Considering Housing Vacancy Rates In Terms of Supply and Demand

I received the follow comment on yesterday's housing post:

You may want to look at the latest quarterly data on housing vacancy rates from the Census Bureau [.PDF] which shows the vacancy rate for owner occupied housing hitting 2.7 percent. This is up close to 50 percent from the 1.8 percent rate of just two years ago.

The vacancy rate for ownership units has never previously crossed 2.0 percent. More than 2 million ownership units are now sitting vacant. I think you are under estimating the extent of the housing situation.

Hmmm... and wouldn't you know it? My recently discovered other favorite blog, Mish's Global Economic Trend Analysis, has a bit on the same information. Mike's piece sums everything up nicely, so no need to reprint the same thinking here.

However, I do want everyone to step back for a second and think about what is really going on here. This is supply and demand at its simplest form. Think back to Econ 1A and 1B, when we learned about how when there is too much supply, what must happen to price in order for demand to be filled? A simple shift to the right of the supply line pushes the equilibrium price downward.

Source: Encarta

With too much inventory on hand in certain areas, the rental prices in these vacant homes is going to adjust. Another commenter mentioned not being able to really make ends meet on a $60k salary in Laguna Beach, California with rental incomes as high as they have been. This shift will certainly make going out on a Sunday night a lot more attainable for this individual. Hopefully.

I still don't see a collapse in the United States' economy just because there's too much inventory on hand for homes in certain areas. I see a transition as we work through this inventory surplus. Nothing more. The economy will be firing on normal cylinders from here on. The high-octane injected fuel that was the housing market appears to be working its way out of the system without much of a glitch. Unless we have a large change with incomes in the next few months, I don't see the U.S. economy slowing down. Certainly not because of the housing market specifically.

I certainly hear what individuals are saying. But, I'm going to stick to my guns that this economy is a lot stronger than most have given credit. Lately, however, even those winds have changed a little. Seems others are getting on board to the fact that the economy is firm.

Regardless, if we are facing a firm economy, and there is going to be an adjustment in the housing markets, then I wonder if it's possible that this trend will be reversed quickly?

Comments

[Paul Meisel:]

I have no quarrel with your basic thesis, but please note that rents tend to be sticky downward -- most landlord will not lower a rent right away. In some cases this is for fear of angering existing tenants, or creating future downward pressure; in the case of smaller renters it may just be stubbornness. My point is that this supply excess will take some time to show itself in lower rents, and may be more likely to show itself as delay in rent increases.

Most big landlords with a surplus will provide some sort of incentive (one month rent free, for example) than to lower a rent.

2007 Jan 31 10:28 AM

[David Taylor:]

Paul. Thanks for the comment.

Effectively, giving away one month free is the same as lower rent when you look at annual income. In the end, if a rental sits vacant for too long, prices will adjust to create some kind of incentive to get someone in the place. If not, then the landlord is sitting on 100% loss for the month.

WIth the inventory out there that is sitting vacant, I don't know that it will take too long until we see these adjustments.

2007 Jan 31 07:28 PM