How a Fluctuating Oil Market Can Impact California Real Estate

When people think of Wheel of Fortune, they tend to think of it as fluff – little more than spinning, guessing, and Vanna White. But the show remains compelling and that’s largely because of the wheel. Even when the show is just on in the background, people watch as the wheel spins and the eager participants hang in that balance between an awesome Polynesian vacation and the dreaded bankruptcy. It’s almost mystical, the way that the fate of the contestant can go either way. This probably sounds familiar to investors in the California real estate market, who are constantly impacted by outside factors beyond their control.

Luckily, if you’re an investor, you can learn more about these outside influences that alter your real estate fate. One outside factor that has a huge effect on the real estate market is the price of oil. Due to California’s status as an oil-producing state (and a huge consumer of it, as well), the oil market has an enormous impact on real estate. If you’re looking to invest in a piece of property, you have to be cognizant of these trends that can have a deep impact on your investment. Looking at the connections between oil and real estate could be vital to your success.

Understanding Oil Market Fluctuations

Oil is a strange commodity. Prices can rocket up and down based on technology, natural disasters, new markets opening up, and politics. The reason prices plummeted in the last year (before rebounding recently) is that OPEC, the conglomerate that controls most oil from the Middle East and Venezuela, got spooked by fracking, and wanted to make the process less cost-effective by reducing its profitability. This had a lot of impacts, such as tighter surety regulations for frackers, unemployment, and a readjustment of commodity priorities.

This is going to go on in the future. Just a few years ago, oil was at $100 a barrel. It even dipped into the $40 range before curling back up, but most projections have it holding in the mid-60s through at least next year.

For many consumers, this is great news. Obviously, the immediate impact was that gas prices went down, but there are a lot of secondary effects. It became cheaper to transport goods and to run equipment, which led to a slowdown in housing prices, but also to greater profit for builders and retrofitters, who were able to cut costs on materials without reducing prices.

It did have some bad impacts on some real estate markets, though, particularly in oil-rich regions like Houston or Southern Louisiana. Not only did the general economy suffer a decline, but transient workers, who pumped up the rental markets, left for other areas and other fields. This led to a decline in rental prices, which left a lot of landlords out in the cold and had a chilling impact on developers and fix-and-flippers.

Why Southern California May Be Different

Now, Southern California isn’t completely immune to these impacts. The region isn’t as strong an oil producer as it was during its There Will Be Blood heyday, nor is it dependent upon oil, but it is still a big part of the economy. A wave of regional unemployment hit late last year and early this year thanks to the oil market. However, there are some other factors that can make this a net benefit for folks in real estate.

There are a few commons factors between the various places that maintain strong real estate markets when oil prices plummet. Metros that do well:

  • Have a low median house price
  • Saw a big decline following the housing crash
  • Have a lower median income where people spend a higher percentage of their money on energy
  • Have long commutes and poor public transportation

A lot of these sound familiar. And while there are obviously some very rich areas in the region, there are a lot of Southern California residents for whom lower gas prices will make a big difference by making longer commutes far more affordable. Suddenly these residents can afford housing it and it becomes viable to move farther away from work. This could be a boon for people who are real estate investors wondering where to buy. For while inner-ring areas might not see as much of an impact, places further out from urban centers may see more of a real estate rush with this change in the economy.

For those looking to invest in real estate, a hard money loan from a leading California lender can help get you in the market or finance renovations on a fix-and-flip property. We see how huge decisions made thousands of miles away can impact what real estate will do in California and we know that you need to strike while the market is hot. The smart investor always has to keep ahead of these trends. That’s why Socotra Capital offers quick turnaround times and deep industry knowledge, so you can get your project off the ground as quickly as possible.

Your real estate assets are your best investments for the future. At Socotra Capital, we’re proud to be the premier direct hard money lender for California real estate. Contact us today to learn more about how we can help.

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