Gas Prices Clobber McMansions, SUV Makers

[cmraynew]

"Wealth Evaporates as Gas Prices Clobber McMansions, SUV Makers" (Bloomberg)

ITulip had a two year lead on this phenomenon (see Reports from the Front), but I am seeing more and more reports in the MSM.

"House prices in his rural subdivision beyond the Blue Ridge Mountains in Charles Town, West Virginia, have plunged as commuting expenses have soared. A four-bedroom home down the street from his is listed for $239,000, after selling new for $360,000 five years ago...

"Our whole economy reflects the relative costs of energy: the cars we drive, the houses we occupy, the kinds of factories we have and the equipment in them,'' says Dana Johnson, chief economist at Comerica Bank in Dallas. "I'm expecting relatively large changes in all of these things''...

The lifestyle of the exurban commuter may be one casualty. Emerging suburbs and exurbs -- commuter towns that lie beyond cities and their traditional suburbs -- grew about 15 percent from 2000 to 2006, nearly three times as fast as the U.S. population, as Americans moved further out in search of more affordable houses or the bigger ones that are sometimes derided as McMansions.

``It was drive until you qualify'' for a mortgage, says Robert Lang, director of the Metropolitan Institute at Virginia Tech in Alexandria, Virginia. ``You can't do that anymore. Your cost of transportation will spike too much."..."

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Speaking personally and anecdotally, I live about 20 miles outside of town, where I work. If I drive in every day, I figure 280 miles per week * 52 weeks per year / 30 mpg = 485 gallons per year. At $2 a gallon for gas, fuel costs were not a significant consideration in our purchase; at $6, annual commuting costs would be the equivalent of 2% per year surcharge on our house (145K), over ten years, a 20% surcharge. Imagine if I traveled in a 15 mpg SUV, then I'd be sitting on a 4% annual surcharge to live at my distance from town.

Consequence--as fuel costs increase, the value of our property decreases. So begins the slow death of the exurbs?

Kudos to Itulip's foresight.

[flintlock]

Re: Gas Prices Clobber McMansions, SUV Makers

I agree with the article for the most part. But around here $400,000 homes don't constitute McMansions. The middle class types will really be hurt by this gas thing. Around here( Atlanta) a McMansion is typically what I'd consider a $750,000+ home. More typically a million dollar home. $6 gas will be a mere pinprick to a lot of those types. Of course dropping value in middle class homes is bound to have some effect on the more expensive ones. But as usual, it will be the middle class that takes it on the chin.

[FRED]

Re: Gas Prices Clobber McMansions, SUV Makers

"Wealth Evaporates as Gas Prices Clobber McMansions, SUV Makers" (Bloomberg)

ITulip had a two year lead on this phenomenon (see Reports from the Front), but I am seeing more and more reports in the MSM.

"House prices in his rural subdivision beyond the Blue Ridge Mountains in Charles Town, West Virginia, have plunged as commuting expenses have soared. A four-bedroom home down the street from his is listed for $239,000, after selling new for $360,000 five years ago...

"Our whole economy reflects the relative costs of energy: the cars we drive, the houses we occupy, the kinds of factories we have and the equipment in them,'' says Dana Johnson, chief economist at Comerica Bank in Dallas. "I'm expecting relatively large changes in all of these things''...

The lifestyle of the exurban commuter may be one casualty. Emerging suburbs and exurbs -- commuter towns that lie beyond cities and their traditional suburbs -- grew about 15 percent from 2000 to 2006, nearly three times as fast as the U.S. population, as Americans moved further out in search of more affordable houses or the bigger ones that are sometimes derided as McMansions.

``It was drive until you qualify'' for a mortgage, says Robert Lang, director of the Metropolitan Institute at Virginia Tech in Alexandria, Virginia. ``You can't do that anymore. Your cost of transportation will spike too much."..."

