fixed expenses versus the price of gas

All my friends have been complaining about the price of gas. Trudy commutes back and forth to work every day. One way is 66 miles. In June 2005 Trudys gas bill, just to go back and forth to work, was roughly $200. In June 2006 it cost her roughly $350. Trudy is feeling the pinch, “Those amounts are just for commuting back and forth to work.” Kelli (her daughter) is stationed in San Diego and, “I never used to think about hopping in the car and driving to San Diego. Now I am looking at taking a plane instead because airplane flights are less expensive than driving.”

According to the Oprah Winfrey show, 70 percent of Americans are living paycheck to paycheck. How are people making ends meet if the price of gas has gone up? If the economy is doing so well, why are people feeling the pinch enough for a slowdown in the housing market? According to the Department of Labor, from June 2005 to June 2006 the price of gasoline has gone up 36 percent.

At first glance, it would seem that people were not buying homes because of gasoline prices. When I ask everyday folks that are happy in their homes and not looking to buy a new home if they think the housing market is falling because of gas prices they all say yes. It makes sense. We assume that most people that are buying homes will be commuting to work.

If I were buying a home further from my work I would take into account my current fixed expenses plus my new mortgage and how much more it would cost me to commute to work. If I were living paycheck to paycheck that extra $150 a month would make me think twice.

Sheri is retired, she owns her own home and sold her business three years ago. Sheri has savings, gets social security, and has a part-time job. She should be set, but she is worried about the economy as well and blames it on the price of gas. “I’m considering buying another car that gets better gas mileage because my truck gets such lousy mileage. I have to keep my truck to haul my horses”, said Sheri. Sheri looked at her wages and over the last year her wages, including social security only had a 3 percent increase. She knew she felt the pinch, but she didn’t realize that the reason was that because her earnings didn’t match the cost of living index increase at 4.3 percent.

Gas is only one log on the fire, but it is the one that seems to have people the most worried. One of the analysts I talked to said that it wasn’t the price of gas, but the perception that the price of gas wouldn’t be coming down. It is people’s perception that will affect their spending habits. Core inflation, interest rates are the biggest reasons that the housing market is in decline.

Betty McGuire, a real estate broker in Sidney, MT, population around 8,000, agrees, “I don’t think that many potential buyers will not buy because of higher gas prices. I believe they may adjust their wants or price range. The area I think where buyers may decide not to buy may be the RV market-because they may come out ahead to just rent a cabin or get a motel.”

McGuire used to sell real estate in Portland, OR in the mid-70s and early 80s. Comparing Sidney, MT to Portland, OR, McGuire says, “you and I know 10 miles to live in the country would not be bad. Some people were 20 – 30 miles from the city. I do believe higher gas prices will affect the buying of real estate, but not necessarily stop someone from buying real estate. If an area has a good mass transit system, a potential buyer may now consider using it rather than driving. If a buyer is really stretching their ratios (income to debt) to buy a particular property they should do a reality check on the cost of gas, or drive a vehicle that gets great gas mileage. Used to be I could go into the gas station and top off for $8 – $15.

Now I just hate breaking 2 $20s or worst yet, a $50! Because you know once you break that bill, it’s spent! Those who just pull out the credit card to pay probably have a surprise when the bill comes at the end of the month!”Bob Miller is a real estate broker in the Sacramento, CA area. Miller says, “business, the economic news day-to-day has an effect on people and certainly gas has been in the news. Mortgages are traded in the secondary market, so they are affected by the stock market. First time home buyers are the most affected. The second time buyer has equity to roll over. The number one investment of a person is their house; they want to put their money to work for them. Condos in the city (Sacramento) seems to be coming back. Condos have to do with gas and the high price of a home with less of a commute. Singles and young couples want condos because they don’t want the upkeep needs.”

According to the Department of Labor, the Cost of Living from June 2005 to June 2006 increased 4.3 percent while the earning and wages increased only 2.8 percent. These numbers are the part of the key, says Susan M. Wachter, Professor of Financial Management; Professor of Real Estate, Finance, and City and Regional Planning, Wharton, University of Pennsylvania. Wachter has written “The Inevitability of Market-Wide Underpriced Risk” (forthcoming 2006) “The American Mortgage in Historical and International Context.” (2005) and “Do Cities and Suburbs Cluster?” (1998).

Wachter commented on the theory, “In the 70s there was stagflation. There were inflation and recession and it was 100 percent energy induced. Today, looking through that lens, energy is a part of the story but a small part of the story. There is a loss of confidence in the future strength of the economy and that is energy-related. The threat is not current, but the future as well that contributes to consumer unease. There has been an increase in interest rates but also wages are trailing inflation. The speculative purchase of homes has to come to its own end. The main story in energy is in large SUVs and demand for cars.”

There are analysts that speculate that gas will goes as low as $2.00 a gallon within the next few months and some that say that gas is only dipping for a short time and then going back up. These analysts mention economic slowdown, earnings slow down, and global uncertainty. But for homes, this time around, it is the huge supply of inventory of homes, negative sentiment of buyers, and a high level of speculative activity. While the interest rates were low lots of people purchased homes and that boom is over.

What we can hope for now are interest rates staying nominal, prices of homes coming down, and the price of gas coming back down. All those events would help the cost of living come down and stay more in line with the annual wage increase.