- The Washington Times - Sunday, December 5, 2004

Record high energy prices haven’t ended America’s love affair with big cars and houses, but they have accelerated a trend toward living closer to downtown and looking for ways to cut fuel costs.

Demand for houses in or close to city centers has been on the rise since the turn of the century, originally prompted by dissatisfaction with long commutes and increasing traffic congestion.

“Americans are moving back to their urban centers,” said J. Ronald Terwilliger, partner at Trammell Crow Residential in Atlanta, attributing the trend to congestion, high gasoline prices and “people’s desire to live closer to where they work, where they shop.”

The closer proximity to work and shopping reduces driving and gasoline costs — now averaging near $2 a gallon — and makes walking and public transit convenient in many cases.

A study this past summer by the National Association of Realtors and Smart Growth America found that reducing long commutes is the top priority of home buyers.

Among people planning to buy a home in the next three years, 87 percent said a shorter commute was the most important goal, the study found. Six in 10 preferred a neighborhood close to work, with sidewalks and within walking distance of shops, restaurants, libraries, schools and public transportation.

The trend has been particularly strong in the Washington area, local real estate business people say, with both the city and close-in suburban centers like Silver Spring, Arlington, Ballston, Chevy Chase and Bethesda benefiting.

Demand for housing in the city has skyrocketed so much that developers are profiting by converting office buildings into condos, particularly around metro stops, said John H.C. Barron Jr., a real estate attorney with Duane Morris.

Although the national survey found more than half of Americans still prefer to live in larger homes with the bigger plots more typical of the suburbs, people are willing to sacrifice space as long as they are compensated with pricier amenities, such as top-of-the-line kitchen and laundry appliances, said Blanche Evans, a real estate author.

“Luxury town homes are in. McMansions are out,” she said, noting that homeowners want top-end dishwashers and dryers that are quieter and less obtrusive, as well as more efficient on energy and water use.

Pinching pennies

Paying high prices for housing closer to work is not an option for everyone. The median price of a home in Washington this year soared to more than $300,000, the realtor group said. Because the most expensive homes usually are inside the Capital Beltway, the more affordable homes in the exurbs and suburban fringes remain the best or only alternative for many.

Winter heating bills are expected to soar this season to more than $1,000 per household, but that is a fraction of the cost of purchasing a home in a prime location.

The pull of lower home prices and wide open spaces was a powerful draw for Frederick, Loudoun and other exurban counties during the 1990s, according to census surveys.

The attraction is still there, local officials say, though diminished by long commutes, congestion and high gas prices.

Those who by choice or necessity continue to live a long way from their workplaces have been trying to find other ways to save energy.

Purchases of newer, more energy-efficient appliances and cars are surging, as are investments in energy-saving home improvements such as insulation, weatherization and new windows.

Spending on home improvements rose a robust 5.1 percent in the past year, according to Harvard University’s Joint Center for Housing Studies, and hardware dealers such as Home Depot and Lowe’s are reaping the profits.

Home Depot, which sponsored clinics every Saturday last month on weatherizing a home, reports that revenue from services such as home energy audits, window and door installation surged by 26 percent in the last quarter while its appliance sales are up by 40 percent.

The urge to save fuel also is affecting consumers’ choices in cars.

Gas prices more than $2 a gallon have altered the rage for sport utility vehicles, funneling demand into more fuel-efficient models known as “crossover utility vehicles” (CUVs) because they are based on car platforms rather than trucks.

Smaller is beautiful

Sales of CUVs, such as Honda’s CR-V, rocketed by 16 percent in the first half of the year as gas prices spiraled into record territory, the National Association of Automobile Dealers reported.

Sales of vans and minivans, also seen as replacements for heavier, gas-guzzling trucks, also were up by 8.4 percent over 2003 levels, while sales of traditional trucks and large SUVs both dipped, the dealer group said.

“Double-digit sales of CUVs has been under way since 2000” when energy prices first started to soar from the low levels that prevailed during the 1990s, said Paul Taylor, chief economist at the dealer group.