-----------------
Speaking personally and anecdotally, I live about 20 miles outside of town, where I work. If I drive in every day, I figure 280 miles per week * 52 weeks per year / 30 mpg = 485 gallons per year. At $2 a gallon for gas, fuel costs were not a significant consideration in our purchase; at $6, annual commuting costs would be the equivalent of 2% per year surcharge on our house (145K), over ten years, a 20% surcharge. Imagine if I traveled in a 15 mpg SUV, then I'd be sitting on a 4% annual surcharge to live at my distance from town.

Consequence--as fuel costs increase, the value of our property decreases. So begins the slow death of the exurbs?

Kudos to Itulip's foresight.

The other iTulip forecast that addresses this trend is Housing Bubble Correction Update: Geographic Regions Cascade,Weekly Commentary - March 29, 2006:

During the early growth stage of various regional housing bubbles, housing prices increased first in metropolitan areas, then in the suburbs and finally in rural areas. (These are admittedly crude geographic designations designed to simplify the explanation of the theory without invalidating it.) Prices cascaded geographically outwards from areas of high employment (income) and population density (housing demand) in metro areas to areas of lower employment and population density in the suburbs surrounding metro areas and finally, once demand pushed housing affordability to extremes there, to areas of low employment and low population density beyond the suburbs. This process of geographic price cascading took approximately ten years, from around 1995 to 2005.

The dynamic that drove prices outward was the need for workers in the cities and later the suburbs to escape high real estate prices, to move to where real estate was relatively cheaper and the cost of living lower, but still within an “affordable” commute. ...as more and more home buyers searched farther away from metropolitan areas, prices increased in outlying areas as well until property values in rural areas reached historical peaks and experienced bubbles of their own.

Living in rural areas and working either in the suburbs or metropolitan areas increased commute time and expense, but this was affordable with gasoline under $1.50 per gallon as it was before hurricane Katrina. But combined increases in gasoline, heating oil, natural gas and propane prices plus higher interest payment on ARMs combined in mid 2005 to pushed many household budgets past the tipping point for those living in homes purchased in rural areas at or near the top of rural market housing bubbles.

This change in psychology will start to cause housing bubbles around suburban then metro areas to decline in a reversal of the process that drove prices from metropolitan markets outward to suburban and rural markets. The trigger, it should be remembered, was rising gasoline and energy prices and their impact on rural homeowners who purchased at the top of the market.

[metalman]

Re: Gas Prices Clobber McMansions, SUV Makers

The other iTulip forecast that addresses this trend is Housing Bubble Correction Update: Geographic Regions Cascade,Weekly Commentary - March 29, 2006:

During the early growth stage of various regional housing bubbles, housing prices increased first in metropolitan areas, then in the suburbs and finally in rural areas. (These are admittedly crude geographic designations designed to simplify the explanation of the theory without invalidating it.) Prices cascaded geographically outwards from areas of high employment (income) and population density (housing demand) in metro areas to areas of lower employment and population density in the suburbs surrounding metro areas and finally, once demand pushed housing affordability to extremes there, to areas of low employment and low population density beyond the suburbs. This process of geographic price cascading took approximately ten years, from around 1995 to 2005.

The dynamic that drove prices outward was the need for workers in the cities and later the suburbs to escape high real estate prices, to move to where real estate was relatively cheaper and the cost of living lower, but still within an “affordable” commute. ...as more and more home buyers searched farther away from metropolitan areas, prices increased in outlying areas as well until property values in rural areas reached historical peaks and experienced bubbles of their own.

Living in rural areas and working either in the suburbs or metropolitan areas increased commute time and expense, but this was affordable with gasoline under $1.50 per gallon as it was before hurricane Katrina. But combined increases in gasoline, heating oil, natural gas and propane prices plus higher interest payment on ARMs combined in mid 2005 to pushed many household budgets past the tipping point for those living in homes purchased in rural areas at or near the top of rural market housing bubbles.

This change in psychology will start to cause housing bubbles around suburban then metro areas to decline in a reversal of the process that drove prices from metropolitan markets outward to suburban and rural markets. The trigger, it should be remembered, was rising gasoline and energy prices and their impact on rural homeowners who purchased at the top of the market.

insight's good when you act on it. my area, i fear, will be devastated... rural, undiversified econ. splat. shoulda moved.

