Gas prices and economy

[John Carbone]

Gas prices are really starting to accelerate with the national average at $3.40, which is historically very high. Oil is only just over $80 a barrel, and I believe $150 a barrel was the ATH several years ago. GDP only came in at 2 percent and we still have revisions that are expected to be below 1 percent when it is finalized, and this despite all the liquidity injected into the market.

my question is, high gas prices impact short term rentals especially in the panhandle and Smokey mountains. These markets are on fire and at all time highs but headwinds look extremely bleak and reminiscent of the cold winter from 2008. How are you all feeling about this, is this just FUD?

The data seems to show that we are at the beginning of a potential long period of stagflation reminiscent of the 1970s. 

[Dave Stokley]

I’d be shocked if gas prices had much if any impact. Even someone is coming from 500 miles away 1000 miles round trip in a car getting 25 mpg is only 40 gallons, so even $1 more per gallon is negligible. 

[John Underwood]

People that can afford to go on a nice vacation can afford high gas prices.

[John Underwood]

My Marathon oil stock is on fire!

[John Carbone]

Interest rates are also increasing. Historically every 100 basis points represents a 10 percent move in real estate. What’s the continued bull case? I’m struggling to find them, all I see are headwind after headwind. 

And yes, $1 a gallon more is just x more, but at what point does that extra dollar become significant. $2 to $3, $3 to $4, $4-$5 etc, eventually it matters. I think $4 gas pricked the economy last time. 

[Josh C.]

@John Carbone

Every 100 basis points in interest rate move real estate prices 10%? Not sure about that fact. Maybe some local swinging market. But that wouldn’t be true in most places.

Agreed above, people who spend $400 a night on Airbnb don’t care about pump price. Even at $8 a gallon.

[JD Martin]

Originally posted by @John Carbone:

Interest rates are also increasing. Historically every 100 basis points represents a 10 percent move in real estate. What’s the continued bull case? I’m struggling to find them, all I see are headwind after headwind. 

And yes, $1 a gallon more is just x more, but at what point does that extra dollar become significant. $2 to $3, $3 to $4, $4-$5 etc, eventually it matters. I think $4 gas pricked the economy last time. 

 $4 gas in 2007 is a lot different than $4 gas in 2021. My prediction is even $4 gas has virtually no effect on anything regarding tourism. RVers may stay at locations longer; beyond that, even a $2/gallon rise in gas prices only adds $100 to the travel costs of someone driving 1000+ miles round trip, beyond which a lot of people will fly instead of drive. 

If you want to worry, of course, then by all means you should enjoy yourself; there's certainly no shortage of news items you could pick on which to feel distressed :)

[John Carbone]

The only thing that matters is monthly payment for the vast majority of people. Interest rate is the key variable. 

1m @ 3% = $4,216

885k @ 4% = $4,225

788k @ 5% = $4,230

And it goes on and on, with each 100 basis points equaling an approximate 10 percent decline in the asset price to keep the payment the same. 

There’s no way at $8 a gallon that there will be no drop in demand on $400 rentals. Your assumption is that life goes on as normal for everyone. Even if just 10-20 percent of people change behaviors it has a ripple effect throughout. When contractions occur people look for substitutes. Luxury items and vacations are the first things people cut back on. Maybe they go on 1 or 2 vacations instead of 3 or 4 in a year. But when this happens demand drops and people will have to cut prices, so those $400 nights might become $300 or $200. 

Interest rates matter, gas prices matter, real estate and stock prices matter (wealth effect and consumer confidence), discretionary income matters. 

[JD Martin]

Originally posted by @John Carbone:

The only thing that matters is monthly payment for the vast majority of people. Interest rate is the key variable. 

1m @ 3% = $4,216

885k @ 4% = $4,225

788k @ 5% = $4,230

And it goes on and on, with each 100 basis points equaling an approximate 10 percent decline in the asset price to keep the payment the same. 

