Gas prices are well known for having ripple effects throughout the economy. Rising fuel prices show up in consumer goods in multiple ways, from direct transportation costs to indirect raw material costs for manufacturers. However, a recent paper found a surprising benefit of higher gas prices — lower home prices.
A paper from researchers at Florida Atlantic University and Longwood University found that every $1 increase in gas prices results in a $4,060 decrease in home prices, and in some cases up to $6,600. Why would that be the case? It boils down to the real estate agents that are showing homes. When gas prices are higher, agents try to minimize their driving miles when they show homes and are more discriminating about whether a longer-distance showing is more likely to result in a sale.
The authors looked at ten years of data on gas prices and compared it to the home prices for over 17,000 listings in the same area over the same time period. Gas prices during that time ranged from a low of $1.11 (remember those days?) to a high of $4.12. The average across all real estate agents was a $4,060 decrease in home prices for every dollar of increased gas prices, but when inexperienced agents with 4 years of experience or less were involved, the correlation rose to $6,600 in lower home prices per dollar.
That is all well and good, but why would this correlation make sense? As the old saying goes, correlation does not necessarily prove causation.
The logic behind the author's conclusion is that real estate agents are less aggressive in marketing homes for sale when gas prices are high and are less willing to take a flyer on a longer-shot sale. That means lower competition for individual home sales, which should mean lower prices since lower demand for housing drives down prices. It is a localized variation of basic supply and demand.
That would also explain the effect of less-experienced agents, since they may be less able to assess a sale properly that would be worth the extra drive or the extra marketing effort. Another reason that less experienced agents can suffer is their lower overall number of transactions. Gas is a fixed cost that hits all agents equally, but more experienced agents have a larger number of transactions to spread out the cost. For less experienced agents, fuel costs represent a higher percentage of their overall cost of doing business.
The authors also acknowledge that the other ripple effect of gas prices may affect the results. High gas prices chip away at both disposable income and consumer confidence. If you are consuming more of your income to fill your tank, it affects your ability to save up for a down payment and enter the housing market, and you may question whether you can afford the monthly payments of a new home at all. One could argue home prices are lower while gas prices are high because too many buyers simply cannot afford to get in the market.
If you are in the market for a home, should you consider buying now because gas prices are low? No — you should consider buying now because interest rates are still hanging in at nearly historic lows and are likely to rise before long. Getting a favorable interest rate will save you far more than the $4,060 to $6,600 effect of gas prices and real estate agents. We also suggest sticking with the experienced real estate agent, despite the results of this study.