Oil Crisis Triggers Housing Market Recession 92% of the Time

The oil shock could really decimate the housing market that's already teetering on the edge of basically falling over. Let's dig into what is going on with oil, how it's interrupted the housing market in the past, and what it means moving forward. We know that 92% of the time that we see this oil spike that it causes a recession in coming months after the spike. So, look, it doesn't necessarily cause a housing recession, but it does delay the Fed from making rate cuts to keep the housing market going, okay?

So, this is a macro tightening event. All right, it impacts your construction materials, your trucking and logistics, your asphalt and roofing, a lot of the inputs to a lot of, you know, materials that's used in housing, plastics and ins- insulation, commuting costs. So, basically what it does is it drains consumers, and it puts a lot of pressure because it causes inflation. And history shows us that out of the last 12 major US oil shocks, a recession has followed 92% of the time.

You can see in this chart, it doesn't include the 2020 spike as well, but this is a great chart that just explains what is going on for housing. You can see that in the past, in the oil embargo, the oil crisis, the war spike, the oil spike, all of these did not necessarily cause housing to go down, but it made it a lot worse and maybe increased the direction a lot more for magnitude because it kept mortgage rates higher, which impacted the affordability of housing. So, even though it's not again, it's not directly impacting housing, it indirectly causes housing and can speed up the pain that we're currently even experiencing. Builders in history have often responded by offering bigger incentives.

We're already seeing this. So, not only are we teetering already on the edge of an affordability crisis, but this oil really can cause the affordability crisis to go over the edge. They cut base prices. We're already seeing this.

And then shrinking home sizes. We're seeing this because the builders are building in the wrong price points, they're building the wrong type of product for the next generation. They're building more luxury stuff, so that way they can get more margins. However, with this oil situation, it's spiked mortgage interest rates.

We were below 6% for just a short period of time and then boom, the oil situation over in Iran basically just drove prices up basically from $65 and we saw it all the way pump all the way up to $125 briefly before it came back down. And this is a real problem. It says that the US Iran war is the biggest oil supply disruption in history. So, this is why it's important.

So, studying history it makes the things worse. Now, this is the biggest oil supply disruption in history. The closure has caused the biggest oil supply disruption according to Rapidan Energy, about 20% of the global supply has been disrupted for 9 days. That's more than double the previous record in 1956.

There's virtually no spare capacity to address the problem because Saudi Arabia and the UAE are cut off from the global oil market. The administration's trying to do everything possible to solve this, offering insurance on the tankers and all this stuff that's moving the oil through and it's not working the way that they want right now and so that's why we saw overnight this the price of oil just spike and that's a huge problem. And once they make these closures to these plants, my understanding is it can take 3 to 4 months to get them back up and running cuz the oil does have a a shelf life, so they'll stop producing the oil if they can't move it. And this is really important because if we have sustained inflation, we know that every 1% rise in mortgage rates cuts the buyers purchasing power by 10%.

So, if mortgage rates are up 2%, that cuts the buying power of 20%. This is why we're already experiencing affordability crisis. So, look at this, if we brought the mortgage rate, which is now around 6 6 and 1/2% all the way up to 80 80 8%, so if we moved it all the way up to 8%, you would get 20% less purchasing power and this is a massive problem. This is why we're seeing a slowdown already because we already went through them 3% all the way up to 78% and now back down to 6% and so we're seeing prices have to adjust to the new payment economy here and this and oil's making things worse.

So let's see. So yes, this is the example of what it would look like on a $400,000 loan at a 3% monthly payment it'd be 1600 and then on a 8% interest rate we'd be seeing 2900. Okay, that's almost a 74% increase in payments but obviously incomes didn't rise 74% and this is why affordability collapses and the next wave of buyers just pulls back and doesn't buy. And so this is why oil is a much bigger deal than we expected and here from my area Florida and Texas they're much more vulnerable to the rate shocks because they're much more dependent on the marginal buyer, right?

So if oil prices move up, we don't get those rate cuts that are needed, the marginal buyers stay on the sidelines and they disappear and the problem is Florida inventories already up 50 to 70% from 2020 to lows and in our area they're actually up about 6X which is crazy and the inventory is stacking every single month. So the current situation is that Florida and Texas are over built already over built with tons of new construction inventory. The demand here in the Sunbelt areas relies heavily on net domestic migration which in Florida is down 93% from the peak and when that affordability slows because of the oil and because of the rates staying higher it removes the huge chunk of demand who would otherwise be purchasing. Further the investors dominate these markets and they're very rate sensitive especially right now.

Most investors have just completely jumped out of the market and in fact are now even net sellers, right? They're rate sensitive, they don't want the rising rates. The rents are all even falling which causes more issues and there's declining appreciation right now. So investors do not want to be in these markets.

Ownership costs have surged, which just makes it more expensive to hold this, brings your returns down a lot. Insurance, taxes, HOA, maintenance are all up 50% over the last few years. So, when these rates rise and all of these other issues are compounding together, it can be the perfect storm for areas like Florida and Texas and areas in the Sun Belt, right? Lower migration.

The investors are backing out and the new construction overbuilt because they thought international immigration and the net migration would continue forever. So, here's what we saw happen. This was obviously a day or two ago, but we saw prices jump all the way up to 125 at one point up to 115. Oil is basically dampening the mood for housing.

