RETURN

Vacant Homes
For Sale Cloud
Economic Hopes

Data Pointing to Glut
Are Worst in Decades;
Impact of Speculators

By MICHAEL CORKERY
February 5, 2007; Page A1

Amid brightening hopes that the U.S. housing market is stabilizing, some economists are zeroing in on a piece of data that could augur badly for the consensus view: the homeowner vacancy rate.

That figure, an often-overlooked measure of how many homes for sale in the country are empty, has climbed to its highest level since the Census Bureau began tracking it four decades ago. Last week, the bureau said that in the final three months of 2006 there were about 2.1 million vacant homes for sale.

REALESTATEJOURNAL

A Web-Surfer's Guide to Finding Discounts on Brand-New Homes

That brought the national homeowner vacancy rate to 2.7%, up from 2.0% a year earlier. Before 2006, the number had never risen above 2.0%. Like the housing economy more broadly, the measure varies by region: The South had a homeowner vacancy rate of 3.0%, the Midwest had a rate of 2.9%, the West had a 2.4% rate and the Northeast had a rate of 2.0%.

The report, which usually gets little attention, sparked fresh concerns about the housing market. Goldman Sachs economist Jan Hatzius concluded in a report last Monday that rising vacancies signal that excess housing supply continues to grow -- and that new construction has to decline further this year, even after a 13% decline in new home starts in 2006.

Meantime, J.P. Morgan economist Haseeb Ahmed said the overhang of vacant housing stock could erode existing home values as sellers slash prices to move their vacant properties. Economists fear that many vacant homes are owned by speculators who are stuck with investment properties that they can't sell and may be under increasing pressure to drop their prices. "We are concerned that there could be downward pressure on prices for awhile," Mr. Ahmed says.

Such worries could cloud hopes for a swift housing rebound. Those hopes have been bolstered recently by signs that the market may be stabilizing. Sales, which fell sharply through much of last year, have leveled off in many metropolitan areas and mortgage applications have been rising.

Also upbeat was a report two weeks ago from the National Association of Realtors that the supply of existing homes for sale declined during the final two months of 2006. That was greeted as a positive sign for housing because a decrease in supply tends to lead to firmer prices. But the NAR figures count both vacant and owner-occupied homes for sale -- and inventory levels for owner-occupied homes can fall not just because the home is sold, but also if sellers remove the property from the market because they didn't receive desirable offers.

The homeowner vacancy-rate increase "does temper your outlook" for new construction, says David Seiders, chief economist at the National Association of Home Builders in Washington. Mr. Seiders is forecasting largely flat housing sales this year followed by a strong rebound in housing starts in 2008. "There clearly are uncertainties about how this is going to work its way out," says Mr. Seiders. "I keep preaching to builders it's not time to ramp up production."

Mr. Ahmed of J.P. Morgan says the homeowner vacancy rate calculates vacant homes that are residential year-round, and is supposed to exclude homes that are used occasionally as vacation homes, which have been growing in number in recent years. He says it's possible the vacancy rate may have captured some of these seasonal properties inadvertently. The high vacancy rate also may have been affected by the active 2005 hurricane season that forced residents to flee the Gulf Coast.

Another factor that may have contributed to the high vacancies, says Mr. Hatzius of Goldman: newly constructed homes that are finished and awaiting occupants, but haven't sold.

The vacancy indicator may help distinguish between the sellers who have casually listed their house on the market to see what price they can fetch, versus sellers who are under real pressure to sell. The owner of a vacant home -- who may be squeezed by mortgage payments for the vacant home as well as a current residence -- could be more willing to drop the price to minimize the cost, than a homeowner who lives in the home and doesn't have to sell.

Jon Estridge, 34 years old, owned a pair of investment homes in Virginia that sat empty for several months last year. When the market slowed, it was difficult not only to find buyers, but also to find tenants who would pay enough rent to cover his mortgages. "It eats you alive," said Mr. Estridge, who works for the federal government. "The market is going down, and you are paying a mortgage."

He eventually sold one home last spring, after dropping the price. He bought the property for $395,000 and sold for about $35,000 less. The other home sold for $260,000 in late August after he dropped the price by about $30,000.

To be sure, so far prices have fallen in relatively few markets. In fact, median home prices nationally were up 1.1% in 2006, according to the NAR. And last week, the Federal Reserve's Federal Open Market Committee said in a statement that "recent indicators have suggested somewhat firmer economic growth, and some tentative signs of stabilization have appeared in the housing market."

Many economists agree, however, that rising vacancies have likely been fueled by a group that is proving to be the wild card of this housing market: speculators. During the boom, they flooded the market and flipped homes for a profit. When sales slowed, speculators were stuck with vacant homes that have lingered on the market.

There's no doubt speculators had a major impact, but their numbers have been difficult to quantify. The recent vacancy data may be a useful measure of speculative activity and its fallout.

"I think a persuasive case can be made that the reason we are seeing such extraordinarily excessive vacancy is because of the heavy investor demand over the past few years," said Richard DeKaser, chief economist at National City Corp.

What's troubling is that speculators may not act like typical home sellers. When they sell their vacant home in a down market, they don't necessarily purchase another home. By contrast, people selling the homes they live in will most often buy another house -- thus fueling a healthy market of buying and selling.

[Webmaster’s Note – Speculators artificially drove up housing demand when prices were rising. As noted, as speculators sell vacant houses they will not replace them, which will positively adjust demand. Just as the free market, which is not a perfect market, created too much supply for the artificial demand created by speculators, so now the free market will cool the supply side to correct the supply/demand imbalance. As an imperfect market we can expect gyrations in the short term, with long term stabilization, but always in a cyclical manner.]

Not surprisingly, buildings with five or more units -- which include condos that were magnets for speculators -- had the highest rate of vacancy. The vacancy rate among these units rose to 11% in the fourth quarter from 7% in the first quarter. For single-family homes, the vacancy rate rose to 2.3% in the fourth quarter from 1.8% in the first quarter.

Mr. Hatzius expects homeowner vacancies will slow, as builders cut back on production and owners convert their units to rentals to take advantage of rising rents. But then again, the housing market has been full of surprises.

"This whole thing has been new," says Mr. Seiders, the National Association of Home Builders' economist. "We've never seen this kind of investor activity and we've never seen this kind of [vacancy] resale. It's an extra complication moving forward."

Write to Michael Corkery at michael.corkery@wsj.com

RETURN