I'm excited.  Commentators from all sides of the economic arena are telling us that we may be about to see something we typically only read about in textbooks - real free market supply and demand principles in action and in an important and very visible aspect of our daily lives.  Provided the Saudis don't increase oil production and our government doesn't dip into the Strategic Oil Reserve, it appears that something "classic" may be happening right now that should lower the price at the pump all by itself.  People are finally changing their behavior.  I'm one of them.  Just last week I started using my wife's VW Bug whenever I get the chance while Pam takes my gas guzzling Volvo for her shorter jaunt to work.  I now plan my errands and carefully see if I can postpone a short trip and consolidate several into one.  My list goes on but more importantly, anecdotal evidence seems to show that many of us are taking steps to reduce our demand for gasoline.  Most of my friends in Bluffton, South Carolina have altered their driving habits in some way.  If memory serves me right, my college economics professor along with Paul Samuelson's text, clearly told me that with less demand and a stable supply, prices go down.  Right?

I lived in Hong Kong in the mid 90's and many say that Hong Kong then, and to a large extent even today, despite the turn-over to China, is one of the last bastions of true free enterprise.  Milton Friedman believed that "the only plausible explanation for the different rates of growth (between the UK and Hong Kong) is "socialism in Britain and free enterprise and free markets in Hong Kong."  But enough of pure economic thought.  The question I want to ask is if we do see a cap on gas prices and if our behavior actually does produce the expected result of lowering those prices, what impact will this have on our real estate market.  Let's first look at the impact we have seen and can expect from higher energy prices.

First, when energy prices do rise as they have been for some time now, prices start to rise generally throughout the economy.  We've all seen this.  Starting with basic transportation, everything that needs to be transported is costing more these days.  And that list goes on as well.  If these higher fuel costs aren't matched by a higher corresponding increase in productivity, inflationary pressures just continue to mount.  We would then expect to see lenders looking for some way to offset these pressures and raising interest rates would be the expected next step.  I've already said (Bridging the Gap in Today's Real Estate Market) that those buyers sitting on the sidelines today waiting for the buy of the century may look back in the next several months and wish they had acted now with the combination of rates and home prices at a point we may not see again for quite some time. 

See also the May 6, 2008 Wall Street Journal Article, "The Housing Crisis is Over", WSJ.com - Opinion: The Housing Crisis Is Over.  As the WSJ Article points out, the key factor that started the real estate slump is the same factor that will bring us out of it - affordability.  The author optimistically points out that the recent overall decline in real estate prices has brought us back to the point where it now takes "19% of monthly income for the average home buyer....to purchase a house." This percantage had reached as high as 25% just before the bust in 2006.  At this point and above, folks just couldn't afford to buy homes and they stopped doing so, pretty suddenly.  But at the current 19%, homes are "back to being as affordable as during the best of times in the 1990s."  If energy costs do continue to rise, the factors above could delay what some predict could be a pretty quick recovery from a mild or phantom recession, and depress housing sales even more as rates increase.

Well, if Milton Friedman is right and my own behavior and that of my friends is any indicator, we may all be doing this whole market a favor as we ride our bikes and actually pay attention to speed limits.  And if we start to see the price at the pump decline, WSJ may be right.  Keep your eye on the pump and honk when you see a Bug.