Home Prices vs. Gas Prices

With mortgage rates hitting 2015 highs last week, one might worry that the housing recovery will lose steam.

The 30-year fixed climbed to 4.08% per the latest survey from Freddie Mac, up roughly half a percentage point from the lowest levels seen earlier this year.

Clearly this reduces home buying affordability, and could make it more difficult to both buy and sell a home.

But as I’ve mentioned before, if you can’t afford a home you’re interested in thanks to an interest rate fluctuation, you might want to reassess the entire decision.

The good news is that there doesn’t seem to be a strong correlation between homes prices and mortgage rates.

In other words, just because rates rise doesn’t mean home prices will go down or stop going up. There’s actually data to support this.

Should We Look at Gas Prices Instead?

Perhaps a better indicator of home prices is what you pay at the pump, as evidenced by a recent study from Florida Atlantic University and Longwood University.

The collaborative effort, which used data spanning over 10 years, found that for every $1 decrease in gas prices, the average selling price of a home climbed by 2.4%.

That’s about $4,000 more per sold property included in the study.

Additionally, homes seem to sell more quickly when gas prices are low. Again, for that $1 per gallon decrease in gasoline price, the average time to sell a property falls by 25 days.

There’s also a better chance of closing a sale when gas prices are lower. Indeed, that same $1 decrease was also shown to increase a seller’s chances of closing the sale by about 20 percent.

So if you want homes to fly off the shelves at higher prices, lower the price of gas, not interest rates.

If you’re wondering why gas prices matter, just consider consumer confidence.

When prices at the pump are lower, consumers have more disposable income, which equates to a larger pool of prospective home buyers.

That larger pool of buyers means a home has a better chance of selling and at a higher price.

Bennie D. Waller, Ph.D., professor of finance and real estate and director of the Center for Financial Responsibility at Longwood University, also noted that the effort put forth by the listing broker increases as gas prices fall.

The idea being that they have more money to spend on marketing a home, and maybe it’s cheaper to drive clients around town.

Over the past year, gas prices have fallen about $1 per gallon despite a recent uptick during the past two months, according to the American Automobile Association (AAA).

Gas prices this summer are also expected to be the lowest they’ve been since 2009.

Don’t Rely on Gas Prices to Determine Housing Affordability

Interestingly, gas prices are very volatile and certainly not locked in. We don’t prepay for gas.

So consumers may think they’re better off for a few months while shopping for a home but if and when gas prices rise that supposed benefit quickly disappears.

You can almost liken it to an adjustable-rate mortgage, which may start at a low interest rate but eventually adjusts higher and could land a borrower in a home they can’t really afford.

That’s the strange thing about the data. A low fixed interest rate truly matters long-term since it’s what you’ll be paying for years to come, whereas low gas prices can be very short-lived and not really that beneficial.

And let’s face it; gas prices are never going to stay put so choosing to buy a home on that basis isn’t very wise.

But this might tell us when it’s a better time to sell your home, knowing there are more anxious buyers out there willing to pay top dollar.

Perhaps you can even snap up a relative bargain when gas prices are high.

About the Author: Colin Robertson

Before creating this blog, Colin worked as an account executive for a wholesale mortgage lender in Los Angeles. He has been writing passionately about mortgages for nearly 15 years.