Monday, June 9, 2008

Wealth Evaporates as Gas Prices Clobber McMansions

Wealth Evaporates as Gas Prices Clobber McMansions

By Rich Miller and Matthew Benjamin

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Sky-high gasoline prices aren't just raising the cost of Eugene Marino's 120-mile (193-kilometer) round-trip to his job in the Washington area. They're reducing his wealth, too.

House prices in his rural subdivision beyond the Blue Ridge Mountains in Charles Town, West Virginia, have plunged as commuting expenses have soared. A four-bedroom home down the street from his is listed for $239,000, after selling new for $360,000 five years ago.

Homeowners in the exurbs aren't the only ones whose assets have taken a hit because of the surge in energy costs. Companies such as General Motors Corp. are writing off billions of dollars in plants and equipment that are no longer viable in an age of dearer oil. The destruction of wealth and capital will weigh on U.S. growth for years to come.

‘‘Our whole economy reflects the relative costs of energy: the cars we drive, the houses we occupy, the kinds of factories we have and the equipment in them,'' says Dana Johnson, chief economist at Comerica Bank in Dallas. ‘‘I'm expecting relatively large changes in all of these things.''

The loss of wealth could be a double whammy for the U.S. economy. In the short run, it depresses demand as homeowners save more and spend less, and companiesIND' ))"> fire workers. Longer run, it curbs IND' ))">productivity growth, as firms shift their focus from increasing worker efficiency to reducing energy costs.

$4 a Gallon

The national average price of regular gasoline topped $4 a gallon (3.79 liters) for the first time, AAA, the largest U.S. motoring club, reported yesterday.

‘‘At $4 per gallon gas, $125 per barrel oil and $10 per million Btu natural gas, a lot of activity becomes uneconomical,'' says Mark Zandi, chief economist at Moody's in West Chester, Pennsylvania.

The lifestyle of the exurban commuter may be one casualty.

Emerging suburbs and exurbs -- commuter towns that lie beyond cities and their traditional suburbs -- grew about 15 percent from 2000 to 2006, nearly three times as fast as the U.S. population, as Americans moved further out in search of more affordable houses or the bigger ones that are sometimes derided as McMansions.

‘‘It was drive until you qualify'' for a mortgage, says Robert Lang, director of the Metropolitan Institute at Virginia Tech in Alexandria, Virginia. ‘‘You can't do that anymore. Your cost of transportation will spike too much.''

The 38-year-old Marino, an archeologist for the U.S. Fish and Wildlife Service, is among those feeling the pinch. ‘‘Eating out and discretionary income are a thing of the past for us,'' he says.

Declining Value

He reckons he once could have sold his 2,700 square-foot (250 square-meter), four-bedroom house for around $450,000 based on the value of other homes in the neighborhood. Now he figures it's worth about $330,000. IND' ))">Gasoline prices have doubled his commuting costs since he bought his home in 2003, he says.

‘‘Gas prices are really hurting demand here,'' says Celia Lainez, a broker at Keller Williams Rice Realty in Martinsburg, West Virginia. She says she has yet to receive a bid on the house down the street from Marino's, which has been on the market for five months.

Nationwide, home prices in neighborhoods with long commutes and no public transportation are falling faster than prices in communities closer to cities, according to a study by Joseph Cortright, an economist at Impresa Consulting. For example, his study found that prices in distant suburbs of Tampa fell 14 percent in the last 12 months, versus a 9 percent drop in areas nearer the city.

Suburbs, Exurbs

‘‘The decline in almost every case is worse in the suburbs and exurbs than it is in close-in neighborhoods because transportation costs are so much more of a factor,'' says Cortright, whose Portland, Oregon, firm studies regional economies.

Americans are trying to cope by switching from gas-guzzling trucks and sport-utility vehicles to more energy-efficient cars. Asian automakers outsold Detroit's Big Three in the U.S. for the first time last month as buyers left GM and Ford Motor Co. trucks on dealer lots in favor of Honda Civics and Toyota Corollas.

‘‘This is a fundamental change,'' Ford Chief Executive Officer Alan Mulally told reporters last month. The Dearborn, Michigan-based company plans to temporarily idle its Wayne, Michigan, SUV plant and cut production at its Louisville, Kentucky, pickup-truck facility.

Drastic Steps

Detroit-based GM is taking more drastic steps. It plans to close four North American pickup and large-SUV factories, cutting capacity by 700,000 trucks a year, and may sell its Hummer SUV brand, which averages about 13 miles per gallon (5.5 kilometers per liter) in city driving and 18 on the highway, according to government data.

The largest U.S. automaker is responding to ‘‘a structural change, not just a cyclical change,'' Chief Executive Officer Rick Wagoner said before the company's annual meeting June 3. Gasoline prices are up 31 percent this year and have doubled since March 2005.

Dennis Virag, president of the Automotive Consulting Group in Ann Arbor, Michigan, says vehicle manufacturers will find it cheaper to shut factories than retool them.

‘‘Domestic automakers, in their infinite wisdom back in the 1980s and 1990s, built factories and tooled factories just to build trucks and SUVs'' like the Ford Explorer, the Chevrolet Suburban and the Ford F-150, Virag says. ‘‘So it's very likely you're going to see more plant closings.''

Airlines Retrenching

Airlines are also retrenching. More than a dozen have failed in the last six months, including Columbus, Ohio-based Skybus Airlines Inc. and Frontier Airlines Holdings Inc. of Denver.

UAL Corp., operator of Chicago-based United Airlines, the world's second-largest carrier, will cut its fleet by 70 planes and shut its low-fare Ted unit to counter record fuel expenses. The airline will ground about 64 Boeing Co. 737s and six Boeing 747s by the end of 2009.

Delta Air Lines Inc. in Atlanta is grounding 90 planes, and Fort Worth, Texas-based AMR Corp.'s American Airlines, the world's largest carrier, plans to reduce capacity on domestic routes by 12 percent.

‘‘Skyrocketing oil prices are changing everything,'' Giovanni Bisignani, chief executive officer of the International Air Transport Association, told the group's annual meeting June 2. ‘‘The situation is desperate.''

The association, whose members account for 93 percent of international traffic, forecasts that airlines may report combined losses of $6.1 billion this year, the worst since 2003.

‘Obsolete' Capital Stock

‘‘The change in energy prices makes a portion of the capital stock obsolete,'' says Richard Berner, co-head of global economics at Morgan Stanley in New York. ‘‘That will depress demand.''

He sees the U.S. economy growing at a sub-par 1.4 percent next year after expanding just 1 percent in 2008, held back by a variety of forces that include the destruction of capital resulting from the rise in energy prices.

Zandi at Moody's says permanently higher fuel costs will depress productivity growth during the next three to five years as companies retool to boost energy efficiency.

That's what happened in the 1970s, as successive oil shocks, coupled with increased environmental regulation and other factors, led to a sharp slowdown in productivity growth.

Federal Reserve Chairman Ben S. Bernanke said in a June 4 speech at Harvard University that he doesn't see a return of 1970s-style stagflation, in part because the economy is more flexible and adaptable than it was back then. That doesn't mean the future will be pain-free, others say.

‘‘We're going to see some companies go out of business,'' says economist Philip Verleger, president of PKVerleger LLC in Aspen, Colorado. ‘‘There is going to be a large amount of wealth destroyed.''

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