How High Gas Prices Triggered the Housing Crisis

Republican presidential candidate Rick Santorum made headlines last week when he suggested that high gas prices made mortgages unaffordable, causing the recent housing bubble to burst and sending the economy into recession. It may sound far-fetched, but it is precisely the theory that I and a pair of coauthors presented in a working paper released five days before Santorum’s remarks.

We are actually a bit more nuanced, arguing that unexpectedly high gas prices triggered the collapse of the housing market — igniting a fire fueled by easy credit, lax lending practices, and speculation. It is a provocative claim and one with broad implications, but it is also a claim supported by economic theory and empirical evidence.

The federal government’s Financial Crisis Inquiry Commission asserted in its 2010 report that “it was the collapse of the housing bubble . . .that was the spark that ignited a string of events that led to a full-blown crisis in the fall of 2008.” And a broad, if not unanimous, consensus among economists suggests that the ongoing economic malaise was induced by a financial crisis caused by the housing crisis. Relatively less well-understood is what caused the housing crisis in the first place.

We contend that a persistent upward trend in gas prices starting in 2005 — and the doubling of gas prices between 2005 and 2008 — altered the calculus of suburban living, causing homeowners to revaluate the wisdom of long work commutes from suburban and exurban communities into city centers.

For at least half a century, economic theory has held that the price of owner-occupied housing is declining in distance from the city center — all else equal — and that ever-declining costs of transportation induce sprawl, as households trade off the time-inclusive costs of commutes for the opportunity to own homes and land.

For much of the housing boom from the mid-to-late 1990s through 2005, gas prices were relatively low and flat — under $2 per gallon in real 2011 dollars and under $1.50 in nominal terms. Housing was developed on the outskirts of cities, in part because of constraints on growth within them. Low down-payment requirements and the growth of subprime lending, combined with high expectations for housing price appreciation, attracted relatively low-income households to the housing market and induced a phenomenon known to realtors as “Drive Till You Qualify,” whereby prospective homeowners would drive out from city centers until they reached communities in which they could afford mortgages.

The boom resulted in the newest and lowest-income homeowners settling farthest from cities and gambling that rising home equity would allow them to renegotiate mortgages before rates climbed. They were most exposed to a gas price shock as they faced the longest commutes — 50 miles or more in some communities. And they were least able to absorb the costs of higher commutes. Some households couldn’t afford mortgage payments and defaulted, others found themselves underwater and preferred to walk away instead of throwing good money after bad. Foreclosures rose and the market unraveled from the outside in. 

Antioch, California is one of the communities that suffered most during the collapse. A resident who commuted 45 miles to San Francisco would have seen his gas costs for work trips climb $3,000 annually at the height of the gas price shock. His total commute cost would have constituted fully 41 percent of the mean annual expenditure among U.S. households in the lowest income quartile.

There is no doubt that subprime lending and speculation fueled demand for housing assets. But these are uniquely American phenomena. The housing boom and bust is not. A similarly volatile cycle was observed in Britain, Spain, France, and Ireland, among other countries that while not exposed to the aggressive lending in the U.S. would have been affected by global energy market dynamics.

And presumably new mortgage products and easy credit were available throughout the U.S. Why then did the impact of the housing crisis vary so much by location? How then to explain that both the percent decline in home values and the increase in foreclosure rates grew in magnitude with distance from major city centers? Or that seven of the twenty metropolitan areas with the highest foreclosure rates in 2010 were California cities located in outlying areas like Modesto, Riverside, Stockton, and Merced?

Moreover, while the prevalence of risky loans made the housing market susceptible to collapse, had home prices kept rising in 2007, instead of turning down, rising home equity could have been used to renegotiate risky loans, thereby concealing and even resolving the market weaknesses.

Low interest rates assuredly made credit — and thereby housing — cheap. But the housing boom began before interest rates fell, and it persisted after they rose. And with interest rates near their lower bound, why is the housing market still in the tank?

And if you think the housing market was in a bubble, you may be right. It is true that all bubbles burst — by definition. But even the eminent bubble expert, the economist Robert Shiller, concedes we don’t know why the housing bubble burst when it did. Or do we?

