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Wealth Evaporates as Gas Prices Clobber McMansions, SUV Makers

6K views 97 replies 42 participants last post by  Michael_S 
#1 ·
Wealth Evaporates as Gas Prices Clobber McMansions, SUV Makers



June 9 (Bloomberg) -- Sky-high gasoline prices aren't just raising the cost of Eugene Marino's 120-mile round-trip to his job in the Washington area. They're reducing his wealth, too.

House prices in his rural subdivision beyond the Blue Ridge Mountains in Charles Town, West Virginia, have plunged as commuting expenses have soared. A four-bedroom home down the street from his is listed for $239,000, after selling new for $360,000 five years ago.

Homeowners in the exurbs aren't the only ones whose assets have taken a hit because of the surge in energy costs. Companies such as General Motors Corp. and UAL Corp. are writing off billions of dollars in plants and equipment that are no longer viable in an age of dearer oil. The destruction of wealth and capital will weigh on U.S. growth for years to come.

``Our whole economy reflects the relative costs of energy: the cars we drive, the houses we occupy, the kinds of factories we have and the equipment in them,'' says Dana Johnson, chief economist at Comerica Bank in Dallas. ``I'm expecting relatively large changes in all of these things.''

The loss of wealth could be a double whammy for the U.S. economy. In the short run, it depresses demand as homeowners save more and spend less, and companies fire workers. Longer run, it curbs productivity growth, as firms shift their focus from increasing worker efficiency to reducing energy costs.

http://www.bloomberg.com/apps/news?pid=newsarchive&sid=a4kOXcpI3dQg
 
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#4 ·
The issue is that these developments are so far away from job-centers, that as the price of gas goes up, the value of the houses goes down, since living closer to job centers would save you more money.

Example:

Bob's McMansion is 50 miles from his job, and Bill's McMansion is 10 miles from his job.

Annual Miles Driven

Bob = 50 miles x 2 times per day x 5 days per week x 52 weeks in a year = 26,000 miles per year

Bill = 10 miles x 2 times per day x 5 days per week x 52 weeks in a year = 5,200 miles per year

Annual Fuel Consumed

Bob = 26,000 / 20 mpg = 1,300 gallons

Bill = 5,200 / 20 mpg = 260 gallons

Annual Fuel Cost at 2.50 per gallon

Bob = 1,300 x 2.50 = 3,250 bucks

Bill = 260 x 2.50 = 650 bucks

Annual Fuel Cost at 4.00 per gallon

Bob = 1,300 x 4.00 = 5,200

Bill = 260 x 4.00 = 1,040

Now, let's multiply that by 20 years of home ownership, and calculate the difference in price-hike impacts between Long-Distance Bob and Short-Hop Bill:

Bob = 65,000 total cost at 2.50, and 104,000 total at 4.00... difference of $40,000

Bill = 13,000 total cost at 2.50, and 20,800 at 4.00... difference of 7,800.

Hence, houses further away from job centers are impacted more by higher fuel costs.
 
#6 ·
The issue is that these developments are so far away from job-centers, that as the price of gas goes up, the value of the houses goes down, since living closer to job centers would save you more money.

Example:

Bob's McMansion is 50 miles from his job, and Bill's McMansion is 10 miles from his job.

Annual Miles Driven

Bob = 50 miles x 2 times per day x 5 days per week x 52 weeks in a year = 26,000 miles per year

Bill = 10 miles x 2 times per day x 5 days per week x 52 weeks in a year = 5,200 miles per year

Annual Fuel Consumed

Bob = 26,000 / 20 mpg = 1,300 gallons

Bill = 5,200 / 20 mpg = 260 gallons

Annual Fuel Cost at 2.50 per gallon

Bob = 1,300 x 2.50 = 3,250 bucks

Bill = 260 x 2.50 = 650 bucks

Annual Fuel Cost at 4.00 per gallon

Bob = 1,300 x 4.00 = 5,200

Bill = 260 x 4.00 = 1,040

Now, let's multiply that by 20 years of home ownership, and calculate the difference in price-hike impacts between Long-Distance Bob and Short-Hop Bill:

Bob = 65,000 total cost at 2.50, and 104,000 total at 4.00... difference of $40,000

Bill = 13,000 total cost at 2.50, and 20,800 at 4.00... difference of 7,800.

