The housing downturn and rising gasoline prices are each exerting a significant contractionary influence on U.S. GDP. There is also an interactive effect between the two.
Temecula is a community in southern California some 60 miles from downtown San Diego and not a whole lot closer to anywhere else. And yet I’ve known people who commute to work here from Temecula, having been willing to trade driving time for more affordable housing. The population of Temecula doubled over the last decade.
But with gas now nearing $4.50 a gallon in San Diego, the housing-commuting tradeoff is looking a lot less favorable for these exurban communities. Via Calculated Risk, the Los Angeles Times reports that as many as 15% of the homes in Temecula are currently either bank-owned or in some stage of foreclosure.
If you make your living trying to provide goods or services to those residents, higher gasoline prices are hitting your wallet by much more than the cost you personally pay for your own gasoline.
The interaction effect must be significant– I wonder, though what the p-values would look like. Any data on this yet?
I know I’m going to sound like a raving madman here, but I can’t help but wonder if this is good in the long run. I know that there is a lot of variables to this equation, but having some sort of positive outlook might help in some form. If this is what it takes to encourage people to actually live where they work, then we might actually be seeing something good happening. I think that we may actually be seeing a change in the way that Americans choose where they live. Instead of choosing housing based on how big of a house they can get, we may see people willing to give up the 3 SUV garage for a condo in the city.
One thing that has shocked me about Americans ever since I lived abroad is how they seem to believe that so much of what we have is “necessary.” Like how we “need” a minivan or an SUV if we want children (I met plenty in Japan who never owned cars and did alright with their kids), or like how Americans think you “need” an extra bedroom in your McMansion for your dog/office/guest bedroom/room of junk.
Perhaps I lived outside of the US for too long, but I have long lost my sympathy for those who chose to live 60 miles from work just to have a backyard they only use once a year. Again, I realize how much of an anti-American communist this makes me seem, but living in a tiny duplex in rural Japan with no real amenities– not even a dishwasher (gasp!) or central A/C (DOUBLE GASP!)– made me realize how much most of us can give up and still live very very nice lifestyles.
And before I get tarred and feathered and told that there is simply NO WAY that anyone could EVER afford to live in the city of SD, I’ve seen condos in the city for around $2K a month. Much more economical than these McMansions so many people gobbled up. Of course, the prices will change as demand shifts (ceteris parabis), but there is a lot of areas around the city, not too far from most jobs, that I suspect could soak up a lot of the Temeculan refugees.
Alas, if only the bloody SD light rail went from UCSD to the city, we’d have it all here. Too bad! I’ll tell you what though, Prof. Hamilton, the MTS 150 is really nice midday to take to the city. I’ll sure miss the free bus zone now that I’m done with IR/PS.
Hmmm, high gasoline prices can make homes in isolated regions of the country less desirable by ensuring long commutes. Makes sense!
On a completely unrelated note, why doesn’t some profit maximizing fellow buy huge quantities of gas in Missouri, send it California, charge slightly lower than the prevailing price and pocket the difference less the expenses? There seems to be an arbitrage opportunity that shouldn’t exist in the free market.
Isn’t this third degree price discrimination?
Your plan would face three obstacles, Kevin. (1) state taxes on gasoline are 28 cents/gallon higher in California than Missouri. (2) It’s not free to ship the stuff. (3) You can’t legally sell the kind of gasoline they use in Missouri anywhere within the state of California.
This would be a good thing IF it was possible to quickly and efficiently add density near where people work.
It’s not – it’s expensive and in most cases illegal (strict suburban zoning codes mandate low-density garbage even in the middle of old cities in a lot of cases!)
To paraphrase Leonidas’ wife in the movie “Spartans”, “This will not be easy, it will not be over fast and we will not enjoy it.” The only truth is that this isn’t your father’s America – and will be less so in 10 years.
Prof Hamilton and friends
See the Center for Neighborhood Technology’s “Housing plus Transport Affordability Index” tool at http://htaindex.cnt.org/ that measures the true affordability of housing by estimating not just the cost of the housing itself, but also the costs of transportation.
