge amounts of folks leave my state when our local  economy falls because nearly all of them are recent residents who moved  here for the jobs.  Oil, gas, and coal are the massive drivers of my  states economy.  We do have some nice industries like trona, tourism,  agriculture, etc, but make no mistake we are an energy driven state.   there is a massive boom in our state currently because of things like  the Bakkan oil drilling in North Dakota, the Jonah field, the massive oil shale recovery  going on from Casper to Colorado, coal production in the powder river  basin, and lots of secondary recovery from old oil fields.

The  recent drop in the price of oil has sent more shivers through me than  the housing drop in 2008 because it hits local so hard.  About 80% of  our local tax base is from oil and gas and many of those fields are old  and in secondary oil recovery.  We have lots of workers who drive to  North Dakota to work for 2 weeks on and come back for their 2 weeks  off.  We have a lot of oil field service companies, chemical additives  for oil wells, drilling pipe, motor rewinding, dirt contractors,  construction/moving equipment, rental equipment, workover rigs,  consultants, etc.

I know this post is not about politics, but ignoring politics in this is ignoring  reality, especially for my state.  The current administration has waged a  war against coal (because of pollution concerns I believe) that is killing our number one cash cow.  It is now  impossible to build a coal fired power plant that is profitable with the  current regulations.  We will probably see a full third of our coal  fired power plants shut down prematurely in the next 5 years or less if  regulations do not change.  If that trend does not halt or reverse our  local economy will take some hard hits.  That is offset somewhat by  increased natural gas demand, but with inventories soaring and oil  prices dropping if that trend continues jobs will leave my state.  Let  oil drop anywhere near where production costs are for shale oil recovery  for very long, and you will see prices on real estate drop by 50% or  more.  Again I have seen this at least twice in my lifetime.

The good thing is that overproduction of oil, gas, and coal is great for  the national economy.  It is easier to start and run a business with  energy costs down 30% and no one drawing high school graduates away from  local employment for $25 to $30 an hour jobs that require no formal  education.  The oil field also has a massive amount of jobs for  tradeskill workers of well over $100K per year, and many make 2 or 3  times that.  Those will go away as well.

I believe the  national economy will begin growing at a slow but improved rate, I see  energy struggling for a bit then coming back at a little more   calculated rate, and less of a frantic rate.  I will look more closely at investing in  other markets.  All of this is of course going to be influenced widely  by politics and the national economy good or bad in ways I cannot predict now.  Increases in the national economy will drive up oil and gas prices.

E-Mail: jwlaw@directairnet.comJerryW. WASP Inc Don't let others decide your attitude!

Bill S. · Answer

@Cal C. there is nothing new under the sun. What goes up must come down. Wyoming, I know, has been through more than one energy boom and subsequent bust. This one is not the first nor the last. Make hay while the sun shines and watch the clouds on the horizon.

Cal C. · Answer

I hope at least a few people read this thread from last January and heeded the (obvious) warning.  Oil Slump hits Houston home market

HOUSTON—Home sellers are slashing prices and offering incentives to keep buyers from walking away from contracts as an 18-month oil slump buffets this city’s once-booming housing market.

Home-construction permits in the area plunged 26% from a year earlier in the third quarter, while December sales of existing single-family houses fell nearly 10% from the same month of 2014, according to data from the Commerce Department and Houston-area brokers.

Jon Holdman · Answer

I used to be in the oil business.  I moved to Houston in Januray 1982 and the apartment finders we were working with told us "if you see something you like, rent it on the spot, it won't be available if you leave and come back."  A year later we moved and the new place was offering one month free on a six month lease, two months on a year.  By 1985 "jingle mail" and "cramdowns" ("loan modifications" in today's terms) were common.  I remember one 10 story building I drove by every day.  It sat empty for years.  The windows slowly disappeared on all the floors you could hit with a rock.

When I left the oil business and moved to Colorado in 1999 oil was under $10 a barrel.  The heavy crude we produced in CA, where I was working just before coming to CO, was more like $6 a barrel.  Our lifting costs, because we used steam injection to get this heavy stuff out of the ground, were more like $9 a barrel.

I remember seeing many little signs in peoples offices saying "Please, God, let there be another oil boom.  I promise not to piss it away this time."

This is a boom/bust business.  We've been in a big runup in prices for a long time now.  High prices mean big expensive projects and marginal fields become profitable.  Production rises.  Prices fall.  Production in marginal fields gets shut in. Prices rise.

Where prices are going from here is beyond me.  If they stay at these levels, fall more, or even rise somewhat (a 50% increase at this point still puts us well below where they were six months ago) areas that have a big oil component of their economy will see impact.  Investors who jumped into these areas expecting big runups in values are going to get hurt.  I don't think it will be as bad as the big bust because the lending has been much tighter.  But I do foresee pain coming.

Robert Warren · Answer

@Jon Holdman

One of the biggest expenses for developing fracked wells in shale is the pipelines.  The expenses go up a lot as the development moves away from existing pipelines.

The issue with production collapse is very different from conventional wells.  Conventional wells produce for decades without the need of more capital expenses.  Fracked wells produce for 2 to 3 years and then need more capital outlays.

Jon Holdman · Answer

@Robert Warren  I do know the production declines from these fracked shale wells very quickly.  That's true of any well, though the decline is slower for most other types reservoirs.  Fracking has been going on for a long, long time.  But fracking these shale reservoirs is a technique that was developed after I left the business.  With other types of wells ongoing "workover" operations are needed over time.  I suspect these fracked shale wells can be worked over, too, to improve production after it declines.  Maybe that's not true.  But if so, I'm sure companies will.  And workover operations are much less equipment and labor intensive than drilling a new well.

Oil prices have always been very, very volatile.  That's why I  left this business and got into the software/hardware business.  Not that its all that much better in that regard.

Robert Warren · Answer

@Jon Holdman

One more issue with fracking is that the wells play out in 2 to 3 years.  We have seen the low hanging fruit exploited.  This next phase will be more expensive just in time for the oil prices to tumble.

Look for more volatility in oil prices in the years ahead.  We are in a time of transition and it will be a rocky road for awhile.

Dan Glagola · Answer

Caution is necessary here in Southwestern Pennsylvania. My day job is in the gas industry that has provided a great boost to the local economy and real estate prices.  Some companies in the industry are cutting back rapid expansion, and some have backed off from the industry standard 12 hour shifts to eight hour shifts.  But no one is boarding up new houses yet.

But we do have some diversity in our economy that will sustain us.  I believe that those who have not leveraged to the hilt and have not spent every penny will get through a slowdown in this activity.  The slowdown is not evident in real estate prices yet.  But I plan to use this part of the business cycle to add to the portfolio.  I see many people who profited by buying after the "crash" in 2011-12.

Tyler Flagg · Answer

@Cal C. thanks for the post. I haven't thought much about the subject...so I definitely appreciate you broadening my horizons.

Rhett Tullis · Answer

yes we are pretty diverse here in okc.  much more so than back in the 80's but still will hurt alot of prices stay at this level.

6 oil states had record home prices in November. Can it last?

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