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December 5, 2016

Now for the Bad News About Falling Oil Prices

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Now for the Bad News About Falling Oil Prices

While much of the nation is enjoying lower gas and energy pricing thanks to recent drops in oil prices, the good times aren't being felt in every corner of the country — and the effects will likely extend to the housing market.

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While lower energy prices translate to more money in consumers’ pockets and can help to increase their spending power, in energy-producing states, a drop in oil prices can bring bad news: a big dent to their housing markets that could even mark a decline in home prices in those areas.

CNNMoney reports: “For states with economies tied to the energy sector, lower oil, gas, and coal prices can bring layoffs, belt tightening, and less demand for housing.”

"Fewer jobs means less homebuying demand, and that will naturally soften the housing markets in those job-impacted areas," says Lawrence Yun, chief economist at the National Association of REALTORS®.

One of the states most at risk for a drop in home prices: North Dakota. The state’s oil boom in recent years has led to a housing boom. But a 12-year low for oil prices could see that housing boom slip.

"The jobs are leaving, and if an area gets depopulated, they can't take the houses with them and that's dangerous for the housing market," says Ralph DeFranco, senior director of risk analytics and pricing at Arch Mortgage Insurance Company.

Other markets that could be at risk for falling home prices are Wyoming, West Virginia, and Alaska, according to a report from Arch MI. Yun also says home prices in Oklahoma and Louisiana will need to be carefully watched from falling oil prices. Those markets saw a downfall from oil in the mid-1980s.

Five of the largest cities with the highest risk of falling home prices, according to Arch MI, are in Texas, including Houston and Austin. However, housing experts say Texas’ economy is diversified enough to weather the drop in oil prices.

Regardless, JP Ackerman, president, strategic real estate products at HouseCanary, says it usually takes about 15 to 24 months after the start of an extended decline in oil prices to affect the housing market. As such, the housing market may not actually see a decline from the recent drop in oil until toward the end of this year, he says.

But for some states, a drop in energy prices doesn’t spell trouble but actually the opposite — and can even lead to a boost to their economies, such as the Great Lakes region.

"When oil prices go down, it stimulates the demand for automobiles and jobs and it does ultimately stimulate home values," Ackerman says. "When oil was over $100 a barrel, that really affected Detroit."

Source: “Cheap Oil Could Hurt These Housing Markets,” CNNMoney (Jan. 11, 2016)