Rising gas prices, declining suburbs

A while back I posted a lengthy bloviation arguing the housing bust will hit much harder in far-flung suburbs. Update: A new study argues that, not only will suburbs be harder hit in this downturn, but also that rising gas prices were the tipping point that caused the housing bubble to burst.

"The gas price spike popped the housing bubble," according to a new report from the group CEOs for Cities, which adds, "Growth in housing prices was fueled by low and stable gas prices from 1990 through 2004."

More: "Although housing prices are in decline almost everywhere, price declines are generally far more severe in far-flung suburbs and in metropolitan areas with weak close-in neighborhoods. The reason for this shift is rooted in the dramatic increase in gas prices over the past five years."

The report concludes, "The rise in gas prices has fundamentally altered the landscape of urban housing markets in a way that will not quickly be undone, barring an unforeseen collapse in oil prices."

Your thoughts? Comments? E-mail story tips to peter.viles@latimes.com.
Photo Credit: "She's real fine, my $4.09," submitted by Pete to the "Pain at the Pump" album on Your Scene at latimes.com.

Comments

[Patrick Duffy, HousingChronicles.com]

I'm glad you're bringing this up again, because it's an important trend that's just not going away. But it's not just due to gas prices -- as Richard Florida argues in his new book "Who's Your City?", it's also the value of time that's mostly lost during commuting.

More employers are also going to have to stop insisting on 'face time' for jobs that can just as easily be done from a home office and instead judge their workforce on productivity measures alone instead of determining whether or not someone looks 'busy' (and aren't we all good at that when necessary?).

The suburbs which do the best will be those within close proximity to whatever mass transit options we have in SoCal -- meaning mostly MetroLink and the light rail lines.

Sometimes it's hard not to laugh at SUV drivers who bought those ridiculous urban tanks with the assumption that gas prices would stay close to or under $2.00/gallon.

[E]

What happens when those option arms reset out there in the burbs?

Free gas won't help that situation.

[Willie]

Not only did the gas prices burst the housing bubble, but it is busting everyone's budget all around. Then, add to that, the rising prices on everything else as a result of the gas prices that there is pain to go around for everyone for awhile. It is going to be a hot long summer.

[jmart]

I have a hard time seeing the rise in gas prices as the reason for the collapse of the housing bubble. Seems like a stretch.

It seems to me that the housing bubble collapse was caused by people not being able to make payments on mortgage resets. Once a few people started having trouble, others realized that they would end up in the same boat, and either put their houses on the market or stopped buying. Too much supply, not enough demand. When the price supports starting hitting the securitization market, then the financing side completely collapsed. I think one could track all of these issues via the housing and econ blogs pretty easily.

[Laker]

As Oil just passed the $120 mark...I guess it is a good timing...The sad thing is that now, we have a new goal of $130...and we are getting there pretty fast.
Since even moron knows that the influence of FED funds rate is only "felt" about 6-8 months after any move, it kills me as i cannot understand the latest 0.25% rate decrease??? The last 0.5% and 0.75% reductions are still not accounted to the economy. Wall street sure applied them already though...
Since "official" inflation is now about 4.1% and FED funds rate is 2%...are we actually have a negative real 2% interest rate. For the average Joe, if you don't borrow money now as much as you can, you actually lose 2% of return. If average Jane is saving some money in a CD or savings account, she is forced by the FED to lose 2% guaranteed, and any rate she gets, essentially starts from -2% (negative 2). That is she needs to get at least 2% to break even.....
So, why do you expect all the speculators to do now???
Borrow money for free (-2% real interest rate) and buy oil futures.....This is not a joke, and if rate are kept negative, oil is heading to $200 a barrel. Right now if you could ask any "Oil estate broker" he'll tell you oil prices never fall, we should buy oil now coz rates are historically low....
That report that gas prices are going to $7.00 in 2012 seem much closer now...

[Matt S]

I agree that there is a housing bust and that gas prices have spiked (I am a master of the obvious), but I think that saying that the gas spike was the trigger for the housing bust is about as credible as Jerry Falwell blaming 9/11 on sinful behavior by new yorkers.