Energy is 6 to 7% of the consumer price index. Gasoline is only 3 to 4% of of the consumer price index. One of the things that's been helping CPI recently is that rents and shelter costs and mortgage payments have been getting better every single month and that's actually bringing down the CPI recently, which has been helping the Fed's argument for, "Hey, maybe we need another rate cut." But this just throws a wrench in that entire plan. Now we're seeing that every $10 increase in oil prices adds about 0.2 to 0.3 in a CPI increase.

So, we're up about $60, okay? 50 to $60. So, we could see a 1.2 to 1.8% increase in CPI just on oil prices. And that would cause a delay of rate cuts from the Federal Reserve because they're going to want to keep the policy tighter for longer cuz they have the dual mandate, inflation and maximum stable employment.

And if we're above those levels, which we've been, it can really throw a wrench in delaying these rate cuts that the housing market needs to continue moving forward. And of course, we're starting to see the Treasury rates move up. We saw this gigantic jump and then they've slowly come back down as uh the governments are figuring out, "Hey, how do we keep the street open and and keep things moving?" Um but ultimately, if the if this happens and stays this way for a longer period of time, we could see busy season off to an awful start and it could really slow housing at the beginning of busy season. Um where we're already on a record low level of demand all the way back to to 1995 levels is the level of demand that we're at right now and it's not looking good moving forward.

And when you study people and you ask them questions, you start to realize things are already pretty bad. This just makes it worse. Is it a good time to buy a house? Only 17% of respondents say it is good time to to buy a house and that's one of the lowest levels ever.

So consumer sentiment is already at a breaking point and affordability is is at the 2006 right before the great financial crisis levels. So people really they do want to buy. The good news is there's a lot of buyers out there who do want to buy but they're sitting it out because it's cheaper to rent and the payments don't make sense and they need the prices to come down. So buyers have opportunity costs.

They can go find other options than buying and they don't want to have the American dream be a debt trap. And that's the biggest thing that a lot of people fear is okay, now I'm loaded up with student loans. That was the American dream, go get a college education. Now the next thing for the American dream is I'm going to buy a house but they're so expensive and the rates are high.

So now they're saying well, those two things that are American dream, we're just going to put them off and move in another direction to find more affordable ways to live our life in a in America and that's a problem. So this is what's happening with the affordability crisis. Now that people can't afford the houses as you can see, they started increasing interest rates in March of 2022. That caused the buyers to completely back off and sellers started stacking every single month as they try to sell their house to buyers that have just basically vanished and now we're creating this massive gap between the buyers and the sellers in the marketplace where now we have 44% more sellers than buyers and the gap is widening every single month that it's being tracked.

And frankly, this is looking to accelerate. So we're looking at closely the share of outstanding homeowner mortgages with negative equity. So this is hey, I'm selling it for less than what I bought it for. You can see there's specific areas of the country that are you know, worse than other areas, especially here in the Sunbelt area.

You can see all these blue is it shows the percentage of mortgages with negative equity. Right now across the board it's 2.1% of mortgages are underwater and this does not include the 10% round trip expenses to transact real estate. Obviously when you go to buy real estate it costs money when you go to sell real estate it costs money. So this is just what you what you buy and sell it for.

So we're getting in touch with us tons of sellers who need help with short sales. So if you're going through a short sale situation need help, we are specialist here in Florida. You can reach out we can get you in touch with the best team in Florida to help you get those to go through. Only about 30% of short sales go through.

This group can get about 80% of them to go through. So if you need help and you're underwater, definitely reach out to me, shoot me an email, get you in touch with the team to to get you very well taken care of. But uh Florida is definitely one of the epicenters for this and it's likely going to be the vintage years of 2022, three, four, five, and 2026 with with maximum leverage, right? FHA, VA loans where they're putting down very little and the seller, you know, loses their job, they have a death, they have something that happens that they have to move and all of a sudden they need to get rid of the house.

They try to rent it, but it's like $800 underwater per month. They try to sell it. They can't get the price they want to cover the mortgage, so they need to do the short sale and we're seeing that every single day. So reach out again if you need help.

And unfortunately, that's not looking like it's going to get any better. The inventory is stacking. Uh this is not necessarily true in the north. The north is a completely different setup, but in the Sunbelt areas, there's no housing shortage, okay?

We're seeing the new homes for sale is near the great financial crisis levels. We're overbuilt due to the speculation of the builders and the change in net migration in the area because it's no longer affordable for workers in many of the areas around Florida. So my question for you is will oil prices spiking, the stock market going down a little bit, will that impact the housing market? My bet is it absolutely will, especially if the oil prices stay elevated for longer and they don't figure this out.

And if the stock market cracks, that has a huge connection to the real estate market in Florida because there's a lot of cash buyers that use their 401Ks, their stock portfolios, they leverage their portfolios to go out and buy real estate. And so if the stock market crashes, I think one of the reasons why real estate hasn't, you know, corrected more is because all these other asset classes are hitting all-time highs. So I think if if the stock market does break, it will push the housing price the housing market down. It'll be a double whammy if you see oil prices spike and the stock market go down.

That'll really hurt the real estate market. But I'd love to hear from you uh what you think. What do you think will happen if oil prices stay elevated for longer? And then what are you seeing on the ground in your market?

Are you seeing more homes for sale? Are you seeing buyers back off? And drop a comment below where you're from. As always, I appreciate you watching this video.

I will be on later this week, likely on Friday at noon, and I'll come on and do a live Q&A. So bring your questions, drop your questions below, and I'll answer all the questions on Friday doing live during live Q&A that you can log in for. Thanks so much. As always, you can follow me on Substack.

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