Inflation's impact on energy costs was already being felt before the Russia-Ukraine conflict, but now new sanctions restricting the exportation of fuel are exacerbating the problem and causing gas prices to soar. While it may not seem like real estate and rising gas prices go hand in hand, they are far more related than you may think. Here's how skyrocketing fuel prices could impact the real estate market in both the short and long term.
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Gas prices are soaring
Gasoline prices are one of the cases where consumers can see the immediate impacts of cost increases. Even a week's difference means you are paying more for a normal fill-up. According to AARP, the national average price for regular unleaded gasoline has increased 17% in the past month alone. It's estimated the increased gas costs could add up to $2,000 to the average household budget this year.
This isn't just affecting Americans as they fuel up their cars, but it also causes companies that ship and deliver goods to have to adjust their prices to compensate for fast-growing fuel costs. Energy costs to heat or power homes are also being impacted by rising fuel and oil prices, which all get passed on to a higher bill for consumers. Until oil production is increased, helping ease the supply strapped market, this issue will likely only grow -- meaning gas expenses are likely to keep rising.
Real estate and gas price correlation
The housing market is driven by supply and demand. Limited housing supply and high demand recently, thanks to favorable mortgage terms like low-interest rates, have pushed home prices to record highs. Over the past year, home prices have increased 19% on average while rental rates have increased 12.6%.
Double-digit increases in the cost of housing when wages are growing around 4.5% puts a lot of pressure on low- to middle-income earners. Add in a rise in cost for everyday commodities like food and gasoline, which have increased 7.9% and 38%, respectively, over the past year, the mounting problem becomes crystal clear. Skyrocketing fuel and oil prices means people can afford less, which restricts consumer spending.
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The impact on real estate
Real estate in areas where people have a long commute, like the suburbs, could see lowered demand as people battle rising fuel costs. Thankfully, with many people still having the freedom to work from home, long commutes aren't as big of an issue as in the recent past. Rather, it's more likely that we will see a direct correlation between high gas prices and lower demand for housing.
The Federal Reserve has outlined a plan to increase interest rates several times this year in an attempt to combat the inflation surge, which will, in turn, cause an uptick in mortgage interest rates. Higher interest rates mean people have to buy properties for less money in order to achieve the same monthly payment they could achieve from a lower interest loan.
As people tighten their budgets, they will have to determine where they spend their money. Savings that may have been set aside for a home purchase may be used to help people float temporarily until inflation and things like food and fuel costs come down. This could mean less spending in stores and online, which could negatively impact retail or industrial real estate, as well as less money spent on vacations and leisure activities, which could negatively impact hotels, short-term vacation rentals, and entertainment venues.
While the housing shortage is certainly still giving fuel to the price-growth fire, I expect gas prices in addition to inflation and rising interest rates to combat that in the near future, lowering demand and helping prices cool.
