Economists say that high gas prices triggered the housing crisis in 2007 (2012)
today.oregonstate.edu
today.oregonstate.edu
For what it’s worth I cannot find evidence that this paper was ever published, so I think it’s safe to say they did not convince the rest of the profession that this was the (or even a) trigger.
I’m sure it’s being shared to suggest that high current gas prices will do the same now. I doubt anyone has any good reason to be confident in such a suggestion.
I personally think that trends like increased EV/hybrid ownership and WFH could mitigate this issue in particular, but I don’t think these are trends that apply to all Americans equally (especially those with more precarious finances).
With work-from-home I'm finding that this is absolutely not the case anymore. I do walk a block every few days to buy simple groceries that I didn't used to do. This isn't about the car and mostly as a way of making up for the exercise I don't get by going to the office every day and associated incidental walking/meandering.
Literally everything you use in life, even if you're the most shut-in Hikikomori on the planet, is downstream of fuel. If the fuel cost increases are transitory, you might not notice it. But if they persist, you absolutely will.
To be honest I’m a bit surprised by the strong reactions as today’s news is filled with different perspectives on the economic consequences of higher gas prices (as unimportant as that is relative to the war in Ukraine) but I appreciate the feedback. There’s no intent to be dishonest or self-serving here but I’m sorry if that’s how it was construed.
https://citeseerx.ist.psu.edu/viewdoc/download?doi=10.1.1.80...
If energy prices were at all responsible it is that in late 2008 when the central bank had its planning meeting, they were looking at Core Inflation. In that meeting they decided to raise rates because they thought inflation was a little high. This was because of high energy prices in their core inflation metrics.
You can actually go back and read the minutes of those meetings. As Scott Sumner writes:
> And many forget that the United States was not zero bound during the great NGDP collapse of June to December 2008; indeed, interest rates fell to near-zero levels only in mid-December. Consider the Fed meeting of 16 September 2008 two days after Lehman Brothers failed. The Federal Open Market Committee (FOMC) voted to hold rates at 2%, citing an equal risk of recession and inflation. The risk of recession is obvious; we had already been in recession for nine months. But why the perceived risk of high inflation? By the day of the meeting, five-year TIPS spreads had fallen to only 1.23%, far below the Fed’s 2% target. In fact, the real risk was excessively low inflation, not high inflation. The Fed should have cut rates dramatically. Why was the Fed decision-making so misguided? It adopted a ‘backward-looking’ policy, focusing on the relatively high inflation of the previous 12 months (mostly due to high oil prices that were already plunging by the time the Fed met). It was like trying to steer a car while looking only in the rear-view mirror. A forward-looking policy would have allowed the Fed to be far more aggressive.
There would maybe still have been a small recession and a housing bubble in some states, but the real failure was to not react to the liquidity demand and in 2009 there was a deflation. This is the real cause for the majority of what we now call Great Recession.
Are we in another bubble? And if so what is the theory for why? I assume subprime and lax lending wouldn't be the cause after the lessons learned from last time
High energy prices are also going to spike inflation which eventually means rates rise. If that happens owners with their 2.75% mortgages aren't going to be inclined to sell. Coupled with higher new construction costs the housing market probably continues to rise.
They cannot necessarily pay those mortgages after inflation screws up the rest of their month to month budget.
People always love to circle jerk about inflation "inflating away your mortgage" but that's only if you manage to hold onto it.
Wages lagging inflation will still hurt a lot of people. "Just switch jobs" doesn't work in every industry and even where it does you're gonna stagnate in terms of skill/experience due to ramp up times in new roles so you're basically borrowing from your future earning potential by doing that. <Insert ye olde quip about "10yr of experience being a junior developer vs being a senior developer" here>
Unfortunately most people who championed the bad decisions that got us here are wealthy enough to weather the storm with little more than reducing their retirement contributions.
Or able to sell.
This is the other side of historically low rates pushing home prices up by allowing people to pay higher prices while keeping their mortgage payment affordable. If (when?) rates go back up, that may cause prices to fall. This could also put people underwater on their homes, and even trigger another (hopefully smaller?) wave of foreclosures if they suddenly can't make payments anymore and also can't sell the house at a price that will cover the remaining balance of their home loan.
This is crucial. Many people sometime need to sell. When people cannot buy it they lower the price. When they lower the price the valuation of neighboring houses goes down. If people also have less money saved because of higher oil prices, well, they another compounding factor.
Rates are going to go up, and it is much to late in the game for them to rise without serious repercussions.
The only sort of cataclysmic risk out there is a change in government regulations. Zoning changes, Prop13, or some action banning investors owning SFHs. But none of that seems remotely imenent.
