Sources of Excess Vacant Homes
Source:
http://boiserealestateinfo.net
Publish Date: 06/26/2009
The inventory of existing homes for sale, published by the National Association of Realtors and used in calculating the months’ supply of homes for sale, is another commonly used measure of the supply of housing units. Over time, that inventory behaves similarly to the number of vacant housing units for sale; between the end of 2005 and the end of 2007, the inventory of existing homes for sale increased by 40 percent, while the number of vacant homes for sale increased by 39 percent. However, the number of vacant homes better captures the downward pressure of excess supply on new construction than does the number of homes for sale, because homes for sale include occupied homes as well as vacant homes. An additional occupied home for sale adds to both housing demand and housing supply, because the residents generally buy or rent another home after the home is sold. An additional vacant home for sale adds only to housing supply.
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A greater number of vacant units puts downward pressure on construction and home prices only if those vacancies are not the result of higher demand for housing units, whether occupied or not. For example, to the extent that investors are willing to accept a lower probability of occupancy of rental units in order to take advantage of high expected price appreciation, then higher rental vacancy rates do not reduce construction. To determine the likely impact of today’s vacant housing units on future construction, it is important to understand the sources of those vacancies. In the period spanning mid-2005 to mid-2008, foreclosure rates rose after vacancy rates did and thus can explain only a portion of the increase in vacant units. The percentage of homes with subprime mortgages on which foreclosures had started remained low through mid-2006 and did not rise above its mid-2000 peak until the second half of 2007. Meanwhile, the number of vacant units for sale grew by 730,000 between the second quarter of 2005 and the fourth quarter of 2006 and by just 70,000 over the subsequent six quarters. Thus, 90 percent of the increase in vacant units for sale between mid-2005 and mid-2008 was added when foreclosure rates were still at normal levels. However, continued high foreclosure rates could spawn new vacancies in the future.
Expectations of above-average rates of price increase most likely explain much of the growth in vacant units. A higher expected rate of increase in home prices increases the incentive of investors to buy real estate to either rent or resell. In the case of rental units, unless rents fall, there is no increase in the number of renters to match the increase in the supply of rental units, so the number of vacant rental units rises. In the case of investors buying homes to resell, those homes are vacant for sale while they are on the market. ### |
Over
optimism among home builders can explain even less of the increase in vacant
units. The number of new completed single-family homes for sale climbed by only
79,000 between the second quarter of 2005 and the second quarter of 2008, less than
one-tenth of the increase in vacant units for sale over that period. (Total new
single-family
homes for sale also include units not yet started and units under construction,
which are not included in vacancies.)