[GRG55]

Re: Gas Prices Clobber McMansions, SUV Makers

insight's good when you act on it. my area, i fear, will be devastated... rural, undiversified econ. splat. shoulda moved.

Depends on the local economic drivers metalman. There is a reasonable case that rural areas dependent on resource extraction and/or agriculture may do rather well in the years to come.

[Jim Nickerson]

Re: Gas Prices Clobber McMansions, SUV Makers

Depends on the local economic drivers metalman. There is a reasonable case that rural areas dependent on resource extraction and/or agriculture may do rather well in the years to come.

I agree, if one is away from population centers, one can have something like a bunker in which to hide and persevere.

[CanuckinTX]

Re: Gas Prices Clobber McMansions, SUV Makers

I agree with the article for the most part. But around here $400,000 homes don't constitute McMansions. The middle class types will really be hurt by this gas thing. Around here( Atlanta) a McMansion is typically what I'd consider a $750,000+ home. More typically a million dollar home. $6 gas will be a mere pinprick to a lot of those types. Of course dropping value in middle class homes is bound to have some effect on the more expensive ones. But as usual, it will be the middle class that takes it on the chin.

I used to think people in $750k+ homes had lots of money. It usually just means they have a huge mortgage these days. They might be worse off with $6 gas than someone who is living within their means in a $250k house.

[flintlock]

Re: Gas Prices Clobber McMansions, SUV Makers

I used to think people in $750k+ homes had lots of money. It usually just means they have a huge mortgage these days. They might be worse off with $6 gas than someone who is living within their means in a $250k house.

In many cases you are exactly correct. I know of a few personally.
I just think gas prices are the least of their worries. I'd be more worried about losing a quarter million bucks off the value of my home!

[flintlock]

Re: Gas Prices Clobber McMansions, SUV Makers

I've noticed a pretty sharp drop in nice large lot homes in rural areas around here. The nice houses( not mansions)in the country with 5-10 acres like I've always wanted now seem a lot more affordable. Of course the reality is, they arent if you have to commute. Which most of us still do. A few years ago, you had to look hard to find a nice affordable home on some land for sale around here. They just were not up for sale that often. I picked up a real estate book last week and now there's dozens for sale.

[zoog]

Is America's suburban dream collapsing into a nightmare?

CNN link

...Yet Nelson also estimates that in 2025 there will be a surplus of 22 million large-lot homes that will not be left vacant in a suburban wasteland but instead occupied by lower classes who have been driven out of their once affordable inner-city apartments and houses.

The so-called McMansion, he said, will become the new multi-family home for the poor.

"What is going to happen is lower and lower-middle income families squeezed out of downtown and glamorous suburban locations are going to be pushed economically into these McMansions at the suburban fringe," said Nelson. "There will probably be 10 people living in one house."

Hm, now where have I read that before? Oh yeah, iTulip.

Fifteeen Years to Revert to the Mean

January 20, 2005

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Step F: Ten years into the downturn, real estate will be widely regarded as a terrible, "can't win" investment. McMansions will be subdivided for rental as multi-family homes.

more from CNN article

In Shaun Yandell's neighborhood, this has already started to happen. Houses once filled with single families are now rented out by low-income tenants. Yandell speculates that they're coming from nearby Sacramento, where the downtown is undergoing substantial gentrification, or perhaps from some other area where prices have gotten too high. He isn't really sure. But one thing Yandell is sure about is that he isn't going to leave his sunny suburban neighborhood unless he has to, and if that happens, he says he would only want to move to another one just like it.
"It's the American dream, you know," he said. "The American dream."

I watched The End of Suburbia: Oil Depletion and the Collapse of The American Dream one time, which features, among others, the always dramatic doombat James Kunstler. Good show, but like a Hollywood disaster movie, takes the worst-case scenario and runs with it.

