Will High Oil Prices Derail Charlotte Projects?

[NcSc74]

I thought we have been through this already. I hope half of them get built. At least 2 have started already so hopefully the rest will make it. I think if we get through this rough patch then gas will go down to about 2 dollars. Of course I am speculating just like the oil companies are but I can't see oil prices staying at this high price for long. All I have to say is there are communities in NC that would love to get there hands on an oil refinery. Tell GW to come to the old north state and plop down one or two. Well now that I think about it our coastline is so untouched I take that last statement back. However its not a totally horrid idea. How about putting one in the global transpark......

[ElricSeven]

In a place like Charlotte (or any other city, for that matter), wouldn't the huge increase in fuel costs prevent the housing bubble from popping? At least for in-town neighborhoods. The suburbs might suffer, but I'm thinking shorter commuting distances and mass transit options would help protect urban markets.

I know very little about this sort of thing, so don't be shy about telling me how wrong I am.

I concur. Living Uptown has cut my driving miles by about 75%, plus I have to heat and cool much less space. My energy based bills are about as low as they could go. I think demand would remain strong, especially if inflation of commodities takes hold and cuts down on the supply of Uptown housing. My recollection is that during previous gas crunches inflation was high and housing values climbed. The thing about housing that's different than stocks is that people have to live somewhere. They really can't get out of the market. Given that, in times of high energy costs, one would want to minimize the amount of construction materials used in a dwelling (condo) and energy use (Uptown condo).

[monsoon]

I concur. Living Uptown has cut my driving miles by about 75%, plus I have to heat and cool much less space. My energy based bills are about as low as they could go. I think demand would remain strong, especially if inflation of commodities takes hold and cuts down on the supply of Uptown housing. My recollection is that during previous gas crunches inflation was high and housing values climbed. The thing about housing that's different than stocks is that people have to live somewhere. They really can't get out of the market. Given that, in times of high energy costs, one would want to minimize the amount of construction materials used in a dwelling (condo) and energy use (Uptown condo).

Actually interest rates were high and housing prices fell in the 70s. Its simple mathematics. Look at what mortgage rates do to a $350,000 house

5% interest = monthly payment $1878/month (have to add taxes & insurance)

9% interest = monthy payment $2816/month

There simply are not as many people that can qualify for a loan like that, so the number of available buyers falls, and you see the unfortunate owner of the $350,000 house either lowering the price, or taking the property off the market. As A2 said, it is always about supply and demand and demand disappears when interest rises. High priced property falls simply because no one can afford it anymore. Also during these times, people lose their jobs which further reduces buyers and places more (bankrupted) property onto the market.

Look at 1981 Charlotte. Very high oil prices had cause interest rates to be well above 10%. There were tons of abandoned houses in Myers Park (even on Queens Rd) because no on could afford to take on these places at those rates. Well off people were building homes behind Eastland mall because that was all they could afford at the time. When rates fell, these people moved out and a much poorer demographic moved in and we have the East CLT of today. I've witnessed all of this personally so I can testify that it happens. I knews Drs. Lawyers, Engineers all living at the intersection of Shamrock and Sharon Amity, and also people who later rennovated abandoned homes all over Myers Park when things got better.

High Mortgage Rates -> Prices on expensive property falls, high demand for cheap housing

Low Mortgage Rates -> Prices on expensive property rises, prices on cheap housing falls

Its true the demand for housing affects prices. But unlike almost every other purchase, housing demand is directly affected by the financing rate. As a result, one should never ever consider your primary residence an investment property as you may not make a dime off it and might even lose some cash. Remember that nobody buys property with the idea they are going to lose out. Instead a person's primary residence ought to be considered a desirable place (for that person) to live.

It is quite fascinating to watch what high interest rates do to the growth and developement of a city. If rates do head back towards the 10% range, I suspect that Charlotte and the CBD in particular will look quite different that we think it will now.

I will add one other thing. High energy costs do not affect people's driving habits. They simply get rid of their gas guzzlers. It is a false economy to think that people are going to purchase $350,000 condo to save gas money especially if they don't work downtown as most don't in this metro. During the gas rationing of the 70s there simply was no demand to move closer to work in the CBD.

[carolina_fan]

My recollection is that housing prices did appreciate nicely in the 70's--especially rentals. That might have been due, in part, to the accelerated depreciation allowed before the '86 tax reforms.

[monsoon]

This graph shows the decline of house prices that was taking place in the early 80s (starting in the 70s) when there high interest rates. Being at that top end of that line in 2005 would worry me greatly.

The gory details can be found here.

[atlrvr]

That graph supports the housing-bubble point of view.....it's more important to look at the monthly payment/income graph....the situation is nowhere near as bad.....though granted is still spells disaster for the housing market unless interest rates rise fairly slowly.

[monsoon]

That graph supports the housing-bubble point of view.....it's more important to look at the monthly payment/income graph....the situation is nowhere near as bad.....though granted is still spells disaster for the housing market unless interest rates rise fairly slowly.

Well actually it shows that real house prices are rising faster than real income. That is another situation that can't last forever regardless of the interest rates. It suggests that loans are much easier to get now or in other words, the house price rise is being financed in part by really marginal loans. There is probably some truth to that as in the early 80s there were not the creative financing options (re passing out a lot more rope to hang yourself) as there are now. Again I would be very concerned about buying into the market now if my intention was to make some money. It makes no difference however to those who plan to stay in their place for a long time, if they can manage the payments.

[dubone]

what about demographic shifts?

the baby-boomer generation has significant wealth accumulated in housing equity and various other instruments. That may sustain high housing prices for decades with a decrease in incomes, which will only accelerate as that generation retires. If a couple has accumulated 200k in housing equity over the last 30 years, the monthly payment on a $400k home isn't that much, even if rates increase.

