RlSl economists: Housins stock and vacancy

By Bob Berg, RISI

tTltt TIMING oF THE HousING recovery hinges on two critI ical factors: the size of the inventory of vacant homes and the pace at which households are being formed. If we know these data, then we could develop solid estimates of how long it will take to absorb the excess inventory of vacant homes.

In past cycles, the market was not saddled with the level of vacant homes we currently have at the beginning of this recovery. In addition, solid recovery in the economy prevented household formations from straying far from the trend levels. Consequently, demand for new homes (additions to the housing stock) was quickly realized as the recovery unfolded.

In the current market, after more than a decade of excess production, we are saddled with a significant volume of vacant homes and the slow pace of economic recovery (which is in part due to the absence of a rebound in housing) is stifling job creation and putting downward pressure on household formations.

Focusing here on the vacancy issue, our inability to generate a solid estimate for vacancies arises from the inherent errors in the reported data and the difficulty in differentiating between total housing stock and economically viable housing stock. Errors in the reported data are due to the facts that the data are only updated once every l0 years during the Census and that in the interim years they are based on estimates that at the time seem quite confusing.

As a stock concept, housing stock at the end of a year is equal to housing stock at the end of the previous year plus additions (housing completions and mobile homes) minus subtractions (demolitions) during the year.

The table on page 26 contains the U.S. Census housing stock estimate from 2002 (when the data was last updated with the results of the 2000 census) through 2009 along with the housing completions (reported by the U.S. Census) and mobile home production (reported by The Institute for Building Technology & Safety). Given the housing stock and additions data (completions and mobile homes), one can calculate the demolitions used in developing the housing stock data. These demolition data are presented at the top of the table.

The confusing part of these data is the fact that the demolitions are negative in 2006-2008. Over this period, in effect, 1.44 million housing units were added to the inventory as a result of "demolition." During the very strong peak demand years in the 1970s, we experienced this same phenomenon as alternative buildings (i.e., old factories) were converted into housing faster than the rate at which houses were lost to natural and intentional demolition.

However, during the period 2006-2008, demand turned lower and it became increasingly evident that excess housing inventory was built. Consequently, one has to question whether the apparent net additions (rather than removals) reported under the demolitions category actually occurred. Then in 2009, apparent demolitions shot up to just over 1.0 million units, which was almost three times the average demolition pace in 2002-2005. The average demolition rate in 2006-2009 was 0.017o of the housing stock, which compares to a rate of 0.3Vo per year in previous years.

The table also contains the housing stock estimated by holding the demolition rate at 03Vo for the entire period, the observed average in 2000-2005. Using this demolition assumption, the housing stock at the end of 2009 would be fully 1.70 million units fewer than reported by the U.S. Census. The analysis gets even more interesting because there are reports of increased intentional demolition (i.e., Detroit and some of the central valley homes in southern California). If you boost the demolition rate to just 0.57o in 2008 and 2009, the difference between the inventory level