Hence, houses further away from job centers are impacted more by higher fuel costs.
I know, I was just trying to be funny. ;)
 
#7 ·
I don't blame this problem on gas prices, I blame it on irresponsible buyers. If you buy a brand new $360,000 house, and then already can't afford gas prices, you over spent your budget by about $260,000. Gas prices are just an easy excuse. Seems like it would be a lot easier to buy a more fuel efficient car than sell your house at a $120,000 loss.
 
#8 ·
I blame it on irresponsible buyers. If you buy a brand new $360,000 house, and then already can't afford gas prices, you over spent your budget by about $260,000. Gas prices are just an easy excuse. .
This also applies to people who are already in cheap housing - like the mobile home park not to far from where I live - who go out and somehow get credit to buy huge, shiny new trucks that were likely around half of the cost of their homes..! Priorities, I guess... (and easy credit)
 
#10 ·
In the long run I can see a shift to shorter commutes and more fuel efficient cars. The problem is the short run. People are trapped in their SUV loans, while they may have been ahead when they bought them but as the value as plummeted many are suddenly upside down in their loans. Sure you could buy a third car but you won't be saving any money once you factor the payment and insurance. It's going to be ugly until the vehicle fleet can turn over.
 
#11 ·
That majority of the country lives paycheck to paycheck. Most people right now are 2 missed checks away from losing everything they own. Nobody saves, nobody plans.

If more people lived within their means instead of putting everything on a damn credit card we wouldn't be HAVING an economic crisis right now.
 
#14 ·
That majority of the country lives paycheck to paycheck. Most people right now are 2 missed checks away from losing everything they own. Nobody saves, nobody plans.

If more people lived within their means instead of putting everything on a damn credit card we wouldn't be HAVING an economic crisis right now.
How do see these people from so high up in your ivory tower?
 
#13 ·
The stupidity of Americans is really starting to catch up, especially for those that went out and bought 12 MPG monster SUV's to drive to work and the store, bought houses that were outside of there means, live paycheck to paycheck, have 5 maxed out credit cards etc. We are our own worst enemies. Meanwhile the Saudis and OPEC are sitting back and laughing at us and getting fat and rich in the bargain. The gluttony of the 60's nearly put this country at a standstill in 1973. Now the greed and fat of the 90's is catching up with us in this most dreary of decades in a big way. But the problem is we are much different now. Back then people downsides there vehicles and cut back in a major way. Today it's business as usual with more people than ever clogging up the highways paying for all there purchase mistakes forclosing on there homes and racking up those credit cards to max.
 
#21 · (Edited)
This is why I bought my house just as close to the city as I possibly could. I give myself a little credit for foresight. Even back in '99 when I got my house I was saying that someday the price of fuel was going to skyrocket. And all the "McMansions" that were being built dozens of miles away were going to be white elephants. When the families they were built for disperse, and mom and dad don't want four or five thousand square feet anymore. They'll be too far from anything, and too big. In fact, I could almost see a time where they will be snapped up by local governments at foreclosure sales and remodeled into small apartment houses or mini-jails.
 
#25 ·
I bet high energy prices make an even bigger dent in the budgets of people who do not live in McMansions. Someone who lives in an older suburban house - the 3-bedroom ranches that many baby boomers grew up in - may have a long commute, too, but is probably already operating on a smaller budget.
 
#27 ·
Funny thing about the McMansions...I am building a new 3,221 square foot one story home after living in a 1,732 square foot home for nearly 10 years. The new home has double paned low-e windows, radiant barrier, super high efficiency three zoned A/C system, heavily insullated to obtain the energy star certification and will most likely use similar or less energy than my small 25 year old home. Also - I am moving to a more convenient location closer to the cities central main highway. Granted the location caused the dirt to cost much more...but I will consume far less energy than I did in my small cheaper house. Go figure.
 
#29 ·
Funny thing about the McMansions...I am building a new 3,221 square foot one story home after living in a 1,732 square foot home for nearly 10 years. The new home has double paned low-e windows, radiant barrier, super high efficiency three zoned A/C system, heavily insullated to obtain the energy star certification and will most likely use similar or less energy than my small 25 year old home. Also - I am moving to a more convenient location closer to the cities central main highway. Granted the location caused the dirt to cost much more...but I will consume far less energy than I did in my small cheaper house. Go figure.
While it may be a large home, the use of energy saving features and good quality materials "disqualifies" a house as being a McMansion. McMansion kind of a perjorative term describing oversized houses with ill-concieved exterior design features built with cheap materials. These houses are then sold at a great profit to the builder. When some smart planning goes into a house, such as what you have done, a good quality house results.
 
