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Mon, Aug 15, 2005 - Page 12 News List

US real estate counters oil prices

WHAT, WE WORRY?Despite surging oil prices, auto retail sales in the US grew as consumers bought 4x4 gas guzzlers - because the value of real estate is also rising


Oil prices are surging, but they are not rattling the largest economy in the world -- at least as long the real-estate market remains strong, analysts say.

Oil prices shot up here over the past several days from US$63 a barrel last Monday to just under US$67 a barrel Friday.

The market has moved far from prices averaging about US$30 a barrel registered just two years ago.

Analysts say the price increase has undoubtedly put the brakes on economic growth somewhat, shaving between 0.4 percent and 0.5 percent off the leading economic indicator, according to Brian Hilliard of Societe Generale.

However, many remain unfazed.

"I'm not terribly concerned because it doesn't appear to be curbing US demand significantly," said Sal Guatieri, senior economist at BMO financial group.

In fact, retail sales were strong both last month and this month, growing 1.7 percent and 1.8 percent respectively, fueled by promotional deals put forward by the nation's leading automakers.

And what were Americans buying amid reports of climbing gas prices? Mainly 4x4 vehicles known as leading gas guzzlers.

The explanation of this phenomenon lies in the fact that current gasoline prices remain acceptable for the majority of the population.

"There are definitely segments of the US population that are suffering from the approach of US$3 a gallon for gasoline but it's not a big enough segment to thus far materially slow consumer spending," said John Lonski of Moody's Investor Services.

For others, the economy resists high oil prices because it is kept afloat by several positive factors such as capital investments and the rising value of real estate.

Real-estate owners survey the growing value of their holdings and as a result spend more.

"House prices are accelerating, and maybe you can say that's a bubble or not and there will be some correction down the road," Guatieri said. "But until the market corrects it, housing-price wealth creation will provide a powerful offset to the impact of higher oil prices on US consumer spending."

With a three-room apartment fetching about US$1 million in Manhattan and housing prices going up on average 14 percent in June in the country, real estate remains a powerful economic engine.

As US home values rise many consumers, feeling more prosperous, spend more using credit cards; others take spending money out of home equity loans; and still more take cash-out options on home mortgage renegotiations, which are not limited in the US financial system.

All of these factors inject more cash into the economy.

Moreover, this system soothes the hearts of homeowners.

"It supposes there's a psychological effect. You say to yourself, `Well look, the price of gasoline is going up from US$1.75 to nearly US$3 a gallon, but on the other hand the price of my home is going up from US$100,000 to US$250,000 -- why do I care?'" Lonski said. "I think it provides a psychological boost to consumer views."

But the balance is fragile.

Speculators have invaded the market in large numbers. And many take out increasingly more sophisticated and risky mortgages to get the home of their dreams.

Prices are not expected to rise indefinitely.

"While households can temporarily ignore higher energy prices by borrowing more and extracting equity from their homes, the process is finite," warned Joseph Abate, an economist with Lehman Brothers.

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