Posted on 11/15/2005 2:52:45 AM PST by RWR8189
IT IS FINALLY HAPPENING--the much-predicted bursting of the bubble. Surprise: It is the gasoline price bubble that has burst, not the house price bubble. Prices of regular unleaded last week averaged about $2.34 per gallon, below the levels prevailing immediately before Katrina struck, and well below the $3.04 peak reached in early September. Crude prices also headed down from the $70 per barrel level to $57, a six-month low.
That did not stop indignant senators from hauling the CEOs of the major oil companies to public hearings, at which they were excoriated for "price gouging" and for failing to reinvest their record earnings in new production and refining capacity. (No matter that among the principle constraints on such investment are the laws these same legislators have passed, limiting drilling offshore and on federal lands, and turning the process for permitting new refineries into a bureaucratic nightmare.) The industry's leaders pointed out that it takes twice as long--eight years as compared with four--to get a refinery built in the United States as it does in China and other countries.
The temporary spurt in gasoline prices may be past, but its consequences linger. To the undoubted glee of America's critics, who argue that our gas-guzzling vehicles contribute to global warming, sales of full-sized pick-up trucks have plummeted, dropping 26.4 percent in September and 31.8 percent in October, compared with those months last year. Worse still for automakers, sales of highly profitable sport-utility vehicles have declined even more.
It will be some time before we know whether the fall-off in sales of these large vehicles is part of a permanent reaction to the higher gas prices that followed Katrina, or to the decision of automakers to reduce the massive discounts that have brought buyers trooping into showrooms. General Motors, which some analysts now give only a 50:50 chance of avoiding bankruptcy, has cut its average discount by almost $1,000 per vehicle, and is hoping that the robust job market will result in a company-saving sales rise at profitable prices.
THAT WILL DEPEND very much on what happens in the housing market. Last year, Americans "cashed out" some $600 billion of equity from their homes, funding almost 8 percent of their spending at the malls, shops, spas, and on vacations. If house prices decline, or even stop increasing, such equity withdrawals could fall sharply, and with them consumer spending. Worse still, if the housing market slows, the jobs market is likely to weaken. Xiuyue Zhu, a researcher at the Hudson Institute, estimates that almost 5 million workers are involved in the building, financing, and other aspects of the housing industry. That's one out of every 28 jobs in America.
That's why there were shudders among economy-watchers when Toll Brothers, a leading builder, reported that contracts for the purchase of its new homes (average price $679,000) failed to increase in its most recent quarter. As with sales of pick-up trucks and SUVs, it is difficult to tell whether this is a temporary blip in response to the pressure recent gas prices put on family budgets or a permanent reaction to higher interest rates and what Goldman Sachs' economists call a sharp worsening in "housing affordability."
Market data are not much help. The prices of new homes are declining in the face of rising inventories of unsold houses, and the need of highly leveraged builders to meet rising interest payments. The Washington, D.C. area is particularly hard hit, with listings up and sales down, according to Metropolitan Regional Information Systems, Inc. Some builders around the country are offering inducements such as free golf-club memberships to persuade hesitating buyers to sign on the dotted line. But prices of existing homes are firmer, as owners are in a position to sit tight rather than accept offers they consider too low.
Using the quite sensible economic proposition that "no tree grows to the sky," we can assume that the days of double-digit increases in house prices are over. But that does not mean that the housing market is likely to collapse.
Toll Brothers attributed its non-growth in good part to higher energy prices and a decline in consumer confidence. A few days after the company's announcement, gasoline prices turned down, as did natural gas prices, and the University of Michigan announced a rise in consumer confidence, although not to pre-Katrina levels.
That's the good news. The less good is that it is reasonable to assume that consumers will not tap into the value of their homes next year to the extent they have in the past. That means we have to count on business investment to pick up the slack. The business sector is clearly in a position to do just that. Corporate profits have been "on a five-year tear" according to Goldman Sachs. They grew at a double-digit rate in the first three quarters of this year, according to Thomson Financial, and will continue to do so into 2006, according to Banc America Securities. With unit labor costs rising at historically modest rates, and corporate "pricing power" on the rise, healthy bottom lines are the order of the day.
But companies are cautious. Fuel costs remain high. Interest rates are rising. Tightening labor markets may drive compensation up too fast to be offset by productivity gains. Debt-ridden consumers may finally rein in spending and start saving, especially when the shock of higher heating bills hits. The political situation is unsettling, with President Bush's waning strength threatening his ability to persuade Congress to make his tax cuts permanent. Most important, the Fed is determined to slow real growth, and few businessmen are prepared to bet against the Fed.
