Property Grunt

Wednesday, November 23, 2005

FEEL THE LOVE!: GM and the Real Estate connection

As you all may have noticed the response to my last entry was not exactly gentle. Readers seem obligated to line up and smack me with chairs and I expected no less from my people. I would like to share some of the comments, which were greatly appreciated, and of course my responses




I have to say I disagree. While it will contribute to the general discomfort of those already stretched, other discretionary things will suffer first - like luxury goods, Starbucks coffees, movie tickets, mega cable packages, etc. The cost of heat will have a long term effect, if any, but not a short term one.

Brokered. I love you like I love taffy. And I am a man who loves his taffy. Things like Starbucks coffees, movie tickets, mega cable packages, etc. are not luxuries. They are perceived as needs. Try to stop a New Yorker from getting their daily dose of starbucks and they will rip your nipples off.

I do concur that mortgages will play a key role in the correction of the housing market. But oil will be right behind it. There will be people out there who will completely freak when they get their heating bills.

High oil prices probably will not cause many immediate sales or foreclosures. They would aggravate an overall poor financial situation for some people, but I don't even think it would cause a trend of sales and foreclosures. I agree with the first commenter, people would change their behavior before they allowed something like that to happen... including minimizing their usage of oil heat.

Also, most utility companies give residents a good deal of latitude when prices go up during a period of high demand. When I once received a particularly high oil bill, the utility company actually took it upon themselves to amortize the higher cost through the summer months.

Of course they amoritize. It’s the summer. Your not going to use the heat unless of course you live in Alaska. See if they will amoritize next winter winter. Not. Besides I have never heard a utility company doing that for their customers.

Yeah. You're going to minimize your use of heating oil. At the risk of having your kids freeze to death? I don’t think so. Heat is a need during winter and I highly doubt anyone will cut down on that.

Two choices will be presented to owners of real estate which will be pay the heating bill or the mortgage. At that point in the game they may decided to dump their properites since it is causing them to bleed cash. Keep an eye out for this.

I doubt it as well.

Oil is only one way of heating, in a lot of European countries (as in Sweden were I live) the cost of oil is far above the US price and here you see a move towards electricity heating, mostly with some extra kicker, ie. Ground source heat pumps / Geothermal heat pumps, Exhaust air heat pumps or something like that.

So I figure that the major chunk of housingcost is still the loan even in US.

Well my fine Swedish friend, when it comes to alternative fuels the US care less. There are movements that are picking up steam to use alternative fuels but refined petroleum will always have a seat at the head of the table.

Let me go out on a limb and guess that you weren't captain of your high school debate team, Grunt. Your connection between GM and the real estate market is a weak one. Oil prices have their effect on many industries, and undoubtedly, it has an effect on real estate industry as well. But the price of oil is simply a contributing factor (one of many) in the layoffs at GM. It also, as stated by other commentors, probably doesn't have a huge effect on real estate (foreclosures!? are you kidding me!?). If you want to draw the connection between increased crude oil prices and how it will affect homeowners in the coming months, why not just state that the price of crude oil per barrel has increased by X% over the past X months? Using the GM layoffs and plant closings as evidence of increased oil prices is too much of a leap because there are many other contributing factors to the closing (as you even quoted in your entry). There are even other contributing factors as to why SUV sales are down, not solely higher oil prices.

A week ago I would take that limb and swing it at you. But I’m not going to do that since you do raise some interesting points. My argument may seem weak however I feel it will get strong over time. You are correct that right now it appears that oil will not play a role in the downfall of the market. But appearances can be deceiving. SUVs are gas guzzlers and when customers realized they were going to pimp slapped with that bill their interest began to wane. If profits were raining down on GM do you think they would even think of touching their pension program? Their revenue streams are started to dry up which is selling SUVs. That is why they had t take such drastic actions to stabilize the company.

You have to understand that a key component of real estate is the nickel and dime. Little things always add up and can creep up on you without warning. Oil plays a role in that. From what I have heard on the wire, in New York City operating costs have shot up 40% for managing residential properties alone since last year. It doesn’t seem apparent now but just watch and wait, GM’s current situation is a sign of things to come.

I realize I kicked the hornets next on this entry and I have no doubt that the response will be the same to this entry. But before you all start lining up with your hockey sticks I would like you all of you to read these two rather alarming articles.

The first article presents a very unusually meeting between Congressman William D. Delahunt with the President of Venezuela

That meeting -- unusual for a sitting member of Congress and a head of state so critical of the White House -- sparked negotiations that led to the official announcement scheduled for today: A US subsidiary of a Venezuelan-owned company will provide 12 million gallons of discounted home heating oil to Massachusetts consumers and organizations serving the poor.

Those of you who have been living under a rock, Chavez has drawn the ire of George W. Bush and of course Pat Robertson because among other things he is a huge critic of the Bush administration and bestest buddies with Fidel Castro and if you don’t know the significance then you are wasting valuable oxygen. What is really puckering up the administration’s butt holes is that Chavez’s country is sitting on a huge surplus of oil that America needs.

Politics aside, I think Congressman Delahunt is doing what he can for his constituents and I applaud him for that. But if a man of his stature has to go to South America to broker a deal with someone that is so despised by the Bush administration to get heating oil for his people you have to admit there is something really wrong with our oil situation.

The other article deals with natural gas and the long term damage that Katrina has caused. Those of us who use natural gas will also be feeling the pain in our pocket books.

The Energy Department's Energy Information Administration recently predicted that households heating primarily with natural gas can expect to spend about 50 percent more this winter.
Kelliher said the final figure depends on further recovery for offshore facilities, the weather and conservation efforts. He said a winter 10 percent warmer than the last would more than offset gas production losses, but if the winter is 10 percent colder it could double the price effect of the gas loss.

Even on natural gas we are all going to be taking a beating. Energy costs are going to go up and unfortunately little can be done. Utilities will emerge as key factor in the demise of this market.

With addition of overpaying for properties with atrocious mortgages, these oil prices will be a huge burden on homeowners. I know of some people who had to take out a home equity loan to pay for their heating oil. And I am sure they are not alone. If you have to go that far to heat your home then you know you are entering dire straits.

However, what we need here is viagra-induced facts. Are there any investment bankers or Wall Street people who could put in their two cents on this topic? And of course all comments are welcome.

Before I depart I want to wish all of you a Happy Thanksgiving. The Grunt plans on spending it with family. Be safe and be well.