There’s no way at $8 a gallon that there will be no drop in demand on $400 rentals. Your assumption is that life goes on as normal for everyone. Even if just 10-20 percent of people change behaviors it has a ripple effect throughout. When contractions occur people look for substitutes. Luxury items and vacations are the first things people cut back on. Maybe they go on 1 or 2 vacations instead of 3 or 4 in a year. But when this happens demand drops and people will have to cut prices, so those $400 nights might become $300 or $200. 

Interest rates matter, gas prices matter, real estate and stock prices matter (wealth effect and consumer confidence), discretionary income matters. 

 Well, it sounds as if you are looking for confirmation, not information, and in that case you will eventually find what you are looking for. Good luck!

[John Underwood]

People will just find a VR closer to home, they will still find a way to go on vacation. 

[John Carbone]

I’m not looking for confirmation on something that is mathemically accurate. When someone makes a claim that “a fact” isn’t accurate when it is with no basis to back it up, I’ll defend the logic. 

 I’m looking for information from people who have been around this type of environment to weigh in how this effected the short term rental markets.

You say $4 gas in 2007 isn’t the same as it is now. Can you elaborate on that? What price per gallon would equate to how it was in 2007? 

Point of discussion is, how high will gas prices need to go to have an impact and how high will interest rates need to go to have an impact. 

Why is it different this time? I don’t know that answer. 

[John Carbone]

Originally posted by @John Underwood:

People will just find a VR closer to home, they will still find a way to go on vacation. 

so does this mean that the smoky mountains are more recession proof than other short term rental markets? 

[Ken Boone]

Well I would say yes.  Not because of the gas price but because of the simple fact that something like 50% of the US population is within an 8 hour drive of the Smokies.  So yes from that perspective I would say it is more recession proof than other areas. Not saying their won’t be an impact as the economy worsens but not as bad as other areas in my opinion. 

[John Underwood]

People with electric cars can still get to their vacation destination with little impact.

Put in a charging station to attract them.

I have been considering doing this.

[JD Martin]

Originally posted by @John Carbone:

I’m not looking for confirmation on something that is mathemically accurate. When someone makes a claim that “a fact” isn’t accurate when it is with no basis to back it up, I’ll defend the logic. 

 I’m looking for information from people who have been around this type of environment to weigh in how this effected the short term rental markets.

You say $4 gas in 2007 isn’t the same as it is now. Can you elaborate on that? What price per gallon would equate to how it was in 2007? 

Point of discussion is, how high will gas prices need to go to have an impact and how high will interest rates need to go to have an impact. 

Why is it different this time? I don’t know that answer. 

$5.25 = $4 in 2007. There was crazy headwinds in 2007 and cash was dried up. Cash is everywhere right now. We are liable to see some more inflation for sure but stagflation? Highly unlikely. 

For all of the middle class people that you see staying home instead of going to the Smokies, there are people who might have gone to Europe that are staying closer instead. I might be more concerned if I had an STR in a place not high on tourism.

[John Carbone]

Originally posted by @John Underwood:

People with electric cars can still get to their vacation destination with little impact.

Put in a charging station to attract them.

I have been considering doing this.

that’s a great idea. I think on Airbnb you can do filter searches based on “ev charger”, with the new incentives in the projected infrastructure bill there will be more and more electric on the road. 

[John Carbone]

Originally posted by @JD Martin:

Originally posted by @John Carbone:

I’m not looking for confirmation on something that is mathemically accurate. When someone makes a claim that “a fact” isn’t accurate when it is with no basis to back it up, I’ll defend the logic. 

 I’m looking for information from people who have been around this type of environment to weigh in how this effected the short term rental markets.

You say $4 gas in 2007 isn’t the same as it is now. Can you elaborate on that? What price per gallon would equate to how it was in 2007? 

Point of discussion is, how high will gas prices need to go to have an impact and how high will interest rates need to go to have an impact. 

Why is it different this time? I don’t know that answer. 

$5.25 = $4 in 2007. There was crazy headwinds in 2007 and cash was dried up. Cash is everywhere right now. We are liable to see some more inflation for sure but stagflation? Highly unlikely. 

