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Are We Building Too Many Single-Family Homes?

The vacancy rate for single-family homes increased in 2013 and remains well above bubble and pre-bubble levels.

What? Too much new single-family construction? It sounds hard to believe, with only 618,000 single-family housing starts in 2013, heading toward 622,000 in 2014 – far below the pre-bubble average of 1.1 million per year in the 1990s. Even when adding in multi-unit building, which is booming, construction remains a laggard in the housing recovery and is contributing less than it should to employment and economic growth.

Of course, the historical norm doesn’t tell us what the just-right level of construction is now. That depends on the rate at which new households are formed. If new construction runs ahead of household formation, more homes sit empty and the vacancy rate rises. In 2004 and 2005, during the bubble, construction of single-family homes soared to over 1.5 million units. Then, during the bust, household formation slowed, in part because more young people lived with parents. Too much housing and too few households were a dangerous cocktail during the housing bust and recession, causing the vacancy rate to climb until 2010. Since then, the vacancy rate has fallen, but single-family construction has continued to wallow near all-time lows.

Newly released data from the Census Bureau’s American Community Survey (ACS) show that the vacancy rate for single-family homes actually ticked up a bit in 2013. That’s a big surprise. It suggests even today’s low level of single-family construction might still be too much, too soon. To determine whether we’re building too many homes, we need first to understand household formation, and then the vacancy rate.

Single-Family Rentals Increased Despite Low Household Formation Rate
To understand what’s happening with vacancy rates, let’s start by looking at changes in households and housing units in the past year broken down by owner-occupied and rented, and single-family and multi-unit:

Type of unit Change, 2012 to 2013, ‘000s Change, 2012 to 2013, % Change, 2006 to 2013, ‘000s Change, 2006 to 2013, %
Owner-occupied single-family -184 -0.3% -428 -0.7%
Renter-occupied single-family 331 2.3% 3540 31.2%
Owner-occupied multi-unit (i.e. condos) 18 0.5% -269 -6.4%
Renter-occupied multi-unit (i.e. apartments) 263 1.0% 2259 9.7%
Total single-family units, incl. vacant 226 0.3% 4701 5.5%
Total multi-family units, incl. vacant 199 0.6% 2131 6.5%
Total housing units, incl. vacant 356 0.3% 6496 5.1%
Total households 321 0.3% 4674 4.2%
Note: total housing units and total households include mobile homes, boats, RV’s, vans, etc. and their occupants.

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All Those Vacant Homes

The latest Census data show that the vacancy rate remains elevated, and an unusually high share of vacant homes are being held off the market. This vacancy overhang is holding back construction activity.

The 2013 Q3 Census Homeownership and Vacancy survey shows that the vacancy rate is still above its pre-bubble level and remains unchanged from one year earlier. This might come as a surprise to house hunters, who have struggled with limited inventory when trying to find a home to buy or rent, but an unusually high share of vacant homes today is being held off the market. The elevated vacancy rate discourages new construction activity and is therefore one of the major hurdles to a full housing recovery.

To understand why vacancies are still widespread and what impact they have, we dug deeper into the Census data as well as other data sources that report vacancies at the metro level. Here’s what we found.

Nationally, Vacancy Rate Still Above Pre-Bubble Level
In the third quarter of 2013, 10.2% of housing units were vacant, excluding vacant homes that the Census classifies as “seasonal,” such as beach homes. Vacant homes include those for sale or for rent, as well as homes “held off market” for various reasons. This vacancy rate of 10.2% – the share of homes that are empty – was unchanged from 2012 Q3 and well above the pre-bubble level. In fact, the vacancy rate today (10.2%) is closer to its peak during the recession (11.0% in Q3 2010) than before the bubble (8.8% in Q3 2000).

But wait – aren’t homes hard to find? Buyers (and renters, too) have had little to choose from because the listed inventory is low. The share of the overall housing stock that is listed for sale, based on National Association of Realtors (NAR) and Census data, rose slightly in 2013 Q3 compared to last year but is lower than at any other point during or after the bubble. In other words, the for-sale inventory is back down to its 2000 level, and tight inventory has helped fuel sharp price increases across the country over the past two years. That means there’s an inventory shortage, but not a housing shortage:


How can the for-sale inventory be relatively low while the vacancy rate is high? Because the share of vacant homes being held off the market – that is, neither for sale nor for rent – is rising. In 2013 Q3, 53.5% of vacant homes were held off market, up slightly from 52.9% in 2012 Q3 and from a low of 45% at the height of the housing bubble in 2006.

Trulia_Percentage Vacant Homes_Chart

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Why is Construction Activity Still So Low?

Construction won’t fully recover until housing and labor market fundamentals improve. Nationally, the vacancy rate is still too high, and household formation is too low to support normal levels of construction activity.

New home construction starts and new home sales are recovering much more slowly than other housing indicators. In August, new home starts and new home sales were 40-50% below normal levels, in contrast with existing home sales, which were just 2% below normal. (By “normal,” we always mean the long-term historical average, not the peak of the bubble, which was anything but normal.) Likewise, Trulia’s latest Bubble Watch reported that prices look just 5% undervalued. What’s holding construction back? The vacancy rate and household formation are two fundamental drivers of construction demand, and both still look weak.

