It takes some mental effort to see the effect rising fuel prices have on the market, but we do feel the impact. Inflation, of course, increases prices for most everything but the price of oil has multiple downstream effects which are not always tied to inflation. That means that oil price can have an outsized impact on other areas of the economy. OK, enough of econ 101. Let’s talk about real estate investing, specifically.
New Home Construction
Construction is probably the easier to see on this list. The price of oil impacts the price of fuel, which is used in nearly every aspect of construction. Hydrocarbons (oil) are used to make the plastics and in fabrication of metals as well as the transportation of the goods to the construction site. When the price of oil increases it takes less than a month for that to translate into higher diesel prices, which increase shipping costs, and are immediately passed on to buyers of the materials which are shipped.
Any contracts that were already signed might have these costs absorbed by the contractor but will be quickly factored into new contracts. Even if the price of oil goes down, these contracts tend to remain higher, as we’ve seen in the past five years.
Much of the materials used to build homes requires hydrocarbons to produce. That includes shingles on the roof, covering for electrical wires, insulation, adhesives, and much more. Increases in oil price are reflected within 3 months. Other essential materials like cement and glass use energy to produce, which requires oil in our current manufacturing system.
New Home Buyers and Commute
A little more downstream are the decisions made by buyers. As city centers are built out, new construction goes to the suburbs. Single-family homes require more land than other types of housing and are pushed out even more. People contemplating living in these areas have to consider the distance they will travel to the city center to work. As they see increases at the fuel pump, they will find new construction less attractive, but it is likely this won’t be able to offset the price increase due to construction increases.
The net change will be a continued increase in housing prices. As ever, investors will have to be looking at value-add properties that retail buyer have less interest in purchasing. As long as prices keep climbing, these value-adds will be where the value is.