Here's a concrete example that I can take from my own life experience: there was a house we were quite interested in buying. The house's realistic value for the market at the time should have been something we could afford. But the owners simply couldn't let it go for less than about $50,000 more than that, because that was the price at which they could pay off their home loan. So, too bad, no deal. And apparently nobody else would buy it at that price, either. About a year later, this gorgeous, well-cared-for house was foreclosed on, and then at some later date people broke in and ripped out all the copper and whatnot, and so this house eventually got auctioned off as a rehab/teardown job for a (presumable) fraction of what we would have bought it for.
People are really bad at risk management. So when you have a couple pulling in $200k/yr with some crazy mortgage on their $800k house, commuting 30 miles in their 17mpg SUVs, each $1 in gasoline cost increase adds $150/mo in monthly expenses.
There are lots of people like this, many of whom are in weird stress situations already because of issues with COVID and school, etc.
I think you're right that this won't be an exact repeat of 2010 — that era was just crazy for anyone who understands financial responsibility, more like a precursor to the cryptocurrency number-goes-up salesbros now than the current market — but there are some worrying factors I'd consider before buying. I don't think most of these are national in impact but I'd expect some big regional shifts which could be quite hard to handle for some cities, especially if they haven't been doing a good job on their finances already.
1. A lot of those high prices are anchored on demand in certain areas. If younger generations are successful in getting zoning rules changed to allow density, that can add a lot of competition and there are many hopeful buyers who would prefer, say, a new apartment/condo in a city with many things to do to an older (higher maintenance) house in the suburbs. I think this one is long-term enough that most buyers will be bailed out by inflation but it could at the least prove a major upset for the people who are skimping on things like retirement in the hopes that they'll get a massive equity boom like their parents did.
2. Remote work is here to stay — not 100% but enough to cause shifts in buying habits.
3. Most American home buying is predicated on cheap fossil fuels. If that inflation spike eventually leads to higher pay, this helps on mortgages but in the meantime it puts a lot of strain on anyone who can't just soak up their commute and heating costing a whole multiple of what they previously did. Expect a bunch of SUVs on the used market if the current spike lasts for very long, just like in 2010. That cuts down the number of buyers sharply for outer suburbs.
4. Climate change isn't going away: again, not a national bubble but there are areas (e.g. South Florida) with a lot very pricey real-estate which seems unlikely to be able to maintain that value. That includes things like flood insurance, coastal erosion, etc.
5. The classic suburban model isn't really sustainable: the initial work by developers and tax rates set when maintenance is the cheapest are going to require hefty rate increases as infrastructure ages or needs to be adapted for climate change, but the more people are paying for their houses the more they're going to oppose things like property tax increases or be unable to pay them.
This is one thing that could start a collapse and it is why many real estate companies are pushing a "office work is needed for collaboration" narrative. The real estate market for offices
https://www.nar.realtor/commercial-real-estate-market-trends...
The commercial real estate market is recovering but remains weak compared to conditions before the COVID-19 pandemic, according to NAR commercial members who responded to the 2021 Q1 Commercial Real Estate Quarterly Market Survey and industry data.
The question is can they still pay the mortgage if cost of living goes up significantly (like it appears to be)
Unless unemployment spikes dramatically (the opposite of what’s been happening) and they lose their jobs and they bought homes on the ragged edge of what they could pay monthly, this is unlikely to be an issue.
but they also have to pay for energy, food and automobiles, all of which is going up much faster than the average person's salary.
imo, the first area that is going to take a hit is in consumer discretionary spending - people will hold onto their tv's, smartphones, computers and a lot of other things longer than usual, because the things they have to buy (food, energy etc) are all going up dramatically. An awful lot of people live paycheck-to-paycheck and spend at least 100% of everything that comes in each month. Where my spouse works, 2/3's of the employees are in a panic if their paycheck is a single day late; they just don't have a cushion to fallback on.
Consumers cutting back on the 'extras' will be the first domino to fall.
Student loans haven't been something you can discharge in bankruptcy since the 1970s. If you want to thank a US president (as opposed to, say, the legislature that actually passes these laws), you should be thanking Gerald.
https://www.washingtonpost.com/education/2022/02/17/biden-st...
This doesn't prove it's a bubble, but it sure does suggest strongly.
Many people have many theory why something is a bubble or not. And what time frame prices have to go down to call yourself correct.
Anybody that claims to know is a charlatan. Many of those get proven right once in a while.
Last time I was in the house, crackheads were shitting in buckets. Literally.
And there isn’t a lot of good jobs here!
