As the novel coronavirus (COVID-19) is spreading across the United States and the world, our lives have changed not just health-wise, but economically as well. And while we’ve been bombarded with news over the last month concerning the virus, the stock market crash 2020, and financial uncertainty, you may have missed a crucial piece of news – plunging oil prices. This is a key issue that can leave a huge impact on the US real estate market in 2020 and beyond. While the stock market is a great indicator of economic health, low oil prices can affect local communities, major cities, and even entire states. Keep reading as we explain how the coronavirus outbreak had played a role in plummeting oil prices and how this, in turn, is affecting the housing market.
Related: The Impact of the Coronavirus on the US Real Estate Market
Why Are Oil Prices So Low in 2020?
When the fact that COVID-19 wasn’t going away anytime soon became clear, members of the Organization of the Petroleum Exporting Countries (OPEC), led by Saudi Arabia, came together to discuss their strategy to fight the financial fallout of the pandemic. Members of OPEC agreed to cut the production of oil down by about 1.5 million barrels per day. This would keep oil prices high and stable so that oil companies would still be able to profit during the coronavirus outbreak.
Russia, being entangled with OPEC, was expected to agree with the deal. However, in order to prevent US shale oil companies from increasing their market share, Russia announced that it would not abide by the agreement. Russia then went the extra mile and stated that, as of April 1st, it would remove the restrictions on national oil production to compete with US companies. And this is when everything fell apart.
In response, Saudi Arabia and OPEC completely reversed their position. Saudi Arabia stated that it’ll start producing an additional 10 million barrels per day and grant price cuts to their most preferred customers. Essentially, this was the launch of a price war with Russia. However, the problem with this is oil markets, which are already near capacity, are now being flooded with more oil. Plus, the coronavirus forced airlines to cut their flights, businesses to close their doors, and people to stay home. As a result, oil consumption has dropped significantly. This lower consumption leads to lower demand, which in turn leads to lower prices, which means little-to-no profits for oil production companies.
After a two-week-long price war, Saudi Arabia has effectively placed itself to dominate the next 10 years of oil production – even surpassing the US. By keeping oil prices low ($15-$30 per barrel), Saudi Arabia’s largest producer can out-earn US shale oil companies which have increased costs of oil production ($23 vs $8 per barrel). This price war is actually one of the reasons behind the stock market crash in 2020. But how does all of this affect the real estate market?
The Effect of Oil Prices on Real Estate
Of course, oil does not have a direct impact on commercial and residential real estate. It does, however, create a domino reaction that could reach the housing market over time. How? Well, as of the coronavirus outbreak, the US is the largest oil producer in the world. When oil prices drop globally, the US must follow suit in order to stay competitive. However, lower oil prices mean US oil companies will lose profits. When companies lose profit, they’ll reduce the number of employees they have (layoffs).
As they’re left with fewer employees, oil companies will have to lower the volume of supply purchases to keep positive cash flow. In return, this hurts supply companies that provide material (including PVC piping, steel, plastics, etc.) and leads to them taking a financial hit. And when these supply companies start to see a loss in profits, yet another round of layoffs follows – and the cycle continues. With all these layoffs in the energy industry, the unemployment rate will obviously rise, which is not good for any economy. People, especially those with mortgage payments, will panic that another housing market crash is on the way.
Related: Will the Coronavirus Cause a Repeat of the 2008 Housing Crisis?
The real estate market might end up with a bunch of foreclosures which can drastically lower the property value of neighborhoods. Once sellers take their reduced equity somewhere else, they have to settle for lower-priced homes. Consecutively, this lowers the value of other neighborhoods, and the dominoes keep falling. Unexpectedly, you’ll have an entire housing market where property values have plunged, equaling millions of dollars in lost wealth. But, will this effect of oil prices on real estate happen everywhere in the US housing market 2020? Of course not.
Energy-Focused States Will Get Hit Hard
As mentioned, not every real estate market across the US will be affected by low oil prices in 2020. This is because not every state relies on energy production. And while the effects of US oil prices are felt at gas pumps across the nation, lower oil prices actually help consumers by lowering the price of gas. However, experts believe housing markets that rely heavily on energy production are the ones that will get hit the hardest. After all, that’s where the majority of layoffs will come from. Meaning, if this crisis continues, oil prices will affect residential and commercial real estate in the primary oil producers in the US, which are Texas, Oklahoma, New Mexico, Louisiana, and North Dakota. However, there’s more to consider.
Big Cities vs Small Towns
As any real estate investor knows, all real estate is local. Meaning, whether national market trends are booming or busting, what really matters is market conditions in the local region, town, or neighborhood where you plan to invest or buy an investment property. This is why low US oil prices will have different effects on large urban areas vs smaller towns. Let’s take two examples to further explain.
Houston, TX is one of the largest oil-producing cities in the US, so it’s normal to wonder how low oil prices will affect the Houston housing market. If you only look at the fact that Houston holds 29% of the nation’s jobs in oil and gas, you would expect it to get hurt by an oil bust. However, if you look further into the job market in Houston, you’d see a different story. You see, the city has a diversified job market with other primary industries including retail and food services, healthcare, business services, education, and others. So if any of the labor forces were to cripple, there are plenty of other industries to keep things stable, thus protecting the Houston housing market from crashing. In addition, Houston is currently in a very strong seller’s market so a drop in demand would only bring a balanced market in 2020.
Related: Coronavirus Real Estate Update: Is a Buyer’s Market on the Way?
On the other hand, a smaller town like Williston, ND that relies on oil production to fuel its economy could have serious problems. Williston witnessed a massive oil boom back in 2010 which led people from around the country to flock to the small city to take a slice of the profits that oil companies were making. However, oil production has slowed down in Williston since 2015 and an economic slowdown followed. As a result, the Williston real estate market has hardly appreciated in the last couple of years. Not to mention that the oil industry is no longer its leading employer. People who moved to Williston have bought homes that aren’t appreciating or are losing equity. Now, with oil prices dipping even further and the coronavirus outbreak causing panic, Williston real estate could be in for a bad year in 2020. This shows how oil prices affect the housing market and economy.
Final Words to Real Estate Investors
Will oil prices go back up? Well, it’s unknown how far the coronavirus is going to take this price war. So far, there isn’t much information on how long it’ll take to fight the pandemic and go back to a stable world. But until then, experts and economists don’t see oil prices changing from their current trajectory anytime soon. If you invest in real estate, one thing you can learn from all of this is the importance of picking the best location for your property investment. Whether you buy rental properties or flip houses, it’s crucial to look beyond real estate statistics like appreciation and median sales price. Look at the bigger economic picture like how diversified the job market is and remember to run a thorough real estate market analysis.
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