Fuels Costs, High Gas Prices and the Real Estate Investor

by | BiggerPockets.com

Fuel prices are already taking a huge slice out of family budgets with soaring heating and energy cost; but thats only the beginning.

As gas prices skyrocket, the money to buy it must come from the family budget, making it even harder to keep up with the bills and the mortgage payments.

When many homeowners purchased their home during the housing boom of 2005 gas was sitting around $1.93 a gallon, with talk that it could go as high as $2.50. Now it’s sitting at about $3.59, and often climbs towards $4.00 (with $5.00 being on the horizon).

So even if a person fills-up their tank (22 gallon) just once a week, that’s an extra $146.08 a month they’re paying out. Based on my previous commuting experience, fill-ups are required about twice a week, so the cost is closer to $300 a month.

Higher oil prices also mean paying more elsewhere, as businesses are forced to pass on the increased costs. There are many items people don’t think about oil being in, such as roofing, plastic plumbing pipes and the drying process for lumber and bricks. Petroleum goes into many raw materials that are used in homebuilding.

Shock at the fuel pump is becoming a way of life, and the construction industry is feeling the effects of rising fuel costs as well. These increases are a major issue, not only driving up delivery costs but also the price of materials such as concrete, steel and drywall. Commercial, residential and road builders are all feeling the pressure.

How trucking rates are set varies widely around the country and, in most cases, truck owners have little control over what they’re paid. Many construction-truck operations support publicly funded road projects, where contracts are drawn up in advance and often do not provide for fuel-price spikes. The availability of Portland cement, copper, gypsum and PVC pipe became an issue in many parts of the US. during Hurricane reconstruction efforts in late 2005.

Increased fuel cost will also affect the selection process of the average homebuyer. People’s fears about the long commutes to work and the fuel costs associated with long drives twice per day, are causing people to change their minds about where they should live. Holders of real estate in more rural areas may find it hard to sell their homes (if they haven’t already), and even harder to foot the gas bill to commute to work in the city.

However, for those of you looking to invest in real estate, keep in mind that the demand for properties near larger employment areas (downtown) in major cities should be on the rise. This should help level-out some of the effects of the sliding housing market.

Investors (when buying real estate in today’s economy) should focus on areas that have the highest demand such as those within major urban city limits. In my own market, downtown Bellevue (Washington) has seen significant growth over the last few years, and still appears to be an excellent realty investment. Hopefully, for many years to come.

Apartment buildings have once again become a solid investment as people move out of homes they can no longer afford, and first time buyers find it impossible to qualify for a mortgage.

So as gas prices climb toward $5.00 a gallon, and then to $6.00, keep fuel cost in mind when selected your realty investments. It’s only a good buy, if people can afford to live there, and commute from there.

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  1. Excellent article! People had been calling for the Fed to cut rates and they got their wish. However, it was a classic case of “be careful what you wish for.” Lowering the interest rates caused an already weak dollar to fall even further. This increases the cost of imported goods to rise. Our largest import is oil and we can see the results at the pump and in the price of everything that needs oil in its production or shipping. The Government’s ill conceived ethanol program is also causing a shortage of corn which, in turn, is causing a rise in things such as beef which rely on corn for feed. Interesting times indeed. As you point out, we may see a movement back to the inner city areas, which could create great investment opportunities.

  2. As Richard said, I also think that high fuel costs will lead to a migration from the burbs back to the cities, which should certainly lead to renewed opportunities.

    I regularly hear about people trying to move closer to their work thanks to the high cost of gas.

    Nice article!

  3. You will certainly see that happening in areas that lack mass transent systems such as subways. Three years ago homes were selling like hotcakes in areas out in the middle of nowhere, now those homes are on the market and no one is buying. Downtown condos are the hot investment in our city currently. I wouldn’t mind having one myself.

  4. Certainly a good article. Here in Thailand new condominiums that are being built will increase in construction costs by 15%, which may mean a good time to buy finished second hand units which dont have this premium.

  5. I think more employers should allow their workers to telecommute when possible. Not only will it save gas money, tax dollars that would be spent on road construction or public transportation, and the environment, but many workers can regain hours of their life they spend sitting in their cars!

  6. Your investment advice is sound within this article. However, your economic assumptions leave a little to desire and need clarity. As an economist the word “shock at the fuel pump” is a bit of an overstatement. A shock is an exogenous change in an economic relationship that causes either aggregate demand or aggregate supply to shift. These shifts happen immediately and suddenly that can wreak havoc on a given market.

    There is no “shock at the gas pump”. Yes people are talking about the price of gas because the media needs a story and at present, gas is their story! However, the very fact that people are constantly talking about “gas” means that there is no shock in gas prices. Remember shock can only occur if there is a sudden and immediate change in a market that is unexpected. Now let’s say that several refineries are shut down off of the Gulf of Mexico due to a hurricane. That would justify a “shock” and would greatly affect people at the pump because overnight gas prices could jump to eight dollars a gallon!

    So how is gas affecting people? People’s behavior is geared toward rising gases prices; therefore, they are already adapting to the rising cost gas whether they realize it or not, which greatly reduces the economic impact of their change. So are businesses and in particular, construction companies where building material prices are dropping due to a drop in demand for building materials. If someone states that fuel is driving up construction cost they are greatly mistaken!

    With regard to your investment suggestions they are great! However, they have to do primarily with micro-economic factors rather than the macro-economic factors you mentioned in your post.

  7. “people are talking about the price of gas because the media needs a story”

    I think people are talking about the price of gas simply because they’re disgusted with the amount of money that’s being extorted from them at the pump. It shouldn’t take the majority of a one hundred dollar bill to fill your tank up.

    The citizens are being bled dry by the oil companies and the government sits and watches, and thats wrong. Truck drivers can’t afford to deliver goods at the prices they’re paying in fuel.

    As for the shock part, you point is noted. Thanks for the comment.

  8. Yes, oil prices are going to go up and up and up and it’s difficult to image how serious the imact will be, but my instinct is telling me that it’s going to be verrry serious.

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