#38 ·
People buy McMansions because of quality of life and their relaitve cheap price. Prices for these houses are cheaper because of they are not situated within prime land and because these houses are from an existing plan.

Money management is important but so is family and quality of life. The sudden increase of fuel has cought everyone off guard including the best financial managers.
 
#57 ·
First, let me say that the Socialists I meet on the Interwebs are very frightening folks.

Second, I do not live in a "McMansion", but I live in suburbia in a 1960s ranch home. I have two kids, 1800 sq feet. You could not pay me enough to live in a cramped little 2 bedroom condo 10 miles from where I work. That's what I would get for the same mortgage. In addition, I have space for all of my camping gear, my RC cars, my Mustang, my Minivan, a garden, etc...

Between the higher crime rate, lack of parking (how much stress and time does feeding parking meters cost you?), higher taxes, and a less child friendly atmosphere -- no thanks. I like wide open spaces as well. I hate looking out of my window onto a busy street. We lived in a nice apartment before we had children. There are some nice pluses to city living, but once you have children -- I'd rather be minutes from the mountains than from the Drug Dealer.

I never understood the hostility towards people in suburbia. We value things differently, and city folks are always eager to jump down our throats for why we're "stupid" for living so far away from centralized population centers.
 
#58 ·
I never understood the hostility towards people in suburbia. We value things differently, and city folks are always eager to jump down our throats for why we're "stupid" for living so far away from centralized population centers.
It's mostly the complaining about high gas prices and other consequences of sprawl development. If you live in the city, you can get rid of your car, and you won't need to pay for gas anyway.

I live in the suburbs, but the endless complaining about stuff that is their own fault gets to me sometimes.
 
#61 ·
I agree. Where others see doom and gloom, I see opportunity.

I will buy a gas guzzler at way below what it was worth just a few months ago. I will never sell it, as it will do everything I will ever need........... so I come out way ahead. Fuel prices don't bother me, as I don't drive enough to make much of a difference (I am paying $20 more a month now).

3.5 times our income is what a mortgage lender would have loaned us.............. well, our mortgage is 1.3 times our annual income. We have 1 credit card, and owe $1800 on it.

I am hoping to be able to take advantage of the present situation, and buy a nice piece of land, for under value (same way we bought our home in 2003). Then, I will work toward being able to build that log home that I always wanted. This will be our last home, and we will keep, and rent out our current home.

Yes, we have made mistakes, but we have/are paying for them............. and will be done with that within a few months (9/11 killed a business we had). However, it taught us alot of good lessons. Lessons that we will never forget. Hopefully, this downturn will teach some other people some good lessons.

However, I find that I do not have alot of faith in that. I think that as soon as the fuel bubble bursts, and as soon as lenders go "hey, there are a bunch of people with not so good credit that we can make a bunch of money on," that things will pretty much be same ol, same ol. Stupid just stays stupid.
 
#62 ·
Extreme4x4, 1.3 times your income either means that you saved up a ton before buying (which is great), you bought a really cheap house (which is okay), or you already earn a hefty income.

In the first two cases, I think you have ground to stand upon to point out the stupidity of others. In the third case, I think your argument would be weaker. In the 2005 housing market, in many cases your choices were paying outrageously high rent or getting an outrageously high mortgage. And with the seemingly endless rise in property values, the mortgage looked like a better investment.
 
#67 ·
In our area, in 2003, real estate was in a major slump. We bought this house WAY under market, even in regards to that slump. We have a lot of equity, and we have no intention of tapping into it for stupid material things. Basically, short of the house and 1 vehicle payment, we pay cash.

Our income is not that great, but $80K isn't bad. This has allowed us to pay off the $40K in debt that we accrued due to living off of credit cards for 14 months (with a new baby), after 9/11 killed our business. We struggled for quite a while, after my husband went back to a career that he had before our business.......... but we are almost there.

Once the rest of the debt is paid off, we will start some major investing.