Going forward, high gas prices will hurt the exurbs (far out suburbs), but the turning point for this bust was the realization by banks and investors that they were handing out money to people who would never be able to pay them back. The exurbs were hit first NOT because of gas prices, but because that's where most of the cheap new housing was built.

[no longer in the biz]

This reminds me of the "the market hit a brick wall" moment I had in fall 2005 (while still in the biz) when Hurricane Katrina struck and gas prices went to $3 (oh for the days!). I remember one day driving up a major street to take a listing. On the way up, a major gas station price was at $2.89. A couple hours later on the way down it was $3.05. I recall telling a number of frustrated sellers in later months that I actually thought that was the moment when the market psychology changed dramatically.

[firesale]

The ONLY difference between the GAS BUBBLE
and the HOUSING BUBBLE -- the GAS BUBBLE isn't a bubble and won't collapse.

[Julia]

The exurbs will be hurt, especially those trying to get people to live out there that can't afford to buy anywhere in LA, especially areas like Lancaster, Palmdale, and Filmore that already have their share of crime and gang problems.

But I don't think even $6 a gallon gas is going to cause a reversal of white flight out of the suburbs and into the city. I live in Thousand Oaks, and gas prices would have to triple in cost before I ever considered moving my family out of Ventura County. Honestly, if gas prices got that expensive, I think telecommuting would become much more popular.

[GDC]

I've been saying all along if you have cash buy commodities funds. Mine is up 35% in two months. Everytime oil hits a new high, my fund goes up like crazy. With the way the FED is going, it'll be awhile before this bubble bursts. I missed the dotcom bubble and the housing bubble; I'll be damned if I miss this one.

[peter m]

I categorically disagree that high gas prices popped the housing bubble. The bubble popped because of the end of easy credit enabling the 'fog a mirror get a loan' phenomenon. Easy credit and no questions asked loans caused the bubble; tightening the loans is bursting the bubble. Spiking gas prices ain't got nothing to do with it, though it sure don't help if u live out in the IE or high desert and pay $4.00 gas to commute to LA.
Easy credit and overbuilding in the IE occurred in 2004-2007 and would have resulted in collapsed RE prices regardless of gas prices. The IE Economy started collapsing in 2005- 2006, way before the current sharp gas spike, and was already in depression by early 2007.
The argument that hi gas prices caused SCal RE to collapse is a farce. RE was starting to collapse in San diego in 2004, IE in 2005, and LA by early to mid 2007. Gas prices really started ther current sharp spike in fall 2007.
Their are about 10 reasons why the current Scal RE prices are collapsing and high gas prices aren't even one of them.

[Ryan]

The housing bust and gas price increases are a result of the same thing...easy money from the fed.

High gas prices did not cause the housing bust. Lax lending standards did. $4.00 gasoline is nothing compared to the crazy speculation that people did with homes

Without subprime lending and NINJA loans, we would not have had people making 50-60k/yr buying houses worth 500k. People overextended themselves on homes, and builders way overbuilt.

If gas prices had any effect at all, they might have ended the housing bubble a little sooner than it would have ended on its own.

This article is really off on this point.

[Teresa]

Gas prices are not what popped the housing bubble, but I do think the rising cost of gas is going to contribute to people's deciding to walk away from upside-down mortgages on houses located in far-flung exurbs such as Lancaster and Palmdale.

Imagine you're underwater on your mortgage, you are barely making your payments, you see houses all around your nabe boarded up...and now it's costing you $400.00 to $500.00/month to commute to your job in L.A. If high-priced gas was the only issue, MAYBE you'd tough it out, but the gas prices combined with all the other issues are going to push a lot of people off the edge.

[lefty]

hey guys, a famous investor said when you start getting stock tips from gas station attendants it's time to get out! lol the market crashed right after that. well, now everyone is a "real estate expert"! conclusion: we are at or very near the lowest prices you will ever get in fantastic metro L.A.!! it is time for you to start shopping and make your move; good luck everybody!

[Cal]

I'm with Matt, I don't see how gas had a darn thing to do with the housing bubble or it popping. It was a credit bubble and the credit bubble popped.. but it wasn't oil that was pumping all the money into the economy it was crazy lending practices.

[Hank Venture]

Europe has had expensive gas for years. They have adjusted: smaller and less powerful cars, more trains and buses. They even walk places sometimes. I know, crazy.

