I live in Greeley, Colorado which has been in the center of an oil and gas boom the last few years. Oil and gas production in the area has helped our economy be one of the strongest in the country over the last two years. With oil prices high, oil production boomed and housing prices have been increasing at incredible levels. But with oil prices dropping to historically low prices, many wonder if real estate values will drop as well?
How much do oil prices affect real estate values?
Oil prices have a huge effect on or economy and not just on a local economy where there is active drilling, but our national economy as well. Depending on where you are located, high oil prices can be good or bad for a local economy. If you are close to oil production areas high oil prices usually help the lock economy. But, no matter where you live low oil prices can be good for the economy as well. The lower oil prices are the cheaper transportation is, the cheaper manufacturing is and the cheaper heating is. The better the economy is, the better the real estate market is. How much oil and gas prices affects real estate prices will depend on how big a part of the economy oil and gas is.
Oil is a big part of the economy in Colorado, but not the only part. Areas like North Dakota and Wyoming depend on the high prices of oil and gas for their economy to grow. Here is a very interesting article about the crazy amount of houses they have been building in South Dakota and the worry now that oil prices are so low. Here is one part of the article that would be particularly worrisome to me.
“Officials in Watford City about 45 miles away have issued 1,824 permits for apartments, duplexes and homes in the past 18 months after only three houses were built between 1980 and 2000. They are in limbo, worried about filling the units.”
After building three houses in 20 years, they were planning to build over 1,800 units. The vacancy rate in some new apartments in South Dakota is as high as 35 percent. While the oil boom brought this new construction to South Dakota, there are very few industries besides oil in the area. These areas are highly affected by oil prices.
Areas where oil is not the only industry, may see drops in real estate prices as well, but they also might see no drop or even an increase in housing prices.
How have low oil prices affected Colorado’s economy and real estate prices?
I live in Northern Colorado where there has been a huge oil and gas boom. In 2013 and 2014, the economy in our county was the fastest growing in the nation. Naturally we saw price increases in housing and many people moving into the state and area. When the oil prices began to drop, many people worried that our economy would fall apart as well. However, our economy and housing market is just as strong now as it has ever been. How could that happen with low oil prices and less oil field jobs?
- Many of the businesses that were in our town (Greeley) and county could not find workers during the oil boom. Oil field workers were paid $20 or more an hour with no education and little training. The labor force would go work in the oil fields all day long instead of working for other companies that paid less and required more skill. The jobs that were available during the oil field boom are still available and the people who want work can find it.
- Low oil prices have improved other parts of our economy. Transportation is cheaper, manufacturing is cheaper and many professionals who had to drive a lot, now have much more money.
- The oil boom helped our economy, but it was not all of it. There are many industries in Northern Colorado and our population has steadily increased over time. North Dakota actually had fewer people in 2000 than they did in 1930, but the oil boom created a huge surge in growth.
While the oil industry has an effect on our economy and real estate prices, there is much more to Colorado’s economy.
Will Colorado continue to have one of the hottest real estate markets in the country?
Over the last 13 months Denver and Colorado has had one of the hottest, if not the hottest real estate markets in the country. Northern Colorado has been extremely hot as well. The nice thing about Northern Colorado is our prices are not as high as Denver. Greeley’s median price for a home is about $220,000, while it is over $100,000 more in Denver. I cannot predict what housing prices will do, but I do not see a slow down for Colorado. More and more people are moving into the state, the economy is strong, housing prices are still cheap compared to other areas of the country like California. Even North Dakota has a higher median house price than Greeley ($230,000).
One big factor is the cost to build. You cannot build a house in our area for the median sales price. Which means most people can only afford an existing home, which there are a shortage of. While I can’t predict if housing prices will continue to rise, I do not see a bust in the housing market coming to Colorado any time soon.
Is it smart to invest in an area with increasing housing prices?
I have 16 rentals and ten flips going right now. I do not count on appreciation to make money on any of them. While I love to see appreciation and my net worth increase thanks to real estate, the rising prices have made it harder to buy rental properties. It is harder to find great deals and cash flow with rising prices. I am still looking in Colorado, because our economy is strong, but I would not invest in an area that is dependent on one industry. I remember someone asking me if I wanted to invest in new construction in North Dakota a couple of years ago. They said it was a sure win because housing prices were increasing so fast. They did not care about cash flow and assumed the good times would last forever. I politely declined, because I knew the area was dependent on oil and I do not count on appreciation to make money. While I have nothing against rising markets, I so not want to invest in markets where the only plus is appreciation and you have to sacrifice cash flow.
Do oil prices affect the real estate market? Yes. However, low oil prices could be good for an economy that is dependent on manufacturing, but bad for an economy that is dependent on oil production. You cannot assume any area that produces oil will see their real estate market crash when oil prices drop. Even in North Dakota the market has not fallen apart, but I would be worried about investing there now.