Why Vacancy Rates Are the Hidden Indicator of Housing Market Health
Imagine shopping for a new home—whether you're aiming to buy or rent—and finding that every other house on the block is empty. Conversely, imagine a tight market where you can't even find a rental property, let alone purchase a home. What could these two extreme scenarios signify about the health of the US housing market?
The answer lies in a metric often overlooked but deeply interconnected with the state of real estate: housing vacancy rates.
What is Housing Stock?
Before delving into the crux of the issue, let's first clarify a term that I’ll be using several times throughout this post: "housing stock."
Housing stock refers to the total number of residential units available for people to occupy as their primary residence. This inventory includes everything from single-family homes to apartment complexes, and housing stock vacancy is a key indicator of housing market health.
The Intertwining of For-Rent and For-Sale Markets
You may think that the rental and for-sale housing markets operate in isolated silos. However, the reality is far from that. These two markets are intricately woven, each affecting the other's dynamics. Understanding one without the other would be like solving a puzzle with missing pieces.
When vacancies are high, the for-rent market becomes saturated with available units. Consequently, some real estate investors shift excess rental units to the for-sale market in an attempt to improve cash flow. On the flip side, when vacancies are low and demand is high, investors frequently purchase for-sale units to meet this demand.
The Importance of Vacancy Rates in Rental Markets
Therefore, to get a comprehensive view of the overall housing market, it's essential to focus on vacancy rates, particularly within the rental market. A keen eye on these rates can provide invaluable insights into the likelihood of rental units transitioning into the for-sale market and vice versa.
To understand the prevailing trends, let's look at some current data.
Growth Rate And Vacancy Rate
The graph below features two key data sets for your consideration. The annual percentage growth of the housing stock is represented in blue, while the year-round vacancy rate is depicted in red. To help you quickly identify overall trends, a dashed line in the corresponding color indicates the average for each metric. Also, I'd like to thank Andrew Jobst (@ajobst) for his detailed tweet on August 18 that inspired me to write this post.
While the crux of this article concentrates on vacancy rates, it's essential to briefly address the issue of housing stock growth, as depicted by the blue dashed line on the graph.
Since 2008, the rate of housing unit expansion has markedly decelerated, leading to a scarcity of homes. The consequences are evident across the majority of U.S. cities:
- Skyrocketing Home Prices
- Escalating Rental Costs
- Increasing Rates of Homelessness
The data underscores the urgent need to accelerate home construction beyond the pace set over the past 15 years.
Vacancy Rates Reach All-Time Low
Turning our attention to recent vacancy rates, we observe a low point three years ago when rates dipped under 3.6%. Since then, they've rebounded slightly to just over 4%. While a casual glance at historical data might suggest that today's rates are akin to those of the 1970s and early 1980s, such a comparison would be misleading.
It's important to note that the data we're examining comes from the U.S. Census Bureau, which has revised its measurement methodology multiple times over the years. These changes have expanded the scope to include various categories of vacant units, such as mobile homes and dilapidated properties, which were not part of the dataset in earlier decades.
Therefore, today's figures encompass a broader range of housing types than those captured when vacancy rates were this low. It's also crucial to highlight the significant contrast between today's vacancy rates and those observed during the housing bubble years.
Calculating The Year-Round Vacancy Rate
Upon close inspection of the graph's legend, you'll notice the inclusion of detailed titles.
This specificity arises from the method used to measure the vacancy rate, where Census totals have been adjusted by omitting certain categories. I recognize that this exclusion may raise questions among some readers, so allow me to clarify the rationale behind this approach.
Recall that our primary focus is on understanding the deterioration of home affordability. To that end, we've characterized housing stock as follows:
Housing stock encompasses the total number of residential units available for individuals seeking a primary residence. This includes a wide range of accommodations, from single-family homes to multi-unit apartment complexes, and serves as a critical indicator of the housing market's overall health.
The U.S. Census Bureau's dataset contains several categories that are not pertinent to our study, as they neither accommodate individuals searching for a primary residence nor provide options for the homeless:
- Seasonal - Seasonal properties refer to housing units that are used or intended for use only during certain seasons of the year, for weekends, or for other occasional uses. These could include vacation homes, ski lodges, summer cottages, or other similar property types. Seasonal homes are not the primary, year-round residences of their owners.
