No light ahead yet

The subprime mortgage meltdown, drop in confidence, credit crunch, etc., are only part of the problem with housing. The various elements come together when supply is compared to demand. The indicators of that relationship include the supply of unsold new homes, the number of existing homes for sale, and the number of vacant homes for sale.

Quarterly data from the Census Bureau's Housing Vacancy Survey were released today, offering no encouragement to offset the dismal results for December new and existing home sales reported during the past week. The overall homeowner vacancy rate for the 4th quarter of 2007 was shown as 2.8 percent. That was up from 2.7 percent in the third quarter, and matched the record set in the first quarter of last year. The homeowner vacancy rate has been reported on a quarterly basis since 1956. Prior to 2006, it never exceeded 2.0 percent. That is perhaps the most graphic and disturbing measure of the extent of imbalance in the market.

The homeowner vacancy rate is defined as the number of vacant housing units for sale, divided by the sum of the vacant fior sale plus owner occupied plus sold but not yet occupied. The title is a bit of a misnomer, since many of the vacant units for sale were not previously owner-occupied and may be sold to investors rather than for owner-occupancy. Mobile homes and condos are included along with conventional single-family structures, and and the vacant-for-sale category includes both existing (previously-occupied) homes and completed new homes. Only about half of all new and existing homes being offered for sale are vacant, but they represent a greater burden than homes that are still occupied or that have not been completed.

About 15 percent of the 2.18 million vacant homes for sale were not previously occupied, according to the HVS data. That translates into a larger number than the 195 thousand completed unsold new homes reported in the new home sales report, because new condos and mobile homes are included, and because completed homes with cancelled contracts are, in theory, included in the HVS but not in the sales report. Of course, the two surveys--especially the HVS--are not sufficiently precise to justify any major inferences from the difference.

If we assume that a normal/equilibrium homeowner vacancy rate is, say, 1.7 percent (the average in 2004), then the excess number of vacant homes for sale is over 800 thousand. Even though current production is below long-term potential absorption, it would take a while to soak up that excess. Add in the possible effects of widespread foreclosures and the picture is even more dismal.

January 29, 2008 -

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