This is the new reality. Take a deep breath and get used to it.

[1Mile]

We moved out of LA (thankfully) to move to a nicer part of town near my work. Now I drive 1 mile, we rent a nice house for a 1/3 of what it would cost to buy, not to mention earning a nice chunk of interest each month on the down payment that would be required. My wife takes the train to LA. We are fortunate since we spend very little on gas, and the whole gas price issue is just background noise to us. Don't be afraid to move closer to your work - it will change your life. Trust me. All of the hoopla about gas prices seems quite comical to me when mortages and property taxes dwarf $20 a week in increased gas costs. I have absoulately no problem with increased gas prices. After all, this is a free market and supply and demand rules, or did we forget that? Same rules apply to other products, gas, houses, whatever it is. I guess the media has nothing else to talk about... and people have to learn to live within their means. If you hate high gas prices, invest in gas company or oil stocks.

[Laker]

Yeah Peter, this time you are really wrong on this issue.
Gas prices have nothing to do with popping of the crazy bubble house market. Gas price could and would make it worse as far as more foreclosures everywhere because of less disposable income, but mainly in the IE and high desert as working people that need to commute will find it economically crazy to continue doing that.

The #1 reason for this crisis (aka the crazy house prices appreciation) was the low interest rates, PERIOD.
If rates were not that low, banks would not give crazy mortgages as there would be no free money to do so...
Also high rate, would damp home prices and thus discourage speculators from flipping houses.
There are many reason for the creation of this huge ponzi scheme, but their all are minor to the big one - Free money by the FED - low interest rates.

The sad thing is that we did not learn a thing from it, as we are doing it again....today! Isn't that amazing??

[Milla]

this is why towns that are next to metro lines, like highland park, are going to turn into hot property in the next five years.

[Jill]

The idea that high gas prices started the housing bubble is as idiotic as Rev. Wright saying the US Government invented AIDS. Several posts here have done a good job explaining the real culprits, speculation, easy money and overbuilding.

I do not see any relief on the oil front any time soon and it is scary. I am baffled by the recent FED rate reductions which are sending the dollar and oil in the wrong direction. In my mind, the last two rate move should have been up.

Meanwhile, if you are gripping about gas prices – buy some XOM, CVX or other energy related securities. The big oil bashing is ridiculous and expecting some type of political market interference is even worse. When you pull your SUV up to get a $4 gallon of gas, state and federal government actually gets far more revenue than anyone else in the chain.

People also seem to not understand that the Western oil “giants” are just a tiny sliver of the world crude market and most of the oil used to make gasoline for US SUV’s comes from the Middle East and these countries are the big winners in this. BTW – many of these beneficiaries would love to find a way to send some whack job over to LA to blow up infidel Hollywood.

[John T Watts]

Markets turn based on perceptions of the market not the actual factors affecting the market.

[Mike S]

Perhaps a biased institute, CEO for Cities, isn't interested in providing an accurate depiction of suburban areas.

The excess of suburban houses will get consumed, just at prices that make the builder/previous-current owner wince.

I heard a guy promoting the same crap at a recent conference and he was immediately, and rightfully, thrashed by the other panel members.

[Giacomo]

The suburbs won't be dying. People who don't want to live in cities ( and there are many reasons for not wanting to live in a city) will just pay the extra 1K, 2K, 5K each year as the price on gas goes up towards $8-10 /gal levels that Europeans are already paying. We've just been enjoying LOW fuel prices for long, we have a sense of entitlement about cheap, personal transportation.

There's still a lot of slack in the system. The fact is, we've barely begun to adopt simple tactics such as carpooling, or to ask the bigger question: why, with broadband internet available, are millions of office workers STILL obliged to trek across the county each day to sit in their employer's office? Business culture will have to adapt to new times, or face wage inflation.

[tealeaf]

There's still a lot of slack in the system. The fact is, we've barely begun to adopt simple tactics such as carpooling, or to ask the bigger question: why, with broadband internet available, are millions of office workers STILL obliged to trek across the county each day to sit in their employer's office? Business culture will have to adapt to new times, or face wage inflation.

