Record Vacancy Rates Show Market Will Remain Weak

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February 11, 2009 (Housing Market Monitor)

Record Vacancy Rates Show Market Will Remain Weak

By Dean Baker

February 11, 2009

Homeownership rates for African Americans are below their 2000 level.

The Census Bureau’s data on vacancy rates in the 4th quarter of 2008 show how far the housing market must go before it can recover. The vacancy rates for both ownership and rental units increased in the fourth quarter. The vacancy rate for ownership units hit 2.9 percent, matching the record set in the first quarter. Before the collapse of the housing bubble, it had never exceeded 1.9 percent. If we assume that 1.6 percent is a normal vacancy rate for ownership units, this implies there were almost 1 million vacant ownership units. This must place enormous downward pressure on sale prices, since the owners are neither occupying the home, nor collecting rent.

The vacancy rates for rental units rose 0.2 percentage points to 10.1 percent. This rate was only exceeded in the three quarters from the 4th quarter of 2003 to the second quarter of 2004. Prior to the bubble, the rental vacancy rate had never exceeded 8.9 percent. If 6.0 percent is the normal vacancy rate for rental units, then this implies that there are 1.5 million extra unoccupied units due to the slump. This should put substantial downward pressure on rents for some time to come.

The release also showed that homeownership rates are continuing to decline. The rate dropped by 0.2 percentage points to 67.5 percent in the fourth quarter. This is 1.8 percentage points below the peaks hit in the second quarter of 2004 and the first quarter of 2005. The current rate is the same as the rate for the second half of 2000. 

The homeownership rate for African Americans fell to 46.8 percent (the quarterly data by race is erratic), 2.3 percentage points below the peak hit in 2004 and 0.4 percentage points below the 2000 year-round average. The 48.6 percent homeownership rate for Hispanics is 1.5 percent percentage points below the peak in the third quarter of 2007, but still 0.5 percentage points above the 2004 rate. While African Americans clearly are worse off in terms of homeownership than before the boom took off, at the moment it appears as though Hispanics are still somewhat ahead.

This situation will deteriorate further in the next two years as the impact of rapidly rising unemployment compounds the effect of mortgage resets and plummeting house prices. Homeownership rates are likely to fall sharply for all demographic groups. Even in an optimistic scenario, the unemployment rate will be rising well above 8.0 percent over the course of the year.

The extent of excess supply should make Congress hesitant about efforts to boost the market through tax credits. While a tax credit to new homebuyers in 2009 may cause some potential buyers to move up their plans to 2009 from 2010 or 2011, it is unlikely that this would have more than a minimal effect on the market even in 2009. Furthermore, since there is no real hope that the excess supply can be absorbed this year, most of the increase in home purchases in 2009 will be offset by fewer purchases in 2010 and 2011, leaving very little net effect on the market.

The Isaksen amendment, which would give a tax credit for all homebuyers, is likely to prove even less effective. Since it is not refundable, many first-time buyers, who have more moderate incomes, will receive a limited benefit from the tax cut since their tax liability will be relatively small. For example, a family of four, with an income of $50,000 will only be able to get a couple of thousand dollars from this tax credit. By contrast, they could get the full $7,500 from the first-time buyer credit (although in the current version, they would be required to repay this money.)

Most of the benefit from the Isaksen credit will go to existing homeowners who are selling their current home, and therefore providing no net increase to the demand side of the market. There is also the possibility that homeowners will game this credit, making fictitious sales to friends or relatives and splitting the credit.


Dean Baker is Co-Director of the Center for Economic and Policy Research, in Washington, D.C. CEPR's Housing Market Monitor is published weekly and provides an incisive breakdown of the latest indicators and developments in the housing sector.