Friday, June 24, 2011

"Will Lower Gas Prices Help the Economy?"

Each Friday, The Echo Boom Bomb will feature a common question among Echo Boomers and/or their parents concerning economics or finance for the Millennial generation. These questions are often asked by Echo Boomers and/or their parents that I survey or can be directed to my email at echoboombomb [at] gmail [dot] com. If you email a question, please be sure to keep it concise and direct.

Question: You've pointed the the rise of gas prices hurting any housing recovery. Since I've seen them go down some in our area, will housing prices improve?

Yes and no.

Yes, in the sense that Americans will have more money to save for a home or to put toward a payment toward a home. Lower gas prices might also help lower the cost of food (due to transportation) or other necessary goods. Keep in mind, this yes assumes that Americans don't adjust their behavior and start justifying unnecessary driving (which they were more likely to cut back on with high gas prices).

No, in the sense that uncertainty still dominates the market. Okay, so let's suppose that oil drops to where gas prices cost $2.50 a gallon (a completely dubious proposition). But how does anyone know if that price will remain there and how long. Keep in mind that a commitment to buying a home is long commitment, not some short term quick fix. What will happen with gas prices in five years? Or ten years? Now, consider that many mortgages are 15 or 30 year mortgages.

To add to the "no" above this, no one knows if QE3 will occur. Gas prices being low may be a transient drop as any QE program, like QE2, will cause commodities to rise again.