Near Record Vacancy Rates Weigh on Home Prices

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Wednesday, 25 May 2011 21:22

Nearly all economics reporters missed the housing bubble on the way up. They still seem determined to ignore it even after its collapse wrecked the economy.

The Wall Street Journal has a piece that emphasizes the effect that foreclosures are having on house prices. While foreclosures are lowering house prices, the more fundamental issue is that we have enormous excess supply. The country still has near record housing vacancy rates, although the level is down slightly from the peaks hit in 2009-2010.

This extraordinary vacancy rate puts downward pressure on house prices, since it means that there is excess supply of housing. (Those who took intro econ might recall the concepts of "supply" and "demand.") One of the predictable results of excess supply and falling prices is a rise in foreclosures, since falling house prices will put many people underwater in their mortgage. As a result of having zero equity, it is harder for people to pay their mortgage (they can't borrow against equity) and they have less reason to do so.

Anyhow, the key part of this story is the excess supply which was the result of the massive overbuilding of the last decade. It is reasonable to expect that prices will have to fall at least back to their pre-bubble level (@10 percent more) in order to bring the market back into balance.