1

Was 2007 – 2009 a Housing crisis or an Oil crisis?

Gaetan Lion

July 11, 2012

2

Kunstler believes the recent housing- financial crisis was really an oil crisis

James Kunstler, the author of “Too Much Magic”, is one of the main advocates of this view.

3

The Data suggests otherwise…

Home price vs Oil price. Standardized variables

-2.00

-1.00

0.00

1.00

2.00

3.00

4.00Ja

n-8

7

Jan

-88

Jan

-89

Jan

-90

Jan

-91

Jan

-92

Jan

-93

Jan

-94

Jan

-95

Jan

-96

Jan

-97

Jan

-98

Jan

-99

Jan

-00

Jan

-01

Jan

-02

Jan

-03

Jan

-04

Jan

-05

Jan

-06

Jan

-07

Jan

-08

Jan

-09

Jan

-10

Jan

-11

Jan

-12

Home price

Oil price

Using a Case Shiller monthly home price series (for 10 major MSAs) going back to 1987, and using oil prices from the EIA over the same period; we observe that home prices peaked in July 2006 or a full two years before oil prices peaked in July 2008. When oil prices crashed from July 2008 to February 2009, home prices continued crashing too. That’s the opposite direction of what Kunstler and other Peak Oil advocates suggest.

4

Home Price vs Oil Price Scatter Plot

The scatter plot shows that when oil prices are low, they have a positive relationship with oil prices (opposite of Peak oil expectations). When oil prices are high, they have essentially no relationship with home prices (also not supporting Kunstler’s opinion).

Home Price vs Oil price. Standardized variables

-1.50

-1.00

-0.50

0.00

0.50

1.00

1.50

2.00

2.50

-1.50 -1.00 -0.50 0.00 0.50 1.00 1.50 2.00 2.50 3.00 3.50 4.00

Oil price. Standardized unit

Ho

me

pri

ce

. S

tan

da

rdiz

ed

un

it

5

Home Price change vs Oil Price change

The scatter plot focuses on 12 mth change in such prices. And, the result is essentially random. Focusing on other change interval (1 mth, 3 mth, 6 mth) generates very similar randomness.

Home Price vs Oil price. 12 mth change

-100%

-50%

0%

50%

100%

150%

200%

-25% -20% -15% -10% -5% 0% 5% 10% 15% 20% 25%

12 mth Home price change

12 m

th O

il p

rice

ch

ang

e

6

Focusing on the Crisis

When Oil peaked at $133.9 in 2008 Q2, home prices had already declined by over 20% since 2006 Q2. When Oil crashed to $41.1 by 2008 Q4, home prices kept on declining. All those observations contradict Kunstler’s theory.

Real Home price Oil price Home price Oil priceGDP growth index per barrel change change

2006q1 5.1% 223.8 62.7$ 2006q2 1.6% 226.3 71.0$ 1.1% 13.2%2006q3 0.1% 225.1 63.8$ -0.5% -10.1%2006q4 2.7% 222.4 62.0$ -1.2% -2.9%2007q1 0.5% 219.7 60.4$ -1.2% -2.5%2007q2 3.6% 217.4 67.5$ -1.0% 11.7%2007q3 3.0% 212.7 79.9$ -2.1% 18.4%2007q4 1.7% 200.7 91.7$ -5.7% 14.7%2008q1 -1.8% 186.1 105.5$ -7.3% 15.0%2008q2 1.3% 180.5 133.9$ -3.0% 27.0%2008q3 -3.7% 173.4 104.1$ -4.0% -22.2%2008q4 -8.9% 162.1 41.1$ -6.5% -60.5%2009q1 -6.7% 151.5 47.9$ -6.5% 16.6%2009q2 -0.7% 153.4 69.6$ 1.2% 45.3%2009q3 1.7% 158.8 69.4$ 3.5% -0.3%2009q4 3.8% 158.2 74.5$ -0.4% 7.3%2010q1 3.9% 156.2 81.2$ -1.2% 9.0%2010q2 3.8% 161.1 75.3$ 3.1% -7.2%2010q3 2.5% 161.0 75.2$ 0.0% -0.1%2010q4 2.3% 156.0 89.2$ -3.1% 18.5%2011q1 0.4% 150.9 102.9$ -3.3% 15.4%2011q2 1.3% 154.9 96.3$ 2.6% -6.4%2011q3 1.8% 155.6 85.5$ 0.5% -11.2%2011q4 3.0% 149.6 98.6$ -3.9% 15.2%2012q1 1.9% 148.4 103.3$ -0.8% 4.8%

7

Was the 2007 – 2009 Crisis a Housing Crisis or an Oil Crisis?

Correlation MatrixR. GDP gr. H. price chg. Oil price chg.

Real GDP growth 1H. price chg. 0.58 1Oil price chg. 0.44 0.00 1

This correlation matrix uses the data on the previous slide. Notice that over this crisis and post crisis period, the correlation between oil price change and home price change is zero (no relationship whatsoever). The correlation between oil price change and real GDP growth is positive (0.44). That is the wrong sign than what Kunstler and other Peak Oil advocates have in mind. Finally, the relationship between home price change and real GDP growth is the strongest and directionally makes sense. This confirms the financial crisis was strongly housing related. And, it was not oil related (correlation is off wrong sign.)