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How Coronavirus Could Harm the Real Estate Market With an Oil Price War

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With COVID-19 spreading rapidly across the United States and the world, our lives have temporarily changed both health-wise and economically.

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While the real estate market at the moment seems relatively unscathed, will it remain like that?

A key issue facing the U.S. real estate market besides falling stock prices, social distancing, and financial uncertainty, is the effect low oil prices could have on home values.

In this article, we’re going to cover the correlation between oil prices and real estate and how the coronavirus has played a role in the ongoing oil production war between Saudi Arabia and Russia.

Let’s dive in.

The Situation

Once it became clear that the coronavirus wasn’t going away anytime soon, the members of OPEC (Organization of the Petroleum Exporting Countries), led by Saudi Arabia, came together to discuss the oil strategy they would take to combat the financial effects of the virus.

OPEC agreed to cut oil production down by about 1.5 million barrels per day. This would ensure that oil prices remain at a profitable level while COVID-19 spreads.

Russia, being loosely entangled with OPEC, was supposed to sign off on the deal.

This is when everything fell apart.

Russia, in order to prevent U.S. shale oil companies from gaining market share, announced that they would not abide by the agreement and stated that as of April 1st, they would remove their restrictions on oil production to compete with U.S. companies.

This led Saudi Arabia and OPEC to a full reversal in their position. Saudi Arabia announced that they would start producing an additional 10 million barrels per day and grant price cuts to their most preferred customers, essentially launching a price war with Russia.

The problems with this:

  • Oil markets are already near capacity and now it’s being flooded with more oil.
  • The travel industry is being affected the most by coronavirus and people are staying home to prevent the spread of the virus, drastically lowering oil consumption.
  • Lower consumption = lower demand = lower prices = little-to-no profits.

So how does this affect the real estate market?

Related: BiggerPockets Podcast 374: What Real Estate Investors NEED to Know About the Coronavirus, the Economy, and the Problems at Your Door

The Domino Effect of Oil

Oil doesn’t directly affect the real estate market, but it does create a chain reaction that can eventually reach the real estate market over a period of time.

Here’s how.

The United States is the largest oil producer in the world as of the coronavirus outbreak. When global oil prices drop, the U.S. must follow suit to stay competitive.

This causes oil companies in the United States, primarily located in Texas, Louisiana, Oklahoma, New Mexico, and North Dakota, to lose profits. When companies lose profits, they must reduce the number of employees they have.

This means layoffs. Layoffs are not good for any economy.

With fewer employees, oil companies lower the volume of supply purchases to stay in the green. This hurts the supply companies that provide the material, which include PVC piping, steel, plastics, etc.

Once the supply companies start to lose profits, another round of layoffs follow, and the cycle continues.

When Does This Affect Real Estate?

Once companies entangled in the energy industry begin laying off employees to consolidate cash flow, the unemployment rate rises, and people begin to panic. Especially the ones who have mortgage payments.

If those unemployed persons can't find a job in time to alleviate their financial burdens, their mortgage and other bills begin to stack up against them and suddenly they've defaulted on their loan.

Keep in mind, this process takes a lot of time. Real estate is considered a safer investment due to the lack of volatility in the market.

But, regardless, one foreclosure can affect a neighborhood's value, and when you have states like Texas employing over 338,000 fuel-related employees. You may begin to see a serious uptick in foreclosures within certain areas.

When that happens, property values decline because foreclosures are usually sold at a lower price, also known as a "short sale."

Due to comparable property data being the number one determinant of pricing—property values sink—and people start to lose out on their equity.

Millions of dollars in wealth can be lost over the course of about half a year.

Who Will Be Affected?

The pertinent question is wondering who could be affected by falling oil prices.

Obviously, the states relying on energy production will get hit the hardest. The map below shows the states with the highest oil production.

oil producing states

But due to real estate being hyper-focused on certain communities, it’s important to examine what particular areas could suffer the most.

Big Cities vs. Small Towns

Large urban areas with a major oil industry will certainly be affected by lower housing prices due to an oil bust, but how much?

If we look at Houston, Texas, one of the larger oil-producing cities in America, you would expect them to get hurt by an oil bust. But if we look further at their job market, we see a different story.

houston labor market

From the chart, we can clearly see that Houston has a diversified job market. If any of the labor forces were to cripple, there are plenty of other industries to keep things stable, thus protecting real estate from a full-on crash.

However, smaller towns that rely on oil production to fuel their economy could have serious problems.

Related: The Impact of Coronavirus on Real Estate Markets

For this example, we’ll examine Williston, North Dakota. Back in 2010, Williston was home to a massive oil boom. People flocked to the small city from all around the country to take a slice of the huge profits oil companies were making.