Like I said, we made mistakes, and paid for them.......... literally. We did learn though............ and those mistakes will not be repeated. Frankly, I am rather proud of us. LOL
 
#63 ·
Well, as a planner-in-training, I must say that one good thing is that this form of development being discouraged is a good thing. It's incredibly unsustainable and unnecessary. It's my hope that this is going to encourage greater density, better walkability, and (best of all) better transit. It feels weird to post about encouraging a more carless existence on a car forum (trust me, I adore my car), but it is something we are going to have to really start looking at and investing in. Transit ridership is exploding the higher gas goes, and no one is prepared for it. Cheap oil is over, and we're behind the curve.
 
#66 · (Edited)
There're a lot of good posts here, too many to multi-quote.

I attribute part of this housing situation to the school system, part to television, and part to the direction and character of the US-American culture.

Since the NEA essentially hijacked a formerly very good education system in the 1960s, and feelings, nonjudgementalism, values-free "thought" processes, and more recently a "no competition=no losers=no hurt feelings=everyone is happy" thought disordered make-believe world has been forced on the young hominids, young Americans have lost the important developmental years when lessons are presented for possible learning.

When playgrounds are stripped of equipment so nobody can get hurt, where tag and dodgeball and jacks and hopscotch are banned because someone will lose, the real world of actions/reactions/consequences is perverted into the make-believe world that much of congress and other delusional people live in.

Television presents a warped view of reality, and with the loss of objectivity and wholesale selling out to personal opinion in the news and entertainment business, much of the nation followed.
Narcissism is rampant, it is the plague of 21st century America.
"Reality" shows where zero-talent numbskulls are encouraged to demonstrate their empty resumes before audiences of millions, and then they're rewarded with crowns or contracts, encourages and spreads more narcissism.
Narcissism is a contagious disease.
How many times have you heard, "You are speshul. And everyone is speshul."
SPECIAL: 1. Of a kind different from others; distinctive, peculiar, or unique. 2. Exceptional, extraordinary.

When narcissism overtakes integrity, standards decline. Schools emphasize me-too Politically Correct emoti-thought over two-sided debate and critical thinking skills. College students think it's great to shout down one side and cheer the other side. These are future leaders? They are future dictators.

Being a Stalinist dictator requires no character. Being a great man like George Washington requires extraordinary character. Even King George III proclaimed him "the greatest man on earth" when he learned Washington had resigned his commission after the Revolution, and returned to Mount Vernon. Many expected him to make himself king. Many would have supported such an action. Instead he did what no man had done before.

This housing crisis would never have happened to the depression/WWII generation. They were not so reckless, so greedy, so undisciplined, so stupid as to blindly walk into traps like these.

A typical Greatest Generation individual would not have a house and two oversized vehicles which he owed 95% on, and six credit cards run up to 95% of their limits on, and think he was living the good life. He would be a nervous wreck because he would be aware how far overextended he was.

It happened because America is adrift, because we have a shortage of great or even good leadership, and a flourishing of short-sighted self-centered thinking that has been explained for hundreds of years in tales such as "The Ant and the Grasshopper."
 
#85 ·
Capital formation doesn't happen from the "Money Fairy" dropping by and leaving $.....(Excluding inheritance...but even that was taxed originally!)

It came about spending less than one was making and creating wealth/savings to invest....Unlike in TV, this is usually a very long process over decades....The argument is that the income was already taxed once and that to promote savings, it should receive a lower rate than the income tax rate....

Currently, a family of four can make roughly 40k and not pay any Federal income tax after accounting for deductions/credits....so the "poor" aren't paying any Fed income tax...They are paying payroll taxes such as Medicare and SocSec, but these programs' benefits for the 40k wage earner are greater than that which was paid in if you survive to collect them!

I would prefer a consumption-based tax....but that is a different argument for different time.

Obama's current tax plans look pretty ugly for a small business owner....

Top marginal rate back to 39.6%...Uncap SocSec (another 12.4% income tax for small business owners as they pay both sides of SocSec)....add them together and you get a 52% top marginal income tax rate...

He also wants to eliminate the tax deduction for businesses on offering healthcare....In place of it, he would offer tax credits for the working poor to buy it themselves...He would allow a tax deduction for taxpayers to buy their own policy, but his plan has a phase-out based on income....The impact is that the business owner will have to pay for his own policy without the benefit of his current tax deduction...(A huge cost on the "wealthy" small business owner)

Just no digging is economic policy at all....Nothing like increasing the taxes on small business owners (as they create roughly 70% of the new jobs...)...Small business owners use retained earnings to fund growth....More for Uncle Sam, less to provide for growth.
 
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