Summer’s great, isn’t it? The weather is warm, the barbeque is tasty, the moods are friendly, and most importantly, it’s vacation time. Unfortunately, though, summers haven’t been the same since the US economy blew up in the mid 2000s. Namely, the American vacation tradition has gone by the wayside for a lot of people. These days, all we hear about are “staycations” or other creative alternatives to these annual events.
At blame for the uprooting of this tradition has been the slow and painful rise of gas prices. Anyone remember last summer when gas prices approached $5 in certain markets? We definitely do. According to the US Energy Information Administration, gas prices have been hovering around record highs since 2008. As a matter of fact, outside of a dramatic dip in 2009, they have been at or around record levels since 2008.
What’s behind this recent meteoric rise in gas prices? Well, it doesn’t take a trained economist to know that gas prices are largely an amalgam of macroeconomic conditions. They are derivatives of oil prices, which are in turn largely the function of supply/demand dynamics and international policy. Considering the turbulent events of the past few years, we suppose a rise in gas prices makes sense. It’s pretty difficult to forget what happened in the Middle East/Northern Africa last summer with the Arab Spring and its aftermath…along with Gaddafi’s last stand in oil-rich Libya. I guess if we combine those events with the tense nuclear environment in Iran, it should come as no surprise that there were indeed constraints in global oil supplies.
But despite the turbulence of the past several years, this summer has been markedly different in that there has been much less pain at the pump. ”There’s some good news behind the discouraging headlines on the economy: Gas is getting cheaper,” cries out a recent MSNBC article. As a result of the resolution of the aforementioned supply constraints and dire economic conditions in the EU to soften global oil demand, gas prices have lessened from extremes towards a new normal. According to a recent Wall Street Journal article, “Many of the forces that drove gasoline up are reversing, and that is helping bring prices back down … .” Gone with the “staycations”. Bring on the vacations!
But deeper than vacations, the recent fluctuations in gas prices have begged an interesting question that we felt compelled to explore: Is there any correlation between rental prices and gas prices? We’ve recently blogged about record rents in many US markets. As a matter of fact, yesterday we came across this article in CNBC discussing whether such markets are overheated. Rents are soaring…gas prices have recently been soaring, yet are kind of backing for record levels…is there anything there?
It follows logically that rental prices may indeed be correlated to gas prices when thought about qualitatively. Although, this theory may only apply to apartment units near central business districts. The thought here is that increased gas prices may lead to a reluctance toward living far from work/leisure. According to Natalie Dolce of GlobeSt.com, “People are less likely to get in their car and drive … because the cost to fill up the tank has a dramatic impact on the total cost of their [rent].”
In order to double-check our qualitative reasoning, we decided to use some data analysis techniques to confirm things quantitatively. We chose the city of Philadelphia to test out such a correlation. To do this, we compiled a data set of average gas prices in the Central Atlantic region over time and compared that against a data set containing average rent prices over time. Our gas data came from the Energy Information Administration, while our rental data set of ~5000 Greater Philadelphia Area rental units came from our proprietary database. Before running our analysis, it was important for us to figure out how to incorporate the lag between gas prices and rent prices. Our guess n’ check process yielded that it took roughly a two weeks before gas prices had their full effect on rent prices. For the sake of brevity, we are intentionally simplifying what is a technically complex process. For some technical details as to how we did this, check out our data analysis blog here.
Now let’s see how things turned out:
Our data allowed us to measure correlation from April until mid-June. With rent prices in gold and gas prices in black, the graph above confirms our qualitative suspicions: There was a strong positive correlation between rent and gas prices. According to the graph, rent prices have been increasing at almost the same rate as gas prices from the beginning of this analysis until around mid-May. At the end of the analysis, we are seeing gas prices begin a downward course, while rent prices are starting to plateau. Interesting.
So, are gas prices a good leading indicator of rent prices? I suppose the right answer is that it depends on the city analyzed and the time of the year. We can guess that an LA or an Atlanta will have a stronger correlation than a New York City. Nevertheless, the answer is that there is some positive correlation based on our analysis. Now, will rents continue to follow gas prices? We sense that they will, but we will be monitoring this going forward. Look out for further posts on this.