Oil Prices, Real Estate and the blame game

As someone who follows the local Outer Banks real estate market,  I have noticed a steady decline in the value of homes. With the price of real estate falling to the same prices seen in 2004 and a meteoric rise in crude oil many are beginning to worry about the state of the US economy.  Many home owners are seeing the value of their homes tumble in certain markets.  Besides the loss in their home value, many Americans are forced to deal with fuel costs taking a larger portion of their budget. 

The price of crude oil has been constantly in the news.  It is near impossible to turn on any news program without hearing about the record price of oil.  Since oil is now hitting consumers in their wallets, the blame machine has gone into full gear.  You have both political parties blaming the actions of the other.  Congress as recently as Wednesday held its 40th meeting on the subject.  After 40 times they still have not figured it out.  The newest scapegoat for the media has been investors and speculators.  One group that is almost never mentioned but definitely has to share a portion of the blame is Ben Bernake and the Fed.

The role the Federal Reserve plays in manipulating interest rates plays a often overlooked role in the value of things like homes and oil.  The effect the interest rate has differs on real estate and oil.  Though the end result is the same.  Home speculation is fueled by artificially low interest rates.  Artificially low interest rates make credit more readily available.  When credit is readily available, the value of homes are bid up as monthly payments are kept low and in theory people can afford more of a home. This is when people, speculate on the future of interest rates by purchasing interest-only or ARM mortgages, that often cause them a problem.  This series of bad investments by consumers and investors is what eventually will cause the bubble to burst as it did when the availability of credit began to tighten. 

The effect the Federal Reserve policies  have on the price of crude oil is a little more complicated but the same basic pattern is followed.  Artificially low interest rates contribute to a series of bad investments, and once credit is tightened the poor investments come to light and the bubble bursts.  After the bubble bursts, investors with available money will naturally need a place to invest their money.  To safeguard their money against inflation, traditionally investors turn to consumable goods or commodities. 

Nothing in life is truly free.  During times of boom many were able to 'live high on the hog', now unfortunately we are paying as the market corrects the bad investments.  Hopefully the worst is behind us.  On the Outer Banks it seems things are slowly picking up. 

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