With gas prices approaching $4 per gallon nationally, and the latest data on the housing front showing home prices at post-collapse lows, it would seem the housing boom of the last decade has saddled us with a housing stock ill-suited for the future we face. If consumers expect gas prices will remain high — or that climate policy will raise costs of commutes independent of energy market dynamics by raising gas taxes or imposing prices on carbon emissions — then the suburbs — home to roughly 50 percent of American households—may not soon recover from the collapse as urban living becomes relatively more attractive. With one-in-four households underwater and unable to withdraw home equity to finance consumption, a slow suburban housing recovery bodes poorly for short-run growth in aggregate demand and a broader economic recovery.

Matt Graham

I submit also that people would have lost jobs due to companies they worked for having to pay more for fuel.


I know let's stop Goldman Sachs and others from speculating on the energy markets and stop another energy price boom.


Remove the regulation on drilling, refining and distribution to increase the supply. The speculators will speculate that prices will fall.


Yep, ain't nothing $2 a gallon gas wouldn't fix.

Mike B

The problem is that when you cram huge numbers of people together almost any little thing can start a deadly stampede. The housing market was for years in a highly unstable state and just about anything could have caused the collapse. The truth is that since the Dot Com bubble burst the United States was relying on a housing based economy. That is almost the very definition of unsustainable and if gas prices didn't set of the panic, something else would have. The solution is not to somehow increase the value of unsuitable suburban homes, but to force both banks and homeowners to come to terms with the fact that those investments need to be written off.

Urban areas continue to offer huge deals in terms of housing, but a number of factors are preventing the necessary population shifts. Perhaps a program where middle class folks in low value suburban homes can swap places with people people in urban homes. If urban neighborhoods were transformed from poor to middle class, the housing stock would instantly appreciate, which would return wealth to those people who got burned driving until they qualified.



Can't you just buy a more fuel efficient vehicle?

Here in the UK fuel costs roughly $8.70 per (US) gallon, so buying a more efficient car can save you more than the loan to buy it costs. (It helps that fuel efficient cars tend to be cheaper to buy and tax too)

Greg Marshall

I run a Community Education program that provides a wide variety of workshops to my local community. The explanation above dovetails with the consumer patterns I saw with my customers. Six months before the housing collapse, my registrations dropped like a rock. As gas peaked in price, I lost 20% of my customers in one quarter. Six months later numbers kept sliding right into the housing decline. What was interesting is that early decline got us looking around and prepared as we could tell something was wrong...just didn't guess how wrong.


What about the nature of of the mortgages themselves? Many of them were issued with artificially and deceptively low teaser rates that got jacked up to unaffordable levels after the introductory periods ended.


Higher gas prices led to the Fed increasing interest rates as a record number of ARM were resetting. Also higher gas prices kicked the cane out from under the auto industry causing major problems in the midwest. Not to mention the travel industry in Florida and Nevada. California was just mismanaged but the housing crisis was most like what you describe (plus the higher interest rates on ARMs).


A resident who commuted 45 miles to San Francisco would have seen his gas costs for work trips climb $3,000 annually at the height of the gas price shock.

Yes, if he drives an SUV that gets 14 miles/gallon. If he were driving a more economical vehicle that gets 35 miles/gallon, his gasoline costs would have gone up by only about $1200 at the peak gasoline prices.

Perhaps the rapid and massive growth in the sales of SUV's during the period mentioned could be added as a "prime" cause of this event (mortgage payment crisis). I bet if you look at vehicle registration data, you will see that the further away you get from an urban center, the more likely you are to find SUVs (and other vehicles that consume gasoline at a higher than average rate).

Steve Davis

You mean this report by CEOs for Cities from about 2 years ago?


I have to question a couple of your basic assumptions here:

"...the price of owner-occupied housing is declining in distance from the city center — all else equal — and that ever-declining costs of transportation induce sprawl..."

Maybe price declines with distance if all else is equal, but all else seldom is equal. It seems to me that many people who move out of the city center (or choose to live outside ab initio) do so because they want space, privacy, and other amenities that simply aren't available within the city, and which will cost more than seemingly-adequate housing in the city. It certainly was so in my case.