They also tend to downsize in a way that seeks quality, valuing other factors over sq footage. This is leading to a rise in price per square foot, but a similar total price. That is, they might be abandoning their huge $400k home in the suburbs for a tiny $400k condo intown or at the beach.

There are also other demographic changes that are going on. there is an increase in the number of divorsees and childless couples (aka dinks) that want/need smaller places, but want higher quality. In many of those cases, they are willing to pay a higher percentage of their incomes for housing because they don't have soccer, piano lessons, daycare, suv, school clothes, or college savings expenses.

Oil prices might make these projects slow down, but there are major reasons that the current housing demand is different from the 70s and any other time in recent history, and i think those factors will sustain projects like highrise condos and intown density (as well as beach density in other places) for the foreseeable future.

[Dale]

Good points, as they militate against the so-called 'bubble' model. This is a boom like no other in recent memory, a sort of reverse urban flight, if you will.

[monsoon]

I think this was said in the 70s too about the retiring WWII generation. And they had the benefit of company pensions that baby boomers of today don't have for the most part. Every generation likes to think they are facing something new when the reality of the situation is that its just the same old song.

The thing that happens when you get older, especially these days, is you don't want to saddle yourself with huge payments that require you to work a stressful job to keep the place. As the babyboomers finally get rid of their kids downsizing means you don't trade a $400K, 4000sq ft house for a $400K 12 sq ft condo. It means you get a place that costs $200k. (or less). To deny this, just because you think this situation is different, just means that someone else is going to make a lot of money off of you.

The bottom line always comes to this. Raise interest rates, fewer people can afford a place (as my example above demonstrates) demand falls, prices come down. It has been repeated many times over the last 100 years and I don't think there is anything fundamentally different now to change that formula.

[ElricSeven]

I think this was said in the 70s too about the retiring WWII generation. And they had the benefit of company pensions that baby boomers of today don't have for the most part. Every generation likes to think they are facing something new when the reality of the situation is that its just the same old song.

The thing that happens when you get older, especially these days, is you don't want to saddle yourself with huge payments that require you to work a stressful job to keep the place. As the babyboomers finally get rid of their kids downsizing means you don't trade a $400K, 4000sq ft house for a $400K 12 sq ft condo. It means you get a place that costs $200k. (or less). To deny this, just because you think this situation is different, just means that someone else is going to make a lot of money off of you.

The bottom line always comes to this. Raise interest rates, fewer people can afford a place (as my example above demonstrates) demand falls, prices come down. It has been repeated many times over the last 100 years and I don't think there is anything fundamentally different now to change that formula.

The avatar's pretty wacky, I like it.

The cost of a house is much more than just the mortgage. Something that gets short shrift by most SFHO but has had a big impact on my budget after moving into a condo is the lower monthly maintenance costs. I used to get killed by the cost of utilities, landscaping, cleaning, etc. All of that stuff was either eliminated or greatly reduced with the move to the condo. Represented about 40% of the cost of my mortgage, which made up for the 20% increased cost of the condo and then some. I do admit, however, that the prices in Uptown at least have escalated to a point at which I'd be very reluctant to buy. The fact that the Vue can proffer prices at $600 a square foot with a straight face frankly astonishes me.

[A2]

A2, has the office market really rebounded that much? What is the current vacancy rate?

Are these realistic estimates? Atlrvr and others, what do you think?

The vacancy rate is less than 7% in the CBD of Charlotte for Office space. The best in the entire US.

A2

[carolina_fan]

The vacancy rate is less than 7% in the CBD of Charlotte for Office space. The best in the entire US.

A2

Wow! That's quite a change from a couple of years ago. Thanks, A2.

[A2]

No problemo. I will post the article and stats when I can again. I think atlrvr had pasted a link with all of the info before. I will see if I can't find it and post again though just as a reference.

A2

B)

[RiverwoodCLT]

I lived in Texas in the 70's when the so call oil shortage occured. In the Beaumont and Port Arthur area, all oil tanks farms were full and ships in the gulf was waiting to come in to unload. There were gas lines all over town, and soon as they jump the price of gas up, the oil shortage went away. It was all about the price they want to charge, by creating a shortage of gas. They sold a higher price bill of goods to the US consumer. There was never a crude oil shortage.

I had a good friend that worked at Texaco and this is what he told me.

[dubone]

http://charlotte.bizjournals.com/charlotte.../19/daily7.html

The CBJ is reporting that the steel mill in the NorthLake area is expanding. I wonder if that will help stabilize local steel prices by increasing supply for bids on various construction projects here.

[monsoon]

Possibly. It is now attractive to invest in this mill because of the much higher prices. This mill is a recycling mill. Instead of producing steel from ore, it recycles steel and other metal scraps. Good for the area though the scraps are brought in on the same rails that are to be used for the North Commuter rail line.

I ran across a site that said that Levine has canceled some project in Charlotte, presumably near downtown, due to high steel prices however.

It was on this blog. http://andy.ciordia.info/

[dubone]

Galleria is in the Matthews area, which is only "minutes from downtown" in advertisements trying to convince newcomers to live way out there and beyond .

Hopefully, the increased recycling of steel will help put some projects back on the drawing board. Sadly, it probably makes it more valuable to level obsolete buildings that have steel inside that can be sold for recycling.

Also, I hope it increases the speed with which all the old cars in the junkyards in Optimist Park are removed and put back to productive use.

[Vitamin_N]

Also, I hope it increases the speed with which all the old cars in the junkyards in Optimist Park are removed and put back to productive use.

Any thoughts as to when that might happen?