Posted by: Giacomo | May 06, 2008 at 07:49 AM

Giacomo: if we didn't have to sit in the office, we could be anywhere, like, India.

Jobs that can telecommute are already outsourced. The ones left require frequent, on site communication. Business unfortunately happens around the water cooler, like it or not.

Telecommuting was a fad during the dot com bubble. IBM, Best Buy corporate, and other telecommute poster children have mostly reverted back to traditional, in office arrangements because they discovered the productivity was simply not there.

Having managed telecommuters for 10 years, my experience is that the onus goes back on the folks left in the office to neatly package the day-to-day challenges of the workplace into carefully worded e-mails, scheduled video conferences, and lengthy phone calls.

Recent WSJ article on same:
http://tinyurl.com/4ejra6

[Gene J]

I have said it before and I will say it again. The folks who bought so far from civilization were marginal financially to start with. They bought what they thought was a lot of house for the money. They used teaser rates, ARMs etc to get in the house.

The rising gas prices and other economic shocks were just another knife in the back for struggling families.

[prefab sprout]

The price of gas may effect future behavior but it had NO effect on the housing bubble bursting. Its well documented the no cost/no skin in the game loans combined with easy qualifying caused the problem. If the proponents of this theory are correct then Downtown and Highland Park real estate must be holding their values. Oh they arent? Oh well.....back to the drawing board!

[tarbubble]

why don't more businesses relocate to the "exurb" areas where housing is cheaper? when Riverside County was agitating (may still be agitating) for a tunnel to be dug underneath the Santa Ana mountains in order to increase traffic flow into Orange County, i always wondered why they didn't just pour their dollars into attracting businesses. i know everybody here knocks the IE, but i grew up out there and love it and would live there if there were any jobs for us (electrical engineering). but we chose to live near work, so we're stuck in overcrowded and overpriced south Orange County. everybody talks about the culture and the entertainment and the gloriousness of the coastal areas but for those of us who can't afford any of that crap the glamour seems pointless. at least from the IE i could take the metrolink into the city and see a concert every once in a while - since the cost of living in the IE would free up a little money for cultural enrichment. we just can't deal with 4+ hours of commuting every day and the attendant fuel costs. arrgh, now i'm getting frustrated again.

[MyLessThanPrimeBeef]

This just in: Raising rice prices are driving people to the Sacramento-San Joaquin Delta.

When is the next wagon to South Dakota? I am kind of short on wheat.

[RZ]

Everyone's been complaining about rising gas prices since at least 2000. So why are the higher prices just now being blamed for the slumping housing market? Sure, higher costs - whether gas, food, household needs, etc. - didn't help the housing market. But it doesn't change the fact that too many people made financially irresponsible decisions to buy homes they couldn't afford in the first place. Most of the current defaulters would have had to foreclose no matter what the gas prices are.

[LA]

Those of you who are pointing out positive opportunities emerging from this mess - thank you!

We are going to see growth in public transportation, electric cars, hydrogen fuel cell research and development, solar power systems, and many other innovations that will arise to fill our needs. When ANY sector of a market becomes too expensive, or monopolized, or antiquated, it creates opportunities for someone to do it faster, better, cheaper.

This is an exciting time. The future is gonna happen. It's our own fault if we get dragged there kicking and screaming when we could be enjoying the ride.

[Teresa]

1Mile, the gas prices are background noise to my husband and me as well. He telecommutes, and I take the train to Philadelphia every day. I drive to and from the train station (about 5 miles round-trip), and to stores and other errands. I gas the car about every 10 days.

I disagree with Tealeaf that all the jobs that can be telecommuted already are. While some jobs can never be telecommuted, an awful lot that could are not, specifically back-office work such as data entry.

The simple fact is, we are running out of oil. We have enough to last about another 40 to 50 years at best, even if we drill the wildlife refuges. The days of cheap gas are over.

Tarbubble writes:

---------why don't more businesses relocate to the "exurb" areas where housing is cheaper?--------

As gas prices continue to rise, making it more and more difficult and costly to attract employees, they will. They'll also start telecommuting as many jobs as can be telecommuted. However, these things will not happen overnight, but gradually, over the next decade.

