dow jones

East Bay Real Estate IS Being Impacted By Oil Prices!

No matter what you may think, home pricing will change because of the length of one’s commute with today’s oil prices – $4+ a gallon for the first time in history!  There is an OIL CRISIS!

 I am a non-stop student as to what is happening within the local and global economies. I am reading or I am on the internet everyday regarding world wide economic issues.  (I do have a booboo on my head from a sailing accident.) They impact all aspects of real estate – from the Golden Gate to the Caribbean. What happens in London DOES effect what happens in the East Bay Real Estate market.  One of the economists that I read each week is Bob Doll from BlackRock.  They are a premier provider of global investment advisory services. Bob writes a weekly perspective as to his take on current economic events.  Here are some of his thoughts last week that focus on the impact of oil prices.  Some of you will ignore this article because of the word “economist” next to Mr. Doll’s name, but it does have some good stuff in it.

 Bob Doll – BlackRock: ( Mr. Doll is also the Global Chief Executive Officer For Equities, and was the President and Chief Investment Officer of Merrill Lynch Investment Managers.  BlackRock has $1.36 trillion in assets under management as of 3/30/08.)

The surge in oil prices comes at a bad time for the U.S. and world economies.  Consumer spending is already stretched, the housing market remains weak nationally, and the employment picture continues to soften.  High oil prices will no doubt detract from overall economic growth, but we would also note that aggressive monetary and fiscal stimuli should provide some offset.  Our overall forecast for the economy calls for continued weak, but positive growth.  The labor market remains under pressure, but unemployment claims have not increased as much as they typically would prior to a recession, and remain consistent with modestly positive economic growth levels.

To us, the critical oil-related issue is whether higher prices will trigger other inflationary problems, chiefly, accelerating wage growth.  To date, there has been no evidence of that, which is one of the reasons we maintain our belief that inflation will behave itself.  Headline inflation ( which includes energy and food prices ) continues to be boosted by surging commodity prices, yet core consumer inflation ( which excludes energy and food prices ) remains tame and labor costs have been easing.  Looking ahead, we expect that the weak economy could cause inflation pressures to moderate and that headline numbers could come back down to core levels.  The long-term case for higher oil prices is still intact.  Rising demand in China and other developing markets such as India, coupled with shrinking global supply, means that the ear of cheap oil is, unfortunately, over.  We do, however, continue to believe that oil is due for a near – term correction or consolidation.

Putting this all together, we believe that energy prices will correct at some point, that the the U.S. economy will slowly heat over the next 12 months and that inflation will eventually drift lower.  Ironically, a muddling economy is probably the best environment for stocks at present.  Slow growth will prevent inflation from becoming a problem, while also keeping the economy out of deflationary territory.  Markets are benefiting from some other tailwinds as well.  Earnings estimates, continue to fall for financial companies, but non-financial earnings remain sound.  Valuations remain attractive, and there is still a great deal of cash on the side lines that should eventually move back into the world markets.  Our view remains that the S&P 500 low of 1,270 (touched a couple of months ago) marked the bottom for the current cycle, but we also believe tha the S&P hit a temporary ceiling of 1,425 before last week (roughly corresponding to a Dow Jones level of 13,000).  At some point, we believe the positive factors we described will allow markets to break through these levels, but predicting exactly when that will happen is, of course, an impossibility.

After a minute or two of reading Mr. Doll’s economic thoughts, remember that the East Bay real estate markets are STRONG, and interest rates are GREAT!  We may be seeing higher housing prices closer to employment centers like Bishop Ranch and Hacienda Business Park.  Let me know your comments on the experience you are having with current economic conditions where you live.  Until next time.