I don’t know why anyone would mover closer to work just because of gas prices – it’s much, much cheaper to get a more efficient vehicle.
Let’s say you live in a $250K house, and have the average, $28K, 21MPG car. You could buy a $500K house in San Diego and pay at least $15K per year in additional interest (plus addtional RE taxes, which probably balance out the interest tax deduction), or you could buy a $25K Prius (which is cheaper than your current car, which may be due for replacement anyway), and cut gas costs in half (i.e., turn the clock back to $2.25 gasoline) – which makes sense?
Yes, you could downsize in San Diego, but you could downsize, and stay right in Temecula, and save a lot more money.
If you can’t afford a Prius, you can’t afford housing in SD! And, if you can’t afford to change your car any time soon, what about carpooling, telecommuting, or a 95 Corolla?? Carpooling is fast, cheap, and extremely efficient (up to 80% reduction in fuel consumption).
I don’t know why gas prices would force anyone (sensible) to move, if they weren’t ready to move anyway for other reasons.
To reply more directly to the original post: there are so many ways to cut one’s commuting costs, that I have to think that people who are suffering, but not changing how they commute, think that the gas prices are temporary.
The recent crash in SUV sales, and the drop in VMT, suggest that people are starting to decide that this is permanent. I think we’ll see more dramatic change fairly soon.
I’m baffled that carpooling (and telecommuting, for that matter) hasn’t gotten dramatically more popular, but I think it will soon. Internet matching should make it much, much easier than in the 70’s, when it had to be employer-based. It should be possible to match up almost anyone with someone whose home and work are both in close proximity.
($5per gallon)*(100 mile commute)*(250 work days)/(20mpg vehicle) = $6250/year
= 11% of the median income for a family in San Diego is $53,060 (census 2000).
So no way, right? But alternatively:
= the monthly payment for $87,000 borrowed on a 30-year loan with a 6% fixed rate.
If the house were $100,000 less expensive than the city equivalent and you believed gas would stay below $5 (adjusted for future income inflation) then you got yourself a deal.
Presciently, Stephen Leeb “The Coming Economic Collapse” and for even longer Matt Simmons have been preaching and warning about these issues.
Peter Terzakian’s “1000 barrels a Second” written a bit late (2007) to deserve much credit for any foresight has the most balanced description of the impact from high oil.
My wife and I used the advice in these books to sell out of town. To move downtown and to buy more property downtown and to get a Prius in 2006. We are waiting for the exsuburban collapse to give as a nice holiday retreat at a very reasonable price…
You economists are wonderful and I read your great analyses with careful attention to every detail and all too importantly take appropriate actions!
However my conscience is pricked and ashamed about the poor who are affected but completely unable to take action; our politicians and our elite and our society have not carried out their mandate to look after ALL our people – especially those bottom 20%!
Check out Naomi Klein from London School of Economics and her latest book if you want a rather dark view of things. I believe in free markets and Friedman but I am ashamed by the credible criticisms of the system that she has presented. Robert Reich covers this too in his less sensationalist Supercapitalism book.
OK, gas is now $2.00 per gallon higher than a year ago. So if you’re commuting 60 miles each way, and getting, say, 24 highway miles per gallon, your daily gasoline cost is $10.00 higher than before.
But suppose that higher gas prices reduce traffic? If your time is worth $30.00 per hour, you would only need to save ten minutes each way to be as well off as before. That could happen.
Jeff, interesting point. Two observations:
First, the difference in your example isn’t $10 a day – it’s an after-tax $10 a day. For me, that would be about 15 pre-tax dollars a day, but it would probably be more if I earned $30 an hour.
Second, while it’s true that time is money, it’s not equally true of all time. Tens of millions of Americans are paid for eight hours of work, period. If I get to work 10 minutes earlier, all it means is that I can leave 10 minutes earlier; it doesn’t affect my paycheck. I suppose I could try and do something remunerative in those 10 or 20 extra minutes, but odds are I’ll just squander them responding to more blog posts!