For all of the middle class people that you see staying home instead of going to the Smokies, there are people who might have gone to Europe that are staying closer instead. I might be more concerned if I had an STR in a place not high on tourism.

 
that’s a good point, and east Tennessee is still only a little above $3 now so more room to run on that front. In theory if the fed raises rates they could suck some of the liquidity out of the economy, but it does seem like that won’t be happening anytime soon. 

so it would likely need $130 a barrel oil, 20% percent reduction in stocks, and 10 year treasury closer to 3 percent to likely have an impact in the Smoky market. 

I am hedging my short terms with Oil stocks, it’s great to have real estate and equities at all time highs, and even the oil stocks are taking off too. Enjoying this ride for sure, just hope it keeps on churning. 

[Justin Kurpius]

It’s not about what people can pay for gas. It’s about what high gas prices are doing to the economy. Even if someone is rich, when their business take a hit because the broader economy is sucking wind from high energy prices….they spend less. Consumer sentiment is dropping fast. And with all the leverage right now, it could get interesting. 

[JD Martin]

Originally posted by @John Carbone:

Originally posted by @JD Martin:

Originally posted by @John Carbone:

I’m not looking for confirmation on something that is mathemically accurate. When someone makes a claim that “a fact” isn’t accurate when it is with no basis to back it up, I’ll defend the logic. 

 I’m looking for information from people who have been around this type of environment to weigh in how this effected the short term rental markets.

You say $4 gas in 2007 isn’t the same as it is now. Can you elaborate on that? What price per gallon would equate to how it was in 2007? 

Point of discussion is, how high will gas prices need to go to have an impact and how high will interest rates need to go to have an impact. 

Why is it different this time? I don’t know that answer. 

$5.25 = $4 in 2007. There was crazy headwinds in 2007 and cash was dried up. Cash is everywhere right now. We are liable to see some more inflation for sure but stagflation? Highly unlikely. 

For all of the middle class people that you see staying home instead of going to the Smokies, there are people who might have gone to Europe that are staying closer instead. I might be more concerned if I had an STR in a place not high on tourism.

 
that’s a good point, and east Tennessee is still only a little above $3 now so more room to run on that front. In theory if the fed raises rates they could suck some of the liquidity out of the economy, but it does seem like that won’t be happening anytime soon. 

so it would likely need $130 a barrel oil, 20% percent reduction in stocks, and 10 year treasury closer to 3 percent to likely have an impact in the Smoky market. 

I am hedging my short terms with Oil stocks, it’s great to have real estate and equities at all time highs, and even the oil stocks are taking off too. Enjoying this ride for sure, just hope it keeps on churning. 

I'm not real sure about that. I live here and even in 2007-2009 times Gatlinburg/Pigeon Forge was always busy and always crowded. Those crowds were staying somewhere. AirBnb/VRBO weren't as huge as they are now back then, but lots of people had them with management firms and didn't have any trouble keeping people in them. I don't think anything is 100% recession proof but I will say that in the 30 years I've lived in this area nothing seems to stop that juggernaut; I barely even go to anything in S/PF/G anymore because the traffic and crowds are ridiculous. 

[John Carbone]

Ok that’s what I was hoping to find out. That’s more encouraging to hear that people were still booking out in 07-09.

[Joseph Cornwell]

@John Carbone

One factor in my business specifically gas prices have a large impact on is construction overhead. I have a small GC company with a few vehicles, 4-6 full time contractors and a few subcontractors, but when we are pricing contracting work and I have to factor in travel time and gas costs, it adds up a lot more than it did last year. Factor in that with rising wages, rising material costs, and general inflation. Our prices on construction projects have to go up significantly to keep up, I am interested to see when that shifts to where most retail customers or investors can't afford to have renovation work done. So far the demand still outpaces our availability, but it has to shift at some point. 

[Nancy P.]

Originally posted by @JD Martin:

Originally posted by @John Carbone:

I’m not looking for confirmation on something that is mathemically accurate. When someone makes a claim that “a fact” isn’t accurate when it is with no basis to back it up, I’ll defend the logic. 