-------------everybody talks about the culture and the entertainment and the gloriousness of the coastal areas but for those of us who can't afford any of that crap the glamour seems pointless.---------------

That's why we left So Cal. The fact that it was nice outside (at least in the winter--in the summer it's as bad as Philadelphia) and that there were all these great museums, fine restaurants, etc., meant absolutely NOTHING when we couldn't afford to go anywhere or do anything, anyway.

[Milla]

prefab: i said in the "next five years." in case you've missed the headlines, everything is losing value nowadays. but as you said yourself, "The price of gas may effect future behavior..." [sic]

[JohnnyB]

CEO's For Cities PROMOTES urban-centric life and development. That's their power base.

Think back to a 1 1/2 - 2 years ago, when the bubble popped... we (the populace) were not really thinking about gas prices the way we are now. Gas and commodity prices rose on the heals of the RE collapse. So, they have it backwards.

The CEO's are manipulating people's short term memory span to frame the debate in favor of their power (revenue) base. This form of opportunistic urban promotion will lead to funding initiatives and developments that will be urban centric at the expense of suburban and rural life.

This is an unbalanced, misguided approach that would tend to further degrade the strength and prosperity of our individual citizens and our individual rights - especially in terms of quality of life, peace of mind, self determination AND IMPORTANTLY – LAND AND PROPERTY OWNERSHIP.

This is a big, beautiful, prosperous country. We shouldn’t promote living on top of each other like sardines because big oil runs our government. We should promote alternatives to big oil to promote quality of life and a healthier planet.

Hey, I love cities too… absolutely. But, balance is key.

[tealeaf]

why don't more businesses relocate to the "exurb" areas where housing is cheaper?

Same reason business chose Manhattan over New Jersey: because executives choose the location of HQ. And they simply refuse to drive long distances. It's the cold, hard reality of the situation.

Regarding Teresa's disagreement, if a business is going to push data entry to a telecommuter, why push it to "overpriced" Colton when you can push it to Mexico, eastern Europe, India, or South Dakota?

Point is telecommuting will be broadly be reserved for marketing / sales types because of industry's need for presence in other areas. The only exception, which is temporary, is a critical person who relocates out of state (at their old salary). I have rarely seen these sweetheart deals last more than a couple of years.

[yours truly, Johnny Dollar]

I was making Palm Springs-Hollywood-Palm Springs roundtrips; now, everything is backwards; so, I am now
making Hollywood-Palm Springs-Hollywood roundtrips.
Soon, a nice bicycle with panniers will be the new SUV.
(my backpack is my new briefcase).

[yours truly, Johnny Dollar]

Price of a pack of cigarettes when I was a kid was
25 cents; price of a gallon of gas when I was a kid
was 25 cents.
Now that I'm not a kid, the price of a pack of cigarettes
is $4.09; the price of a gallon of gas is now $4.09.
When I was a kid, the rule of thumb was a week's
salary bought you a man's dress suit; now that I am
not a kid.....nothing has changed.

[NoWayinLA]

This is a perfect example of the maxim, "correlation does not equal causation." Yes, the price of gas went up. Yes, the suburbs have the highest foreclosure and value decline rates so far. But the one did not cause the other. People are not suddenly deciding it's worth paying an extra $1800/mo in housing costs to save $100/mo on gas. They can't spend money they don't have.

The market fundamentals in LA and OC still don't make sense. Median incomes don't line up with housing prices. And families moving to LA also have to factor in the overwhelming cost of private school. In a lot of these exurbs, you can still send your kids to public schools. And the teachers even get paid.

Throw in some more quality of life issues... traffic is awful everywhere, hospitals are shutting down, air so thick with smog you can stir it with a spoon, freeway shootings, brush fires... it's a wonder anyone still lives in LA at all.

[yours truly, Johnny Dollar]

Living huge...as a former boss always said.
On a budget that would support no SUVs,
we have two; on a budget that would support
a rental; we have a five bedroom house a three
hour round trip from our workplace; on a budget
that would support 2 children, we have 5 children
(and two ex-spouses).
Keeping up with the Joneses? The Jones' two
cars are paid for (the Joneses are happy not having
anyone to keep up with).
Refer to lyrics in the song "Luckenbach, Texas"
with Waylon, Willie and the boys. Anyone talked
with Jerry Jeff Walker this evening?