- Held Off-Market: Occasional Use - Occasional Use properties refer to housing units that are not the primary residences of their owners or renters and are used only occasionally. These might include weekend homes, or units used for short stays but not on a regular, year-round basis. Unlike "seasonal" units, which are intended for use during specific seasons (like summer vacation homes or winter ski lodges), "occasional use" units may not have a season-specific purpose. These "Occasional Use" units are generally included in the "Year-round vacant/Held off market" category of the housing inventory, similar to "URE" (Usual Residence Elsewhere) and "seasonal" categories. The reason is that these units are not actively available for rent or sale to the general public, even though they are part of the overall housing stock.
- Held Off-Market: Usual Residence Elsewhere - This year-round vacant/held off-market category accounts for vacant housing units because the owner or renter has their usual residence at another location. Such units could be secondary homes, vacation homes, or other properties that are not the owner's or renter's primary residence. Because these units are not available for rent or sale, they are classified as "held off market.
- Held Off-Market: Other - The "other" category typically refers to housing units that are not currently available for sale or rent but also don't fall neatly into the more specific "Held Off-Market" subcategories like "Usual Residence Elsewhere (URE)," "seasonal," or "occasional use." The "Other" category can serve as a catch-all for various situations where a property is kept off the active housing market for reasons not captured by the more specific classifications. For example, this could include units undergoing long-term renovations, units that are part of an estate and awaiting legal resolution, units owned by organizations for future use, or units kept vacant for unspecified or miscellaneous reasons. Since the "Held Off-Market: Other" category can be broad and include a range of situations, it's often used as a fallback for any units that are not actively available for rent or sale but also don't fit into the other "Held Off-Market" subcategories.
In sum, the low vacancy rates we are witnessing today present a nuanced picture that defies a simple comparison with past decades. Adjustments in the Census Bureau's methodology and the complexity of the modern housing landscape make today's rates notably lower than those of earlier years.
Given our focus on the deterioration of home affordability, these low vacancy rates—reflecting a limited supply of homes for primary residency—are a stark indicator of the urgency with which we must address the nation's housing challenges. The scarcity of available housing options puts pressure on prices and limits choices for individuals seeking a place to call home, further emphasizing the need for comprehensive housing policy reforms.
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We Need To Build More Homes
In summary, the core issue at hand boils down to a fundamental mismatch between supply and demand. Over fifteen years ago, governmental efforts to suppress mortgage lending led to a significant slowdown in home construction. When demand eventually rebounded, the industry could not build affordable homes at a pace that could satisfy this resurgent interest. This has resulted in the current housing affordability crisis that plagues many of America's metropolitan areas today.
The most viable long-term solution to this pressing issue is building more homes. Elected officials must hear from their constituents that the only effective way to rectify this growing home affordability epidemic is through proactive housing policy reforms to increase supply.
How Many Homes Are Needed?
Undoubtedly, the United States faces a housing shortage that doesn't align with the needs of its expanding population. While it's true that population growth has decelerated, it's also important to remember that hundreds of thousands of existing homes are demolished every year. These factors compel us to keep pace with population growth and replace the housing stock lost to demolition. So, what is the real magnitude of homes needed in the country?
Estimates of the housing deficit vary widely, ranging from as low as 3 million units to a staggering 8.5 million. Freddie Mac's recent estimate suggests a shortfall of approximately 3.8 million housing units for rent and sale. However, the graph in today's article, which is based on Census Bureau data, paints a darker picture.
Between 1965 and 2008, the average housing stock growth rate stood at 1.66%. In contrast, from 2009 through the second quarter of 2023, this growth rate plummeted to just 0.82%. That's a reduction of over half! Based on Census Bureau data, approximately 14.7 million new homes have been added since 2008, net of demolitions. This indicates a staggering shortfall of over 15 million homes. Even if we adjust for the slowing pace of population growth, the deficit is unlikely to be as low as the 3.8 million homes suggested by other estimates.
The shortage is palpable in both the housing-for-sale and rental markets, driving home affordability to alarming levels that many of us never anticipated.
It's Time To Make Your Voice Heard
Contact your local elected officials and let them know that we, as a community, demand more homes to be built. The stability of our cities and the future of home affordability depend on immediate and decisive action.