I don't think that suburbia will completely disappear. As the article says:

Thirty-five percent of the nation's wealth, according to Leinberger, has been invested in constructing this drivable suburban landscape.

We're not just going to abandon all of that. Elsewhere someone mentioned an idea --as America (presumably) shifts back towards manufacturing-- of building factories out in the burbs where people already live. There will be considerable effort to salvage our vast suburban infrastructure as best we can. At the same time, there has already been a trend back towards the city and a higher-density, walkable lifestyle. I certainly believe this will continue. But people who promote the city life tend to assume that everyone either embraces that lifestyle the way they do, or everyone should. There will be much resistance.*

Unfortunately, as Arthur Nelson says in the article, while those who can afford to continue to move back into the city, poorer people will be pushed out towards the edges. Collapsing suburban home prices may allow some to buy out there, but most will be renting. As many already struggle to afford transporting themselves to work as it is, the longer commute combined with higher gas prices will only make their situation worse. If a new low-wage manufacturing build-out happens in the suburbs where displaced inner-city poor would then live, it might help with their expenses, but runs the risk of recreating large-scale class segregation just like it used to be in the inner cities after white flight. I don't know if we as a culture will ever overcome this.


*Personal note: I grew up in small towns and suburbs, and had an apartment in a western suburb of Portland for six years before buying a house in a still low-income, but gentrifying neighborhood in the city. Now renting a house even closer in. Happy to leave suburbia behind, but no way would I would live in an overpriced apartment tower, much less condo, in our trendy Pearl District a few blocks from downtown. Everyone has their limits.;)

[Slimprofits]

Re: Is America's suburban dream collapsing into a nightmare?

Unfortunately, as Arthur Nelson says in the article, while those who can afford to continue to move back into the city, poorer people will be pushed out towards the edges.

Great post, Zoog.

This process has already taken place in Boston. When I first moved into the city proper in 1997, rents where reasonable. For example, studio apartments could be found in almost every neighborhood for as little as $400-500/month. By 2001, that price had doubled. Most people with jobs in Boston on the lower side of the salary scale cannot really afford to live there. Ride the subways at night and you'll see many of the restaurant employees commutting outbound.

[Starving Steve]

Re: Gas Prices Clobber McMansions, SUV Makers

One of the SHOCKERS of the current energy crisis has to be the town of Patterson, Cal. on I-5, about 80 miles east of the SF Bay Area and Silicon Valley.

During the height of Greenspan's dot.com bubble, commuters used to drive from Patterson to jobs in Silicon Valley and the Bay Area.

Patterson used to be the laugh of central California, a sleepy crossroads without anything except a name: Patterson.

The question used to be, "Where would one end-up if one drove east from San Jose over the summit of Mt. Hamilton and then continued eastward on a dirt road all the way across the Diablo Ranges?" And the answer would be, "Patterson".... Then the follow-up question would be asked, "What's in Patterson?" And the answer would be a laugh and the reply, "There is nothing there, but they call it, 'Patterson'."

Patterson became of interest to developers when home prices in the Silicon Valley and the Bay Area took-off into the gazillians of dollars. The commute would be worth it--- at 96cents for a gallon of gas.

So the construction began at Patterson and elsewhere in the San Joaquin Valley to provide commuters with affordable homes. Some chose to live in nearby Los Banos while others chose Tracy, Stockton, Modesto, even Manteca.

The same story was played-out across the continent especially when "The Maestro" decided to lower interest rates to 1% in his insane experiment to insure against even the slightest of economic down-turns.

Patterson became a boomtown. No less than one square mile of new homes were built, most of them McMansions, all of them packed densely on the tiniest of lots--- all of them in the middle of no-where.

The homes, of course, sold fast with creative 1% interest mortgages, negative amortization loans called in the go-go world of California finance, "neg-ams", etc. And no sooner did "the folks" buy, they used their homes as ATMS, even without a down payment, even without equity, because loans were available everywhere. (Again thank "The Maestro".)