Seems to me no one can figure out what the proper name for this stuff ought to be :P
I got curious, and "Gasoline" apparently comes from "Gazoline", which Samuel Boyd used to avoid trademark infringement with Patent Cazeline Oil (for use in artificial light), which was named after John Cassell. [1]
And now fear we're in for a replay.
Insane loans were granted then loans bundled, sold, rebundeled,sold and so on. The more established banks that bought our loans did zero due dilligence, they just boundled things up and sold them.
We usually only had the loans less than 48h. Wells Fargo (one of the banks that loved our loans) usually max of 96h usually less.
We would sell loans that had $1500 - $2000 payments per month to someone living in an appartment just able to afford $400 in rent.
Towards the end, we started having mortgages pile up that we could not sell, and so we had to actually service them. I think somehow the boss managed to give them away to some other entity because we had 0 infrastructure, software, procedures to do it.
The boss and founder managed to sell the business about 3 months before the big bang.
I quit 6 months prior. Glad I did. I feel guilty and ashamed that I ever worked at that place. It did not even pay very well. The sales people made enomous bonuses if they were able to make sales.
I had friend who stayed until the bitter end.
https://citeseerx.ist.psu.edu/viewdoc/download?doi=10.1.1.80...
Some people bought houses a very long way from their jobs and may have been hurt by an increase in gasoline prices in some areas, but if so, this only affected the timing of the crash, perhaps moving it up a little. It was an unstable structure that was guaranteed to fall apart.
Massive, massive asset inflation, for those that own things - and the bigger and more you own, the more you have benefited, and then massive inflation in consumer/everyday products like food, energy and clothing and for those seeking to buy their first house, as well as renters finding out the rent is being jacked up rapidly - i.e. the people who can afford inflation, are seeing massive gains in their asset portfolios, and the people who can least afford it - are on the verge, if not already at, a disaster in the personal economic situation.
We are heading for a train wreck of massive proportions imo, best to get prepared if you can.
If we didn’t have existing assets like a house or quality cars we could trade in I don’t know what we would do. Just having two good salaries, a lot of cash, and high credit isn’t cutting. You need assets.
Why did the corporations wait for the government to print tons of money to decide collectively to raise prices?
See, inflation would not be a problem if wages kept up with rising prices. But they do not? Why? Because profit and stock buybacks. Corporation are not paying you a fair wage based on the cheapness of the money they can get from the fed. Instead of keeping profit stable they aim at not raising your salary and keeping that profit so their company looks better and their stock price goes up.
I guess you still believe in trickle down economics?
The causality is not as simple as “governments printing money -> inflation”.
However, this is also correlated and reinforced with the actions of the federal reserve for a number of reasons.....
https://www.businessinsider.com/corporations-using-inflation...
"Corporations are using the excuse of inflation to raise prices and make fatter profits," he said.
On the other hand I acutely remember the gas prices at that time. I was a senior in high school and filling up my tank was something i specifically had to save a decent amount of money for.
So perhaps that was the bigger issue, but it does feel like an insignificant amount of money in the grand scheme.
This did coincide with a period when fuel prices were rising but, I think, this was more a case of 'the last straw breaking the camel's back' rather than a direct causation of financial distress.
Very subjective opinion ahead- High gas prices is probably this single most effective way to curb greenhouse gases and I am shocked that Biden and his climate Czar aren’t embracing it. As it stands, even prices doubling or tripling, I would conjecture that a very significant portion of Americans can make significant changes to their driving patterns at the great expense of a mere “minor inconvenience”. Carpooling to work and school, taking mass transit where available, planning errands/trips for efficiency, driving the more economical car in the family unit when no one else is using it (I.e. drive the wife’s wagon on the weekends instead of the big truck). A LOT more people can be driving motorcycles/ scooters. Complaining about high gas cost is almost a form of conspicuous consumption.
At least around city, most people do not think twice about fuel cost of running errands all over town, they just complain about the bi-weekly fill up. For one example, some families schlep their kids all over the city every day for a very packed schedule of events; carpool more or just don’t design up for such an erratic day from the first place. Don’t sign up for that basketball league with a daily practice on the opposite side of town from school. Don’t take as many YOLO trips up to Lake Tahoe or Napa or whatever… or at least pile in with other people to reduce the number unit cost.
Until people begin to reorganize their livelihoods and consumption patterns, then gas prices aren’t really too high, it’s just more than we are used to spending, and I’m not at all convinced an extra $100/mo at the pump is really that big of an impact for majority of folks to behave differently. We just complain instead.