“(2) It’s not free to ship the stuff.”
I was assuming you might be able to ship it in such massive quantities as to make the cost/gallon shipped trivial.
Clearly the government plays a larger part than I originally imagined though!
The California state legislature, bowing to the will of the unions, effectively banned the 4 tens work week (four days at 10 hours per day) by making time and a half mandatory (in most cases) for any time over 8 hours a work day. A 4×10 schedule has been popular with workers as a way to reduce commute costs and to enjoy three day weekends.
A similar housing effect has been seen in Silicon Valley. Prices within close commute distance to San Jose and points north have edged down only slightly while prices to the south in Morgan Hill have dropped 20 to 40% for comparable single family detached houses. (I’m in the market and watching closely.) The close-in housing might have a 15 minute commute were Morgan Hill would see a 45 minute commute.
There are reasons I don’t think a 10×4 day work for employers. I work in labs and offices. The people I know tend to be of two types:
1) You’re lucky to get about 5 work hours per 8 attendance hours out of them after water cooler talk, long luches, disappearance for errands and surfing the internet. I worry that 5 hours of concentration might be a ceiling. The etra time would be absorbed by an extra breakfast or dinner break.
2) They’re working 10-hour days already, and not being paid for it. Some are happy and others grumpy, but for their own reasons they’d rather be in the office than at home.
In those cases 4×10 is a losing game for the employer. I have no data to back it up, but circumastantial evidence supports it:
1) Workers want 4×10, employers don’t.
2) US Government employees are leading the charge.
3) The French do it.
The Japanese did 10+ hours workdays for a long time, but also would take extended naps in between long stretches of work. That seems to be ending, though, and giving way to more flex plans. I wonder if it might the way of the future?
Kevin has some powerful arguments about the employers’ lack of support for 4x10s. However, my current and prior employers here in California have been receptive. One even implemented the scheme while I was there but had to revert to 5x8s after the legislation was passed.
Employers have not been nor would be compelled to go to 4x10s – they can make their choice based on their business needs and the attractiveness of the scheme to their employees. Unfortunately, the legislature makes it very difficult to even consider that choice today, almost compelling 5x8s.
My own personal best was one 90.5 hours in one week.
Oil is almost done. Looks like the price will reach around 150 by July 4th and we trickle down to the fall when we plunge.
If rates and dollar keep on rising at this rate however, we may not even reach 140.
The real problem isn’t oil prices. The dollar must keep on falling so the US economy can keep moving. If the dollar reverses, all that debt becomes VERY expensive jacking up rates.
Thanks for being the one person here who gets that there are positive side effects of demand destruction.
Less driving equals :
1) Less traffic, so less time wasted.
2) Fewer accidents. The US has 2 million injuries and 40,000 deaths a year (mostly people under age 40, and quite a few children). $500 billion a year is lost to the economy due to traffic accidents.
3) Less wear and tear on roads, which are expensive to repair
4) Less competition for parking spaces.
5) A reduction in land devoted to parking lots and gas stations. The amount of land devoted to these two uses is so huge, that even a 5% reduction, due to less driving, would free up a LOT of land for other uses.
6) Less pollution
Furthermore, expensive oil also leads to :
1) Advances in energy technology
2) Advances in engine efficiency
3) Advances in nanomaterials, that reduce the weight of cars, trucks, and airplanes.
4) Advances in videoconferencing, Skype, Webex technologoes
5) Petrotyrant dictatorships burn the candle at both ends, can no longer afford to subsidize fuel as domestic consumption grew too much, and the regimes collapse.
Telecommuting – hmmmm. I’ve done it, I like it and it’s seems to work well but I have my doubts about it as a long term solution. It seems that everyone considers it an absolute reality that we can have some large proportion of our workforce doing “knowledge-based” work from home. I have my doubts. As I’ve expressed before the whole idea of a service economy may be tested over the next several years as we try to right an economy that clearly produces little that the rest of the world wants, at least service-wise. If true, I think a lot of us can plan on heading back into the good old office or whereever it is that we actually make stuff.