Was 2007 - 2009 a housing crisis or an oil crisis?

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This is a data driven investigation on whether the 2007 - 2009 financial crisis was at all oil related or was it mainly housing related. As you will soon find out, it was mainly housing related. Oil had nothing to do with it.

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Was 2007 - 2009 a housing crisis or an oil crisis?

  1. 1. Was 2007 – 2009 a Housing crisis or an Oil crisis? Gaetan Lion July 11, 2012 1
  2. 2. Kunstler believes the recent housing- financial crisis was really an oil crisisJames Kunstler, the author of“Too Much Magic”, is one of themain advocates of this view. 2
  3. 3. The Data suggests otherwise… Home price vs Oil price. Standardized variables 4.00 Home price 3.00 Oil price 2.00 1.00 0.00 -1.00 -2.00 Jan-89 Jan-96 Jan-03 Jan-07 Jan-87 Jan-88 Jan-90 Jan-91 Jan-92 Jan-93 Jan-94 Jan-95 Jan-97 Jan-98 Jan-99 Jan-00 Jan-01 Jan-02 Jan-04 Jan-05 Jan-06 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12Using a Case Shiller monthly home price series (for 10 major MSAs) goingback to 1987, and using oil prices from the EIA over the same period; weobserve that home prices peaked in July 2006 or a full two years before oilprices peaked in July 2008. When oil prices crashed from July 2008 toFebruary 2009, home prices continued crashing too. That’s the opposite 3direction of what Kunstler and other Peak Oil advocates suggest.
  4. 4. Home Price vs Oil Price Scatter Plot Home Price vs Oil price. Standardized variables 2.50 Home price. Standardized unit 2.00 1.50 1.00 0.50 0.00 -0.50 -1.00 -1.50 -1.50 -1.00 -0.50 0.00 0.50 1.00 1.50 2.00 2.50 3.00 3.50 4.00 Oil price. Standardized unitThe scatter plot shows that when oil prices are low, they have apositive relationship with oil prices (opposite of Peak oil expectations).When oil prices are high, they have essentially no relationship withhome prices (also not supporting Kunstler’s opinion). 4
  5. 5. Home Price change vs Oil Price change Home Price vs Oil price. 12 mth change 200% 150% 12 mth Oil price change 100% 50% 0% -50% -100% -25% -20% -15% -10% -5% 0% 5% 10% 15% 20% 25% 12 mth Home price changeThe scatter plot focuses on 12 mth change in such prices.And, the result is essentially random. Focusing on otherchange interval (1 mth, 3 mth, 6 mth) generates very similarrandomness. 5
  6. 6. Focusing on the Crisis Real Home price Oil price Home price Oil price GDP growth index per barrel change change2006q1 5.1% 223.8 $ 62.7 When Oil peaked at2006q2 1.6% 226.3 $ 71.0 1.1% 13.2%2006q3 0.1% 225.1 $ 63.8 -0.5% -10.1% $133.9 in 2008 Q2,2006q42007q1 2.7% 0.5% 222.4 219.7 $ $ 62.0 60.4 -1.2% -1.2% -2.9% -2.5% home prices had2007q22007q3 3.6% 3.0% 217.4 212.7 $ $ 67.5 79.9 -1.0% -2.1% 11.7% 18.4% already declined by2007q4 1.7% 200.7 $ 91.7 -5.7% 14.7% over 20% since 20062008q1 -1.8% 186.1 $ 105.5 -7.3% 15.0%2008q2 1.3% 180.5 $ 133.9 -3.0% 27.0% Q2. When Oil2008q32008q4 -3.7% -8.9% 173.4 162.1 $ $ 104.1 41.1 -4.0% -6.5% -22.2% -60.5% crashed to $41.1 by2009q1 -6.7% 151.5 $ 47.9 -6.5% 16.6% 2008 Q4, home prices2009q2 -0.7% 153.4 $ 69.6 1.2% 45.3%2009q3 1.7% 158.8 $ 69.4 3.5% -0.3% kept on declining. All2009q4 3.8% 158.2 $ 74.5 -0.4% 7.3%2010q1 3.9% 156.2 $ 81.2 -1.2% 9.0% those observations2010q22010q3 3.8% 2.5% 161.1 161.0 $ $ 75.3 75.2 3.1% 0.0% -7.2% -0.1% contradict Kunstler’s2010q4 2.3% 156.0 $ 89.2 -3.1% 18.5% theory.2011q1 0.4% 150.9 $ 102.9 -3.3% 15.4%2011q2 1.3% 154.9 $ 96.3 2.6% -6.4%2011q3 1.8% 155.6 $ 85.5 0.5% -11.2%2011q4 3.0% 149.6 $ 98.6 -3.9% 15.2% 62012q1 1.9% 148.4 $ 103.3 -0.8% 4.8%
  7. 7. Was the 2007 – 2009 Crisis a Housing Crisis or an Oil Crisis? Correlation Matrix R. GDP gr. H. price chg. Oil price chg. Real GDP growth 1 H. price chg. 0.58 1 Oil price chg. 0.44 0.00 1This correlation matrix uses the data on the previous slide. Noticethat over this crisis and post crisis period, the correlation between oilprice change and home price change is zero (no relationshipwhatsoever). The correlation between oil price change and real GDPgrowth is positive (0.44). That is the wrong sign than what Kunstlerand other Peak Oil advocates have in mind. Finally, the relationshipbetween home price change and real GDP growth is the strongestand directionally makes sense. This confirms the financial crisis wasstrongly housing related. And, it was not oil related (correlation is offwrong sign.) 7

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