Wednesday, January 27, 2010

Real estate prices, gasoline prices and economic forecasting.

Clients and friends often ask me to speculate as to when real estate prices will once again resume their previously inevitable and endless increase. After I finish laughing, I tell them I do not like to speculate on the future direction of real estate prices, especially when government programs and/or increased taxes and municipal charges can distort prices and delay a market recovery.

Rather than try to interpret events or statements coming out of Washington, you should look to the best indicator of future trends in prices and the economy as a whole. This indicator is as close as the gasoline pump that you pass on the road every day.

Pick one gasoline station (because they all vary slightly) and make a mental note of the price each time you drive past it. Changes in the price (even slight changes) tell a story. When the price begins to tick upwards, it might mean that the 2009 stimulus package is finally creating the hyperinflation so many of us expect. When the price moves downward, such a move might reflect continued weakness in the economy. A move in either direction might reflect production changes by OPEC or changes in demand in foreign countries, as foreign economies react to the worldwide credit collapse of the past 3 + years.

Gasoline prices tend to move in the same direction as commodities in general, such as metals or farm products. The skyrocketing gasoline prices of 2008 coincided with large spikes in the prices of other commodities, especially metals.

While changing prices on your local sign won't tell you exactly which scenario(s) is playing out, these movements will give you a starting point if you know what to look for. More importantly, they will tell you what is about to happen with the economy. A major spike in gas prices could signal the beginning of an inflationary cycle that could drag real estate prices with it. At the same time, such a spike could signal the death knell to any recovery from the recession, as gas prices directly impact transportation costs as well as manufacturing activity.

When you look at your local gas price sign, you might really be looking at the proverbial canary in a coal mine. Even if you don't know how to interpret small price changes, you still are getting better information than the analysis that comes out of your television on a daily basis. The information exists. You need only remember it from day-to-day and week-to-week.

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