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

19 Replies

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. 

I'm on board with you too Cal.  A family member (in boat sales predominantly in $100K+ range) had oil money coming in right and left to buy for cash before the wells in west Texas started being capped to to low oil prices. The times they are a changing. 

while I agree with much of what you say I have never seen or been banking on large appreciation in Oklahoma.  The big thing here is to bank on cash flow I think.  The are other better markets for appreciation.  

Originally posted by @Rhett Tullis :

while I agree with much of what you say I have never seen or been banking on large appreciation in Oklahoma.  The big thing here is to bank on cash flow I think.  The are other better markets for appreciation.  

 That's great.  The whole purpose of writing this post and others I've written on the same subject  is to make people very wary about investing in these areas with the expectation that past is prologue.  In other words if prices have gone up 20% or more in the past couple of years they are bound to continue that path.  I'd argue the opposite, but highlighting the unlikelihood that prices will continue to rise despite oil being down over 50% is my main goal.  

yep I would agree. I got out of LA just before the bubble burst.

@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.

Originally posted by @Bill S. :

@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.

Exactly!  I'm trying to point out that there are some definite clouds on the horizon.  

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.

Oklahoma has never seen much of a price jump in property values in my opinion compared to other markets anyway. I agree with Rhett the strategy there is cash flow on buy and hold.

interesting article i saw today that kind of shows where we could be headed.

http://money.cnn.com/2015/01/06/news/economy/oil-jobs-gas-prices/index.html

Originally posted by @Sara Cunningham :

Oklahoma has never seen much of a price jump in property values in my opinion compared to other markets anyway. I agree with Rhett the strategy there is cash flow on buy and hold.

There certainly have been localized (location and time specific) jumps in OK real estate. For example: Elk City 1980 to 1985; 1980 population was about 7500, 1983 it was estimated to be about 15000 and by the end of 1985 it was back to about 8000. There were several farmers who lost fortunes building houses to sell or rent into a boom market.  Rental owners, investing for cash flow couldn't find renters; builders had new houses and no buyers or at least none that could find a mortgage company willing to lend.

3 years of cash flow on a 20 year mortgage is still a disaster.  So was bull-dozing never lived in houses that had sat empty so long they were unsafe to occupy.

Just saying, if your buying 'boom' don't stand so close to get caught in the explosion. 

Originally posted by @Rhett Tullis :

interesting article i saw today that kind of shows where we could be headed.

http://money.cnn.com/2015/01/06/news/economy/oil-j...

 Yep.  It doesn't take long before oil companies start killing projects and laying people off.  Shale production is on the expensive end of the spectrum, so those projects are the first to be turned off.  Real estate investors who pumped a bunch of money into these fracking areas are going to be in a world of hurt if the price doesn't double very quickly.  Jobs and production won't stop completely.  But, as for construction, a lot of the jobs are in drilling and completing the wells.  Once they're producing, the labor requirements are a lot less.

A place like Houston or Tulsa is less sensitive to this because there are other jobs.  But there will still be impacts.

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.

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.

@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.

@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.

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.

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@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.

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.

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