Gas prices vs home prices

A recent Wall Street Journal article’s claim that gas prices will make Riverside real estate worthless is exciting but exaggerated.

Paraphrasing the argument: imagine you are the canonical Riverside resident, commuting to LA in a flag-draped SUV. That’s 12mpg, $4.80 per premium gallon, 120 miles per day, 210 days per year: over $10,000 per year in gas, requiring at least $12,000 in pretax earnings or 20% of the median family income. (The WSJ article concludes about $14k after tax, using different assumptions.)

Accurate so far. But then the article quotes a Deutsche Bank analyst claiming such homes could become “effectively worthless” because of the cost of sustained higher gas prices.

Obviously ridiculous. 30mpg regular-gas used cars are readily available for $5,000. The return on investment of changing from SUV to high-mileage beater is over 100%. So even if people don’t behave rationally in the short run, eventually the cost per mile will drift down, using the existing stock of technology and vehicles.

So WSJ and Mr. Deutsche Bank are wrong. Yet these houses may still become nearly worthless, because overbuilding during the bubble was concentrated in marginal locations. Gas prices are not the only thing going the wrong way for Riverside county.

Unlike tradable securities, homes have a fixed location. The cost/benefit assessment of buying in a given neighborhood includes not just gas prices, but taxes, commute time, weather, crime rates, etc.

Comparatively, Riverside County is not a nice place to live. It is the smoggiest location in the nation, brutally hot in summer, yet also expensive, crime-ridden, far from economic centers, and with poor access to good schools.

As a result, when housing supply far exceeds demand, this is logically one of the first places to be abandoned. Gas prices are only one reason.

For historical precedent, consider the Antelope Valley northeast of Los Angeles, which includes the cities of Lancaster and Palmdale. The area lies within Los Angeles County, but is geographically part of the Mojave Desert: baking heat, high winds, dust storms, etc.

The Antelope Valley was marginal to begin with, held together by a local postwar aerospace industry. When that declined, the area was decimated. A double-digit percentage of homes there were abandoned, and Palmdale Airport closed for decades. It can happen.

Riverside is a huge county, stretching from the Arizona border to within 30 miles of the Pacific Ocean. Parts of it (e.g. Corona) are not far from LA, and may recover quickly. But I sure wouldn’t want to own a 4,000-square-foot home in, say, Indio right now.

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