Some Perspective on Housing Vacancy Rates

The cover story of last weekend's edition of USA Today was entitled, Open House Anyone? One in Nine Homes Sit Empty. The nation does indeed have a lot of vacant homes, but it's not as bad as the title suggests. Even in 'normal' years, there are plenty of vacant homes. Take a look at the chart, below, which shows historical vacancy rates for the United States and the western region.

The blue line shows the vacancy rate for the US, and the purple line shows the vacancy rate for the western region. The numbers (and the definition of 'western region') come from the Census Bureau. The figures in the USA Today article excluded vacant homes that are used seasonally (such as beach houses) but the chart includes all vacant homes.

As the article suggests, the current vacancy rate is unusually large, at around 14.5% (which is actually closer to 1 in 7). But even in normal years, plenty of homes sit empty. From 1987 to 2000, the vacancy rate was fairly stable at around 11.5%. That's equivalent to 1 in 8.7, which is still higher than the ratio that USA Today was hyping in its article.

Setting hype aside, a three percentage-point increase in the vacancy rate means that almost 4 million units were added to the pool of vacant homes between 2000 and 2008. To put that in perspective, the national housing stock increased by roughly 11 million units over the same eight-year period. In other words, roughly 1/3 of the new homes that were built since 2000 are essentially superfluous.

Another way to get a handle on the vacancy rate is to consider the rate of new household formation. Lately, it's been running at around 1.5 million per year. Not all of the 4 million additional vacant homes are available for new households (roughly half of them are second homes or vacation homes), but there still appears to be more than a year's supply of excess vacant homes in the nation. Home prices will remain under pressure (at a national level) until those excess units have been absorbed.

While we're on the topic, I thought it would be interesting to plot the national vacancy rate on the same chart as the Case Shiller composite home price index.

It's no coincidence that the vacancy rate started rising at the same time as the housing bubble began inflating. Rapid price increases contributed directly to increasing demand for homes -- that's more or less the definition of a bubble. If the price increases had been driven by true demand for housing, we wouldn't have so many empty homes now.