(Caveat- Low income workers have a different story, but I anecdotally also don’t not see an embrace of more efficient transport means amongst low income population in my city. Late model luxury vehicles and large suvs and trucks remain very popular in low income areas. Gas cost is simply not a significant enough portion of the equation as it stands)
Partially. The problem is, if you allow (or introduce) a high gas price as a politician, you'll be causing social unrest - and that not just in the US where having a car is mandatory outside of the core of urbanized areas, but also even in modern places like France where precisely that was the cause of the infamous Yellow Vest riots. And that social unrest can deal way more damage long term than the GHG emissions you'd save - social unrest is how the 45th took power. Imagine a repeat of the 45th (or someone even worse)... say goodbye to anything done on the political side to curb GHG emissions.
> taking mass transit where available
Yes, the problem is that you'd need reliable mass transit in the first place. And in many areas - again not just in the US but worldwide - mass transit is either not existing at all outside of urban areas or very spotty (i.e. once in the morning and once in the afternoon as school bus). Governments will have to take a lot of money to build out that first. And in urban areas, the side effects of large homeless and/or mentally unwell people makes mass transit pretty unattractive, so again governments will have to take even more money to fix that mess.
We're all sitting on decades worth of political ignorance and now climate change, Putin and a lot of the population (the ones who deny climate change) collide together in a perfect storm event. And I'm not sure which way out it will take.
Biden just released the national gas reserves which is an attempt to keep prices lower. For a long time it has been said that we have to change peoples behavior to solve the global climate crisis but that seems unrealistic and I think instead we should invest in large scale carbon sequestration projects. Telling people what to do doesn't go over very well for anyone.
I recently sold my large luxury SUV in exchange for a smaller sedan ( that happens to be electric). I’ve always thought I needed a large SUV to do the things I want to do, so far nothing is changed. I personally made a huge quantum leap in personal vehicle choice, tesla convinced me, but frankly the new car could’ve been a more mundane sedan and still saved me a fortune. Lots of low hanging fruit out there if gas prices really are “too high“
Americans already tend to buy way too much car, financing them over 60 or even 72 months, and that was happening before the incredible price increases over the past 2 years. Only the (increasingly small) upper middle class and above can responsibly afford an electric car.
Even expecting the general public to be forced to switch to hybrids and more fuel efficient gas cars is unrealistic in the short to mid term as the supply simply isn't there. Letting gas prices be higher than they used to be to incentivize electric car adoption could be a logical step, but likely in 3-10 years when prices are comparable to existing technology.
Source: https://mediaroom.kbb.com/2022-02-09-New-Vehicle-Prices-Retr...
To your point, people just don’t want that car because… cars play into one’s identity and style (at least marketing tells us it does). But that shouldn’t drive our geopolitical oil and gas strategy. Neither should the fundamental expectation that USA should be guaranteed the ability to drive 100 miles on $10 worth of gas in the average vehicle sold.
But then you have the aspect of electricity generation. Did you know that the US currently generates 4 times as much electricity from oil as most renewables only excluding nuclear (hydro, solar, wind).
Our society is steeped in oil, it's beyond cheap, and there's no indication it's ending any time soon.
This is incorrect. As of 2021 the United States generated about 0.5% of its electricity from petroleum. It generated 9.2% from wind, 6.3% from hydro, and 2.8% from solar.
That's only possible because the negative externalities are not priced in.
You can get from point A-B in supreme comfort, in cars that cost half that, or that have twice the mileage. The reason cars are instead bloated and have low mileage is because of American's fetishization of size, and the ratchet of the safety arms race. To break out of this tragedy of the commons, the tax-code needs to incentivize smaller cars, electric cars, flexible work-arrangements, etc... and disincentive larger cars.
And to your point; those stupid poor people (your words) buy used cars, and these used cars were originally the wasteful new cars that the selfish sociopathic rich people (my words) bought.
You can get a used Nissan Leaf for <$10K now in good condition with enough range for most commuter needs, and those things are super reliable and require virtually no maintenance.
I guess we should not do anything if it can't immediately be made affordable to everyone in the very first generation. So we should never have done ocean travel, air travel, non-emergency medicine, higher education, personal computers, ...
Everything is always expensive when it's new.
I agree that current inequality is excessive, but the argument I made applies if there is any inequality at all. There has never been a human society with absolutely zero inequality. If there is any inequality at all there is always some "trickle down" effect in the form of aftermarkets, priming of industrial production leading to future lower prices, etc.
It's possible to simultaneously acknowledge certain "trickle down" effects and believe they can be beneficial while also being in favor of reducing inequality.
Yes this is a very simple car, but this is now less expensive than a similar gasoline car.
not that I think the theoretical reasoning will work, but it is at least plausible, and not only for consumer vehicles.