We also have to look at that declining cost of transportation assumption in terms of what transport was actually used by commuters. I'd argue that a 50-mile commute done in a mid-80s Honda Civic at 2008 gas prices would have been cheaper (allowing for inflation) than the same commute done in a 2008 Chevy Suburban at 1980s gas prices. So it wasn't the price of gas alone that was responsible, it was the fact that many of the commuters deliberately chose to raise the cost of their commutes, and increase their exposure to rising prices, by buying less-efficient commuting vehicles. Which seems to go hand-in-hand with the use of creative home financing, and suggests that the ultimate cause was really down to abysmally short-sighted ignorance.

(FWIW, I live a long way out of town in a house that I bought before the boom, telecommute for work, and drive a car that averages over 70 mpg.)



I won't argue that high gas prices squeeze people's wallets, affecting their overall bank accounts. However, if "the newest and lowest-income homeowners settling farthest from cities and gambling that rising home equity would allow them to renegotiate mortgages before rates climbed" had been stowing away savings and emergency funds each month, they would easily have been able to pay the higher gas prices and still be able to afford their mortgages for quite a while (this is assuming their income remained constant). So it was bad financial decisions (relying on the hope of a refi) and bad financial management (overextending their funds) that did them in, not the higher gas prices.


It'd also be interesting to know how many bought out-of-town a few years before the peak, then after a couple of years did a refinance that tapped increased paper equity to buy the new gas-guzzling SUV to do the commute in.

Lloyd Blankfein's Hairpiece

I saw this with my own eyes. Co-worker lived in northeastern PA and commuted to mid-town. He told me of expenses and I advised to sell and sell fast (I had a real estate license in the late 80's & 90's when the last bubble happened). My co-worker sold around early 2008 and moved to a nice rental where originally he came from in the Bronx with his family. He lost about 50,000, but he laughs about it because by 6 months after he closed - the losses in his old neighborhood were in the 100,000-150,000 range.

Patrick R

It seems like commodity prices would serve as a catalyst more then a cause. With rising commodity prices and stagnant wages, people experience a cash crunch. This could have hit different communities more then others for a few reasons. I would expect people closer to the city to have use free flowing credit to refi instead of buy and people would refi would not be willing to overextend themselves as those who are buying a new house. I would expect people buying a new house to take the risk of being "house poor" for a few years expecting their wages to catch up. However wage growth from 2000 to 2007 was very slow and especially for those on the lower end of the wage spectrum. Since people on the lower end of the income scale were among the last to jump on the free flowing credit ride, they moved the further out. This led those people to have a major cash crunch that led to the first wave of foreclosures.



People who try to afford a larger home are often those with children. They don't want inner-city public schools. They also want space and soccer fields. Those folks can't afford a pious Prius, nor can they fit children and a week's worth of groceries in a so-called "smart car" that's little more than a wheelchair encased in plastic.

The bursting of the housing bubble was inevitable. Why should the government decide (subsidize) what the "American Dream" is for most people? Whose idea was it to "give" (saddle) people with a mortgage when they live paycheck-to-paycheck? Did anyone tell them it takes nearly 10% of the cost of the home each year just in maintenance?

The housing market in this country will NEVER recover to previous levels. Our population is now in decline . . . more people dying than being replaced by birth and immigration. The baby boomers have bought their last house . . . the next one is a retirement home. We have more homes than we need now.



I agree that when the baby boomers move on, there'll be a high supply of houses on the market, bringing down prices again.

I also agree that people who live paycheck-to-paycheck should never have been given a mortgage - but I also think those people should never have been asking for mortgages in the first place. A lot of blame has gone around with trying to figure out the cause of the bubble and its subsequent bursting, but somehow the consumers who took on more than they could afford seem to be left out of the blame game.


There's a rather comprehensive rebuttal by Felix Salmon at Reuters:

James A

Actually it's the AUTO crisis that was triggered by high gas prices in 2008.

Although I own my auto fee and clear, I know how much car payments usually are. I also know that the EXTRA money I was having to give the gas man was equal to a car peyment. If anybody was thinking about buying a car, they could not do it because all the money for that planned car payment was being eaten up by high gas prices.