Housing Recovery Clouded in Oil Prices

By Kevin Chiu

The jump in oil prices and the likelihood for further financial belt-tightening suggest less economic momentum developing than previously believed in the U.S. in 2011 delaying a full-fledged housing recovery, according to an economic outlook released by Fannie Mae. inflation Economic growth for the year was lowered to 3.5% — a down grade of just two-tenths of one-percent from the group’s previous forecast.

The decrease signals growing concerns among government economists specializing in the housing market that the recovery in the U.S. market will develop any time soon. The jump in gas prices triggered by turmoil in the Middle East and volatility caused by speculators in oil futures have injected uncertainty about the prospects for consumer spending and economic recovery in 2011 and 2012, the group said.

Consumer nervousness about an economic recovery stifles demand for housing, despite near record low mortgage rates keeping the market on a bumpy road to recovery. “The U.S. consumes roughly seven billion barrels of oil each year, so every dollar increase in the cost of energy translates into a $7-billion annual tax on consumers,” said Fannie Mac chief economist Doug Duncan.

As consumers pay more for gasoline, uncertainty related to the U.S. economy, and the prices of goods and services, especially groceries takes a growing toll on consumers, and it slows any thoughts that perspective home buyers have about purchasing property, delaying the housing recovery. In 2008 when gas prices jumped, topping $5 in many regions of the country grocery prices spiked as much as 30% for many items, including staples like bread and produce.

nuclear disaster in Japan

“Our national housing survey results during the last year have been very clear regarding consumer uncertainty about the economic and housing environment,” said Duncan. “This uncertainty coupled with the rise in oil prices is precipitating reluctance among people to take on large financial obligations such as borrowing money to purchase a home.”

Disasters in Japan, however, which were not included in Fannie Mae’s analysis of market conditions could, however, make matters even worse as the economic toll from the crisis impact on the U.S. economy becomes clearer.

Historically low mortgage rates, hovering below 5% for the 30-year fixed rate loan and lower home prices have failed to prompt more home buyers to make purchases as unemployment remains high in most of the U.S. But investor activity in real estate is rising with more than one-in-four transactions that closed during the month of February being investment purchases, according to National Association of Realtor figures.