To-day, Patterson has a truck stop and a McDonalds, but it is no closer to San Jose or San Francisco than it was in years past. Rapid rail to Patterson was never built, nor did the talked-about rapid rail ever come to nearby towns like Tracy or Los Banos.

And that square mile of affordable new homes at Patterson now sits empty and isolated, a strange curiosity in the middle of no-where.

Patterson is a truck stop on I-5, a place for travelers to stop and go to the bathroom. And just east of the truck stop are those new homes, a ghost town of affordable large homes built on tiny lots.

The desert sun shines most every day in Patterson, and those thousand or so homes bake, isolated, and forgotten in the middle of no-where..... No better monument to the follies of the Greenspan years could exist than the suburb of Patterson.

And if anyone still believes that the economy needs or benefits from 1% interest rates, let them come and see Patterson.

[Mega]

Re: Gas Prices Clobber McMansions, SUV Makers

Nonsence!

Lets look at this with a level head shall we?

Ok, Why did people move out to the "Bubs".........other wise know as the "White flight"?.............CRIME mainly. I don't wish to get drawn into a Dave Duke type statment, plently of Black people did the same thing and moved as well.....(Where allowed).

Now let me put my "EJ" head on..........WE will have a classic case of Surply V demand. Surply of large numbers of cheap homes in nice low crime area's..............demand of a fuel effcent car........say a 60 MPG Diesel Hybrid?..................Like the one Landrover will have to market by 2010?

See, they don't even need to give up on the SUV idea either!
Mike

[metalman]

Re: Gas Prices Clobber McMansions, SUV Makers

Nonsence!

Lets look at this with a level head shall we?

Ok, Why did people move out to the "Bubs".........other wise know as the "White flight"?.............CRIME mainly. I don't wish to get drawn into a Dave Duke type statment, plently of Black people did the same thing and moved as well.....(Where allowed).

Now let me put my "EJ" head on..........WE will have a classic case of Surply V demand. Surply of large numbers of cheap homes in nice low crime area's..............demand of a fuel effcent car........say a 60 MPG Diesel Hybrid?..................Like the one Landrover will have to market by 2010?

See, they don't even need to give up on the SUV idea either!
Mike

but another thing happened, tho. crime rates in usa cities plummeted over the past 20 yrs while crime grows in the burbs like crabgrass...

FBI: Violent and property crime dropped in 2007

Murders, for instance, were down in cities of more than 250,000, including an enormous 9.8 percent drop in cities of more than a million residents. But murders rose in some small cities - up 3.7 percent in cities of 50,000 to 100,000, up 1.9 percent in cities of 100,000 to 250,000, and up 1.8 percent in cities under 10,000.

[Starving Steve]

Re: Gas Prices Clobber McMansions, SUV Makers

Dear Mega and Metalman:

Crime was never the reason why people left San Jose. In fact, the crime rate in San Jose is lower than in most Canadian cities. Crime has never been a problem in Silicon Valley.

Oakland has plenty of crime, but SF does not. And I don't think commuters fled to Patterson to escape Oakland's crime.

Most of the Bay Area is rather crime-free, just like Silicon Valley is. Oakland, Berkeley, and Richmond are the exceptions.

What drove the commuters out east, beyond the mountains, were the high cost of rents. At the height of the dot.com mania, townhouses were being rented for $2000 per month, or more. So, people fled to the San Joaquin Valley in order to have a chance at an affordable home-ownership. At 96c for a gallon of gas back in the late 1990s, the idea of fleeing to the remotest suburbs, the exurbs, made some economic sense.

Los Banos, Patterson, Tracy, Rio Vista, Stockton, Manteca, and Modesto became boomtowns. The same thing happened all across the continent; people fled to the exurbs.

Probably in the UK, the same thing happened, too. The dot.com boom was on, and people went crazy.... Especially around Silicon Valley, people just became nuts with risky investments, dot.com schemes, new era thinking, endless consumption, inflation, neg-am mortgages, oversized homes, and outrageous commutes.

And as this went on, interest rates of all things, were reduced to 1%. The Maestro ran the Fed.