But since 2015, oil production has slowed down in Williston, and economic stagnation followed. The housing market has hardly appreciated in the last couple of years.

williston nd median sales price

Furthermore, the oil industry, which once comprised a third of the labor market, is no longer the chief employer.

williston nd labor stats

All the people who moved to Williston in search of a better opportunity with oil bought homes that are no longer appreciating, or in fact, are losing equity. They’re also finding themselves working in a different industry due to layoffs in oil.

With oil prices dipping even further and the coronavirus causing mass panic, Williston could be in for a bad year.

How to Protect Yourself as an Investor

If you invest in real estate, then you probably know that diversification is key.

When purchasing properties, renting out to tenants, and flipping homes, it's crucial to look beyond the real estate statistics in terms of appreciation over time, listing volume, and median sales price.

Look at the greater economic picture. Ask yourself questions like:

  • Does this community have a diversified labor market?
  • What is the primary source of income for this region?
  • Do I see any potential economic fallouts due to speculation or over-reliance on a particular industry?

Play your cards the way you see fit—but use data to make informed decisions.

Final Thoughts

How far the coronavirus takes this oil price war is unknown. There isn’t much information or data available to give us an idea on the time it will take to fight this virus and bring stability back to the world.

But until then, I don’t see oil prices changing from their current trajectory anytime soon.

Hopefully, we use this strange time in our history to recognize the underlying issues with our decisions, economic principles, and awareness for unknown possibilities.

My main piece of advice: Wash your hands and be safe.

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Questions? Comments?

Weigh in below!