 I’m looking for information from people who have been around this type of environment to weigh in how this effected the short term rental markets.

You say $4 gas in 2007 isn’t the same as it is now. Can you elaborate on that? What price per gallon would equate to how it was in 2007? 

Point of discussion is, how high will gas prices need to go to have an impact and how high will interest rates need to go to have an impact. 

Why is it different this time? I don’t know that answer. 

$5.25 = $4 in 2007. There was crazy headwinds in 2007 and cash was dried up. Cash is everywhere right now. We are liable to see some more inflation for sure but stagflation? Highly unlikely. 

For all of the middle class people that you see staying home instead of going to the Smokies, there are people who might have gone to Europe that are staying closer instead. I might be more concerned if I had an STR in a place not high on tourism.

Exactly right JD.  We were living in Germany, traveling Europe, when pandemic ended the job early and then his career (early retirement buyouts).  We desperately want to go back to Europe but still not quite comfortable with the ever changing requirements.  So at age 61 and 59, we finally spent a week on the Florida coast this year, and another week at Mackinac Island in Michigan.  Enjoyed them both very much,  and felt far safer as we could drive and then spend most of the vacation outdoors.  Most people I know are doing the same thing.  I especially feel anywhere with outdoor appeal (like the mountains) will be OK even if gas goes quite a bit higher.

[Jabbar Adesada]

@John Carbone

Look at the data for the Smokies from the early 2,000s until now. It’s all publicly accessible. I’ve seen data for a couple mature vacation rental markets and that 2007-2009 era barely affected any of them some even grew in tourism, travel expenditures, and lodging. The years when tourism cut back a good amount were the years of major natural disaster that halted tourism because of so many damages and closed off attractions. I think that will give you more data to formulate your thesis.

Real estate prices on the other hand??? No clue… if someone was underwater before I know they are doing wayyy better now in that market haha. People are trying to retire off these cabins

[John Underwood]

Originally posted by @John Carbone:

Originally posted by @John Underwood:

People with electric cars can still get to their vacation destination with little impact.

Put in a charging station to attract them.

I have been considering doing this.

that’s a great idea. I think on Airbnb you can do filter searches based on “ev charger”, with the new incentives in the projected infrastructure bill there will be more and more electric on the road. 

Exactly. 

I'm sure you can buy a charging station on Amazon and then get an electrician to install it.

I will likely rent a trencher put in some 240VAC direct burial cable and hook it up myself. 

[Matthew Paul]

High fuel prices will affect everything , it is already happening . Food is up , materials are up , etc . A lot has to do with transportation costs .  I can see people staying closer to home or having staycations . 

It cost me $100 to fill my truck now , it was $65 . ( I fill up 3 times a week I run 3 trucks ) I pass that cost to my customers .  Now the 9 to 5 person cant do that . My wife showed me how much food has gone up .  For the average person , that money has to come from somewhere , and thats discretionary spending . The vacation money may be gone before vacation time 

[Nick Robinson]

@John Carbone

Yes that is true that as interest rates rise your buying power will go down. As the FED begins its taper we will see interest rates continue to rise. They can not raise them too much because one it will crush the markets and two I believe it’s around 3.67% on 10yr that the government will default.

So you have to ask yourself if the markets crash or the government can’t pay its bills what’s the most likely thing the FED and government will do? There is no way they cut back on entitlements so the FED will jump back on QE. When that happens you will see big time inflation.

I believe we could see something similar to the 50s after WW2. The government had a lot of debt from the war and artificially kept interest rates low and let inflation take care of the debt. Big difference between now and then in the 50s most of our debt was a one time cost. Now a lot more of our debt is adjustable, entitlements, which means you have to inflate it more. The last I heard was you would need to inflate the US dollar 20% each year for 5 years to bring us back to 70% GDP/debt.

Long story short you want to own assets. Normal/Smart investing strategy will prevail. Buy property in a stable or growing market, purchase under market value, and make sure you have positive cash flow monthly.