Economic Considerations – How Gas Prices Could Effect Real Estate

Here we go again with rising gas prices which may be one of the biggest challenges that the US economy will face in 2012. Due to continuing turmoil in the Middle East, especially with sanctions against Iran for its nuclear program and political problems in Syria, oil prices have already jumped to $118/barrel. This is now reflected in the current national average price per gallon of $3.58. Most experts predict gas prices at $4.00/gallon by April and possibly even $5.00/gallon by summer.

What will this mean for the fragile real estate recovery? Rising gas prices most likely will prolong a real estate recovery. Keep in mind that every dollar spent on gas is that much less consumers have to spend on stimulating economic growth.

For example, consumers have been fairly successful reducing their debt. A little extra money could be used to purchase a big screen TV or other household products. These are items that are manufactured and subsequently sold in the marketplace. The purchase of consumer products creates both manufacturing and retail jobs. Salaries that are paid to newly hired employees result in even more money being spent in the local economy. All of this supports economic recovery and an increase in consumer confidence.

Now, let’s look at the reverse situation. Discretionary funds that were available at $3.50/gallon, are dramatically reduced when the cost of gas increases to $4.50 or $5.00/gallon. Driving habits can be modified, but like food and shelter, transportation costs are mandatory expenses for most consumers. Spending more on gas, means the average family doesn’t eat out as much, and doesn’t buy as many consumer products. Local businesses experience a drop in revenue and lay people off to reduce expenses. The end result? Real estate can’t recover because the economy isn’t recovering and vice versa.