Matthew Myre is a real estate agent and the CEO of PurpleCup Digital, a web design and marketing agency based in Asheville, North Carolina. Matthew speci...
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    Wenda Kennedy JD from Nikiski, Alaska
    Replied 6 months ago
    I live in Alaska. We are VERY dependent on the oil prices and we're already seeing some blow-back from the oil price collapse. But, we went through this same type of oil pricing situation just a few years ago -- so it is blunted in our real estate market so far. It's still going to hurt some. As for the virus -- most of our State is rural, so we're just hanging out doing what we, for the most part, usually do. Anchorage is shut down, and our stores here on the Kenai are shutting down early or all together. So, I guess we'll eat what I have in our pantry and I won't go to Anchorage for the moment...
    John Olu Real Estate Agent from Laurel, Maryland
    Replied 6 months ago
    Greetings everyone: Open houses are getting cancelled in the state of MD. Anyways, I am available in the DMV area if anyone needs help. Happy investing!
    Steven Westlake Developer from Houston, TX (Cypress)
    Replied 6 months ago
    I live in Houston, and that circle graph needs to be taken with a huge grain of salt, 29.16% of Premier Coil Solutions, Waller, TX got laid off last Friday 20mar2020 including engineering folks like me. They are a "manufacturing" company, as they built CTU equipment to service the oil wells. My buddy across the street owns a construction company, he said today several other construction places cut half, or more. He has only work for the next 2 weeks, for him and his cousin, the rest he just calls when he has work. My sister a custodian in Ohio, cut back to 2 days a week, her husband a truck driver in Ohio, laid off Friday. Oldest son a resort worker in Smoky Mtns Tenn, laid off Friday. My opinion is this solution, long term, will be far worse than if they had just let it go, and just restricted the groups at higher risk. This will likely surpass the 1929 crash in results. I hope I'm wrong. Normally low rates and QE means prices rise, great if your a flipper, or you can BRRRR, and rent will cover the new payment. I'll be 54 in a few weeks, and always before, there was a better place, or new job type, so you could move, or learn something new. I have had jobs in 7 states, and changed industries more times than I care to count. Watching to see what looks like the next best, but setting up a cabinet shop in the garage for now, thinking if people are stuck a home, they may want a better kitchen or bath, etc. Any body ever read Atlas Shrugged? And now Pelosi is trying to add some abortion stuff to the bailout money, people staying at work, and not stuck at home, would have stopped far more babies if that was her goal.
    Mark Sewell Lender from Houston, TX
    Replied 6 months ago
    @Steven Westlake I have also suddenly found myself with a lot of extra time on my hands. Not sure exactly where this all leads right now.
    Dave Rav from Summerville, SC
    Replied 6 months ago
    Another major effect COVID will have on real estate, impact from all OTHER jobs. Not just oil-related industry. And your example only addresses a small handful of states. Whereas, jobs in EVERY state in other sectors are being affected by the virus. Though I understand oil is important, not just for transportation, but for jobs and for manufacturing many other products (like plastic - who knew?!), lets not forget all the other employment sectors that are overwhelmingly affected (restaurants, retail, bars, sports venues, private colleges, just to name a few).
    Matt Myre Real Estate Agent from Asheville, NC
    Replied 6 months ago
    Absolutely, everyone is taking a hit from the virus. But for this article, I wanted to focus on oil production and how that will go down. The reason I talked about the five states was because those states have the largest energy industries, so they would naturally get hurt the most by an oil bust. Alaska is another big one. Stay safe!
    Denise Minard New to Real Estate from Williston, ND
    Replied 6 months ago
    Shocked to see my city in this article! I just closed on a duplex in Williston, ND last week. Wish me luck!
    Jesse Frickle from Williston, North Dakota
    Replied 6 months ago
    Im in williston. what duplex did you buy?
    Matt Myre Real Estate Agent from Asheville, NC
    Replied 6 months ago
    Best of luck! Williston has always been a city I've paid attention to since its oil boom. My parents at the time we're considering a move out there but decided on staying in good ol' Asheville. There was a point where I was considering writing a novel set in Williston. I still might revisit that idea if I find the time (and motivation).
    Mike Iger
    Replied 6 months ago
    I'm surprised you didn't mention the green energy industry. It's YUGE! You might spend $35k on an electric car if gas is $3.50 a gallon, but when gas is $1.50 a gallon you won't. Cheap oil is an absolute death sentence to the entire electric car and green energy industry. The employees they layoff will foreclose, spend less....
    Matt Myre Real Estate Agent from Asheville, NC
    Replied 6 months ago
    Another industry that I didn't think about in general was tourism. My economy (Asheville, NC) lives off our summer and autumn tourism. I'm hoping this all starts to subside by summer or Asheville and many other cities are going to have serious issues.
    Steven Westlake Developer from Houston, TX (Cypress)
    Replied 6 months ago
    An update to my above post, my buddy who did not get laid off (see above), said everyone else got cut back to every other week. Dave Rav - plastic is correct, and also a lot of clothing, blankets, waxes, lubricating oils, and asphalt, fertilizer, flooring (floor covering), perfume, insecticide, petroleum jelly, soap, vitamins and some essential amino acids, grossed out yet? Mike Iger - I don't think most people who buy electric cars, do so, based strictly on the math, I think they are much more concerned with pollution issues, personal choices, etc., for years there have been other cheaper choices for transportation, public, pedal power, mopeds, or for example up until 2015 and the VW diesel gate scandal, VW and Audi made a bunch of little diesel cars that approached 45-50 mpg highway real world driving, these cars were $10k-15k less than the electric cars, if you spent that difference to buy fuel, If the price difference was $12,500, and if fuel averaged $3 that would buy 4166 gal, and at 36 mpg you could go 149,976 miles, by which point the electric car would have needed a very expensive battery, and that money would buy more fuel, to get past the second battery for the electric car. I realize there are oil changes, etc on the diesel, but if your paying interest on the money difference or at least don't have that money invested, there's a cost also. I ran this argument in my head back in 2009 and bought a 2009 jetta for $18,600, I averaged 36-38 mpg over it's 243k miles (I live in Houston), on trips seen as high as 45-48 mpg. It made many trips from Houston to Little rock on a little under 10 gal. Worst tank ever was 28 mpg, near zero degrees and 6 inches of snow, close to lake Erie. It still had the original front brake pads, and VW bought it back for $9,675. Sorry for all the math, engineering guy, with to much time on my hands.
    Matt Myre Real Estate Agent from Asheville, NC
    Replied 6 months ago
    Numbers are important. I appreciate your insights and updates. I just had someone from Louisiana contact me this morning about some issues with their energy companies. I hope everyone stays well.
    Steven Westlake Developer from Houston, TX (Cypress)
    Replied 6 months ago
    FYI, been trying since Monday to file for unemployment, always busing phone. No clue how many folks they can handle each day but we're over that.
    Terry Lowe
    Replied 6 months ago
    How do you think the massive stock drop in REIT’s will affect our Real Estate? Sure am worried about both residential and commercial tenants being able to pay rent!
    Matt Myre Real Estate Agent from Asheville, NC
    Replied 6 months ago
    To be honest, I don't know. There's a lot of uncertainty when it comes to anything that resembles a stock. Obviously not being able to pay rent or mortgages is a major issue going forward. Not to mention the number of people who will be behind on bills once this crisis ends. I wish I knew the answer to be honest. However, as someone who does read literature about the stock market and investments and whatnot. I do know that for every decline, there's a rebound to follow that usually will double the value. If I'm an investor in REITs or anything else that is a security, I'm holding right now. (Which is what I'm doing).
    Steven Westlake Developer from Houston, TX (Cypress)
    Replied 6 months ago
    FYI, still trying to get thru to Texas unemployment, so any numbers you are seeing are still way low.
    Steven Westlake Developer from Houston, TX (Cypress)
    Replied 6 months ago
    April 11, still trying to get thru to Texas unemployment, so any numbers you are seeing are still way low.