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175: US market update and the impact of skyrocketting oil prices


US Market Update


The US real estate market continues to be in a distressed and depressed position in most states. However, the market varies – the US is such a huge market – some areas are still rising but overall the situation looks fairly bleak. We believe the extent of the unraveling of the sub-prime woes is about 45% complete. In Spring 2008 we will be past the peak of the rates resetting and by September 2008 most of the resetting will have unraveled. Until hen, expect a bumpy ride with continues negative headlines and some banks getting into trouble and writing down bad debt. The problem emerged in the open in July – it’s now December so quite some time has now passed.


US homes prices have been most negatively affected in areas away from cities where prices shot up the most. Examples are holiday areas in California and Florida. But closer scrutiny of the numbers identified that cities like Miami and Detroit actually saw prices rise slightly in the last quarter. Prices in large cities like New York and Los Angeles are fairly stable. Prices in Texas have been robust and in most areas rising. Prices in remoter areas with less services industries and more manufacturing and agriculture have generally dropped back. It’s difficult to generalize but it does not look like a full scale meltdown. Although everyone talks about the US housing bubble and it’s bursting, prices rose by a relatively modest (in global terms) 50% in five years up until early 2007. It’s difficult to see how prices could crash and burn when home prices came from a low base.  


The US population has risen from 150 million in 1950 to 300 million today. The population is projected to rise to 450 million by 2050. This implies 75 million new homes will be required. The fastest growing areas are Nevada, Arizona, Texas, California and Florida – see our special reports for more details. So in these areas where land shortages occur, it is likely prices will recover and move far higher in years to come. One can expect a period of stagnation for a few years then prices in these areas will again rise. California should also follow suit as the population in this state is also increasing and it’s difficult to see where all the new homes will be build with increasing environmental restrictions coming into force. Ditto Florida. And remember the wave of aging babyboomer that will start retiring this year, peaking in 2016. These people will want to move to the sand, sea, surf and cultural centres. This is why we have a long term view that coastal Florida, California and culturally interesting places like Austin in Texas and Sante Fe in Utah will continue to see prices rising after a few years.


The enclosed map from June 2007 indicates home price risk of correction - though we believe the red areas are some of the areas most likely to increase in the next ten years.  


But be careful investing in oil intensive areas like Detroit and Cleveland. These cities are far too reliant on the auto-industry and the increase in oil prices will hit them hard. But Houston will prosper along with the new energy corridor of western Colorado, Wyoming and NE Utah – areas expose to coal, oil shale and coal-bed methane and closer to the Oil Sands projects of Alberta in Canada.


Impact of Oil Prices Skyrocketing


On 14th August when oil prices were at $70 / bbl – we predicted oil prices would rise to $125 / bbl by end 2008. They almost touched $100/bbl end November before easing back to $90/bbl. We have written ten special reports on this topic – we suggest all serious property investors should read these report that have taken years of analysis and insights to prepare:


169: Oil supply crunch begins… protect yourself

168: Alarm bells ringing – oil price shock now on the horizon

163: Making Serious Money as asset prices plateau – resources and property

161: Resources winners and losers - ranked list for property investors

160: Find out the winners and losers in the biggest oil boom in history - about to happen...

159: Massive oil boom - the winners and losers - be prepared

158: Supply and demand scenarios - oil boom and the property investors insights

157: Impact of "Peak Oil" for Property Investment

151: Oil price $125 / bbl and rising…how to take advantage in property

150: Peak Oil shortly due to be reach – unique insights for a property investor  

148: Take advantage of the oil/gas/coal boom – key insights


In these reports, you’ll find, for free, all you need to know about how to make serious money from the predicted boom in oil prices. The analysis of all producing oil nations has taken years to prepare and we finally think we’ve cracked it. The results shows that we are now on a rolling plateau production rate, meanwhile demand is increasing by 1.3 million barrels a year. We spotted this abnormality on 7th June 2007 and we now think prices will skyrocket. The opening gaps between oil supply and oil demand is a dangerous situation. OPEC meet early December and may very well communicate they will increase supply by 0.5 million bbls oil per day. But it’s too little too late. Any increase in oil supply will likely be lower value high sulfur heavy crude.  When the markets finds out that the global oil producers cannot increase production any further, there will be a mother of all oil price hikes. So be prepared. And don’t say we didn’t warn you!


This analysis is underpinned by our unique oil production mathematical model which forecast’s every country’s production up until 2015 and it does not make very pleasant reading. As already described – production is on a plateau and has been on plateau since October 2005. This is why prices are rising. But many in the market mistakenly believe there is more oil out there that can be switched on – it’s not going to happen. The plateau could be long and undulating, but we believe everyone is more or less pumping at their maximum. So for the property investor:


·          do not purchase property in far off places which take a tank full of gas to reach – this includes suburban homes with a very long daily commute to work centres

·          be careful about purchasing holiday homes in places that need a 10 hour flight to reach (stay within 2-3 hour flight radius from major population centres)

·          be careful not to purchase huge fuel inefficient homes in cold climates requiring much heating oil, gas or electric

·          the lowest risk options are city central quality apartments close to services jobs

·          consider purchasing property:

o         in oil, coal, gas and mining boom towns (refer to the above special reports)

o         close to oil company and oil services company offices

o         in areas positively affected by renewable energy developments – solar, wind, hydro-electric, low energy conservation centres. 


For US investors the best places to invest in the USA to take advantage of the oil boom are:


·          WyomingGreen River area for the coal boom

·          Western Colorado – oil shale potential future boom area

·          Texas – Houston, and Dallas-Irving-Fort Worth – oil/gas HQs and technical services centres

·          New York City – oil/gas/energy trading

·          Oklahoma – ethanol from corn and some old oil/gas wells


The USA has more coal than any other country in the world. So it seems clean coal technology with electricity to automobiles (electric cars) will be a key future response to dwindling oil (and gas) supplies.


As we predicted, Houston has done well in the last few years to weather any downturn in the real estate market and we expect this to continue. But be very careful not to purchase property more than a 30 minute auto commute to a city centre – when oil prices skyrocket, people will want to move into the cities to reduce their fuel bills. Outlying suburban areas will suffer. An extreme example is – don’t buy a large detached suburban house 80 minutes commute to downtown Detroit. The gasoline guzzling car plants will close. No-one will be able to afford to commute or heat a huge house in the cooler north. Better off buying a downtown apartment in the oil capital of the USAHouston, which will benefit from the high oil prices that in turn will destroy the gas guzzling autos.


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