So the increase in business investment has slowed from the 12 percent to 14 percent range to the 8 percent to 9 percent range--not enough to make up for a sharp fall in consumer spending should consumers decide to refrain from tapping into the still-substantial equity in their homes as freely as in the recent past.
Confused? You're not alone. So for now stick with the Fed and assume that the economy will continue to grow at a rate of around 3.5 percent.
Irwin M. Stelzer is director of economic policy studies at the Hudson Institute, a columnist for the Sunday Times (London), a contributing editor to The Weekly Standard, and a contributing writer to The Daily Standard.
The price of oil affects more than just the gasoline tank. I restore old houses and have to use oil based paint a lot of the time. When I went to buy paint last week, I was shocked at the price even though I get a contractor's discount.
Sadly, lots of people panicked and locked in their heating oil prices at or near the high.
Thank the media for the hysterical reaction.
Using the credit card that gives us 5% back and swiping our Kroger discount card which gives us 3 cents off each gallon, we're well below $2/gallon and have been for a week or so.
Ya wanna lend me your credit card so you can make an additional 5% on my gas purchases ;-)
I got it for $2.17 at a Pilot station in Scranton PA last Saturday night (November 12). The day before it had been $2.19 at the same station.
We're down to 2.13 in Detroit.
It was 2.19 last weekend.
I like gambling that the prices will drop further!
Yup.
People are finding ways to save - and at least some of them don't need the Senate to tell us how to do so.
I said in September that oil will gradually fall toward the 35-45/bbl range. Now there is enough data to give a time: I expect that price to be reached in January or February. I'll also predict now: in a couple weeks, there will be industry and government reports available that will shock everyone as to how much less heating oil and gas people are using this winter. I know many around here are using "alternates". I expect that to set off a rapid drop of 4-5/bbl.
I've been wrong before, but the run-up to that 65/bbl range and "predictions of oil above $105 by brokers" seemed so much like a selling opportunity to me. It reminded me of the late-70s run-up of gold from 400/oz to 900 - with people selling their grandmothers wedding ring, etc. --- followed by a rapid crash to 600 and slower decline down to $250 over the next decade plus that we're only now recovering from.
Why is ANYONE surprised that NEW HOME sales are slipping? Katrina drove up builders' costs 20-30%, making the value of an existing home relative to a new house much greater. Nov./Dec. is "death valley" for existing home sales in any year, but watch for a surge in existing home sales after Christmas. That should continue for 6-8 months, until the price effects of Katrina pass through, then new homes should start to pick back up again, especially since those who sold---or want to sell---their homes will have a better market for the next 6-10 months.
Gas here in Dayton was down to $2.09 last week, just up slightly this week at $2.14.
Were down to $1.98 a gal. here in central NJ, 20 miles from NYC.
I'm in NJ, but my son lives in Ohio so I'm glad the price is that much lower there.
6c a gallon less yesterday than Saturday.
I paid $2.01 at Sam's Club in Louisville. It got as high as $3.19 here.
What about all those experts who said oil was going straight to $100 per barrel? What are they saying now?
It's such a good thing that the Senate is fixing these price thingies for us, ain't it?
I'm still wondering when I will hear ONE of the Democrat Senators PROPOSE AND PUSH a piece of legislation changing the only item D.C. has DIRECT control of: Eliminating or lowering the federal taxes on gasoline to help reduce the price directly and immediately.
C'mon, shoomie!
I am privately contracting my new home. I have seen a 'slight' increase in price of wood materials, but other items that can be affected by petroleum (shingles, etc) have not spiked as much as I thought, if any.
I work in an industry that deals with different types of clients. One is wood products (lumber, paper, particle board, etc). I attribute the lack of spiked prices due to the over abundance of stock they had on hand at the time.
In this area (NC), there has been no shortage I am aware of, and prices have only been affected by psychology, not shortages.
Personally, I would attribute the drop in demand to a number of things; interest rates, home prices (ridiculous in Cary), and the psychological impact of being told that any day you could/would lose your job. I can only hope that my house in Cary will sell since it is so much cheaper than anything built in the last few years.
I've heard some of the media geniuses trying to say that it was actually the Congressional hearings with the oil companies that drove the prices down, even though the slide began before the hearings.
I've seen it go down two times in the same day at some stations. I think we need to have another Congressional investigation.
Ya know ...you'd think one of those Harvard business school geniuses could find a way for the average joe to purchase their year's supply of gasoline, heating oil, natural gas or whatever online ....would increase liquidity in those futures...
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