A Brief Soak in the Bathtub of Housing Data
To understand why the vacancy rate and household formation matter for new construction, here’s a simple analogy. Think of the vacant housing stock as water in a bathtub. The bathtub fills when new homes are built. The bathtub drains as vacant homes are occupied, which depends on how fast the overall number of households is increasing – “household formation.” (Side note #1: Newly formed households, who tend to be young, might not be the actual people moving into the newly constructed homes, which tend to be more expensive; rather, this is about aggregate numbers of housing units and households. Side note #2: for simplicity, we’re ignoring the fact that some obsolete vacant homes get demolished.)

When new construction runs ahead of household formation, more water fills the bathtub than drains out – which means the number of vacant homes grows. But when new construction is slower than household formation, the level of the bathwater falls. There’s no magical level of bathwater that’s perfect, but too little water in the tub means a housing shortage, and when the bathtub overfills, that glut of vacant homes might cause a price crash. In the long run, to keep the bathwater from being too high or too low, the “right” level of new construction depends on BOTH the vacancy rate (how full the bathtub is) AND on household formation (how fast the tub is draining).

In the U.S. today, the bathtub is fuller than normal (high vacancy) and is draining slowly (slow household growth). If the faucet were on full force (normal construction levels), our bathtub would soon overflow. Now let’s all towel ourselves dry and look at the two key facts:

1. High vacancy rate means no housing shortage, despite inventory shortage.
The national vacancy rate in 2013 is above its pre-bubble level. The share of all housing units that stood vacant (year-round vacancies only, not “seasonal” vacancies like beach homes) was 10.3% in 2013 Q2 according to the Census, closer to its high point after the bubble burst (10.9% in 2010) than to its pre-bubble level (8.9% in 2000).

If you’ve been house hunting recently, you’re probably surprised that vacancies are high because relatively few homes are listed for sale. Even though inventory has been recently trending upward a bit, for-sale listings are still well below normal. The share of all for-sale homes each year (based on NAR inventory for June and Census total housing stock for Q2) peaked in 2007 but is now at lowest level since 2000.

That means there’s an inventory shortage, not a housing shortage. Despite the shortage of listed inventory, there are plenty of vacant homes NOT listed for sale. Many of those vacant, off-market homes could come onto the market, especially if their owners are just waiting for prices to rise enough to make selling worthwhile. This graph tells the story:


In short: the vacancy rate – or, the level of the bathwater – is still relatively high.

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Where to Find Haunted Homes

To celebrate All Hallows’ Eve, Trulia looked at which U.S. metros have the greatest concentration of old, vacant homes – the homes where we suspect you’re more likely to find ghosts lurking.

For Halloween, we wanted to find out which metros are more likely to keep the Ghostbusters in business. However, it would be way too scary to go door to door since not all ghosts are as friendly as Casper. Instead, we put our skulls together and came up with another way to find them. Which homes do we think might be haunted? Old homes, of course: old homes with creaky bones have a history of previous residents whose spirits might return, or maybe never left. Our other hunch is that ghosts would prefer not to be disturbed, so they haunt vacant homes more than homes occupied by pesky mortals.

Putting on our Ecto-Goggles, we scared up the American Community Survey 2006-2010 Public Use Microdata Sample to identify homes that are both (1) vacant for any reason and (2) built before 1939.

Ghosts Like Capes
From the looks of it, ghosts have a thing for capes. No, silly, not ghosts wearing capes – ghosts on capes: Cape May, NJ and Cape Cod, MA. Those two metro areas have the highest share of housing units that are both old and vacant. Long-established vacation areas, like Cape May and Cape Cod, as well as Portland, ME and Lebanon, NH, are one of the two types of metros with the most old, vacant homes. The other type of metro with old, vacant homes is older cities that have had rough economic times, such as Utica, Buffalo and Albany in upstate New York, as well as nearby Scranton, PA, Detroit and Providence.

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Housing Glut or Housing Shortage? America’s Got Both

Most markets have fewer vacant homes than a year ago. A drop in vacancies is good for overbuilt markets such as Las Vegas and Phoenix – but a challenge for tight markets in coastal California.

Vacancies are one of the best measures of how the housing market is really doing. Vacant homes depress neighborhood home values and discourage new construction. During the housing bubble, new home construction ran ahead of demand: there were more new homes than people to live in them, and some stayed vacant. As prices dropped and foreclosures rose, people lost or left homes they couldn’t afford, creating more vacant homes. Then, construction nearly stopped. Since then, it’s remained below normal levels and way below bubble levels. As a result, the vacancy rate has been moving back down toward normal.

As always, it’s not the national picture that matters: housing is local. Unfortunately, the main up-to-date source of vacancy data is the quarterly Census Housing Vacancy Survey, which is based on too small a sample of homes to provide reliable data at the state or local level. With this post, we present a new measure of vacancies, based on U.S. Postal Service (USPS) monthly data on the number of addresses that are and are not receiving mail. (See the end of post for how the USPS collects these data.) Here’s what we found.

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