He called it a “silent revolution” driven by a new energy consciousness among consumers.

Sales of hybrid cars and hybrid SUVs — which achieve up to 66 miles per gallon relying on electricity as well as gas — have been even more explosive, although the volume of production remains minor compared with all-gas cars.

Japanese manufacturers Toyota and Honda, with their Prius and Insight models respectively, have profited the most from the hybrid trend, although Ford waded in with the world’s first hybrid SUV model this past summer.

With initial prices that are $3,000 higher than conventional models, hybrid cars are attracting consumers who have long commutes and drive more than 20,000 miles per year, compared with the typical 12,000 to 15,000 miles per year, the dealer group said.

Mr. Taylor expects the cost of hybrids to decline in time, but they will continue to be rare on the nation’s roads because so few are being manufactured. Despite double-digit demand growth for the Prius, for example, Toyota plans to ramp up production to only 100,000 next year.

Despite the trend toward more energy-efficient models, Mr. Taylor said, U.S. consumption of gasoline will continue to grow slowly because about 2 percent more drivers are licensed each year.

Still thirsty for gas

Although Americans are striving to find ways to save energy, analysts say, the nation is unlikely to significantly curb its big thirst for oil unless prices surge dramatically or Congress imposes much higher fuel-efficiency standards on cars.

The average fuel economy of cars would have to double from today’s 27.5 miles per gallon to cut America’s use of gasoline in half and come close to eliminating dependence on foreign sources of oil, said the Rocky Mountain Institute, an energy think tank.

Although this year’s 70 percent jump in the price of premium crude to a record of $55 a barrel last month seems punishing enough, economists say oil prices would have to nearly double again to $90 per barrel to rival the inflation-adjusted peak set in 1980.

That bout with astronomically high oil prices a generation ago produced the biggest gains in energy efficiency in American history, prompting Congress to enact tough fuel efficiency standards for cars, appliances and buildings. It also contributed to a deep recession and double-digit inflation.

This year’s oil price spike is provoking a similar, but less severe, adjustment by businesses and consumers to the world of high energy prices, Federal Reserve Chairman Alan Greenspan says.

As in the 1970s and 1980s, fevered oil costs this year have caused a doubling of inflation from last year’s low level of 2 percent, as well as an economic slowdown that has taken the sheen off a vibrant economic recovery.

The nation’s adjustment should be less painful this time, analysts say, because oil prices remain relatively low and because of energy-saving technologies, such as hybrid cars, that did not exist during the oil shocks of the 1970s.

High fuel prices depress the economy because consumers and businesses cannot immediately make the big new investments in homes and cars needed to adjust to the high prices. Their initial reaction is to cut back on other purchases to offset the higher cost of fuel.

Paying the oil tax

Because it forces consumers to cut spending on less essential items like eating out or entertainment, economists say, rising oil and gas prices act like a tax on consumers and the economy.

Low-income workers — who are least able to adjust by purchasing the more-expensive houses, appliances and cars needed to escape high gas prices — are disproportionately affected.

For a typical worker making the minimum wage or senior citizen living on fixed Social Security benefits, the higher cost of gasoline may force them to cut back on critical expenses such as food, clothing and medicine.

Nearly every consumer feels the impact in some way. One retailer survey showed, for instance, that nearly a quarter of Christmas shoppers this year plan to spend less because of the high cost of gas.

In the long run, analysts say, everyone will have to make far-reaching lifestyle changes as supplies of oil and gas dwindle worldwide.

By some estimates, global oil production may be peaking this decade even as demand is escalating because of double-digit growth in China, India and other Third World countries, said Bob Olson, senior fellow at the Institute for Alternative Futures, a think tank.

More optimistic assessments suggest consumers may have another decade or two before oil production peaks and supplies start to decline relentlessly — turning oil and gas into scarce commodities that draw sky-high prices.

Once supplies peak, the inexorable rise in oil and gas prices will make other sources of energy that now look expensive or cumbersome more attractive.

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