RlSl economists: Housins stock and vacancy

By Bob Berg, RISI

tTt"r rMrNG oF THE HousrNG recovery hinges on two crit- I 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 so'iid estimates of how long it will take to absorb the excess inventorv 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 sisnificant 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 10 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 2O09, 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 in2006-2009 was0.0l%o 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 0.3Vo 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 0.52o in 2008 and 2009, the difference between the inventory level

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Meanwhile, rough calculations of vacancy using the U.S. Census Bureau's data on vacant for sale and for rent data puts the "excess" vacancy at around 1.75 million units. This is arrived at by calculating the average share of housing stock that is vacant for sale and for rent prior to the run-up in the last decade (about 3.6Vo of housing stock) and subtracting this from the actual in the last available quarter (4.9Vo) and applying the difference to the total housins stock. This estimate of excess invenl tory of houses falls within the adjusted range of homes that may have been lost to demolition (l 30-239 million).

And then there is the "economic" housing inventory, which is near impossible to estimate. In areas of the country where the population and economy are contracting, much of the excess housing stock will never be filled. Hence the logic behind razing empty homes in Detroit.

On a recent trip through the northern-most port towns of Maine, close to the New Brunswick border. the number of "for sale" signs in each town was spooky. (Very unscientific estimate at speeds of 25 to 35 mph from the seat of a motorcycle put the portion of homes for sale at a minimum of 3}Vo).The local economy has been in decline for years, in conjunction with deteriorating commercial fishing and forest industries. Yet it is clear that the housing stock in the waterfront port towns had been maintained ("quaint").

These towns are hard to set to from major metropolitan area-s, but the drive to secure second homes on the ocean at a reasonable price was most likely the primary cause for the apparent investment in the housing stockin these communities. Consequently, these vacant housing units are not economically viable stock in the current market. Similarlv. developments in the central valley of California that are hours from major economic centers will not be economically viable for many years. It is near impossible to estimate what share of the housing stock at this point in time is not economically viable. Most likely, the economically unviable share of the housing stock is higher than "normal ," which adds to the apparent vacancy rate.

So what is the real vacancy number? To get a more certain count, we will have to wait until the results of the 2010 census are published (proba- bly in late 2}lllearly 2Ol2). tn the meantime, we continue to use current Census data to develop our housing forecast, but we are skeptical about the accuracy of the analyses of excess housing inventory and we are keeping a weather eye on housing developments that could lead to a faster and stronger recovery in housing than bearish assessments of inventory would allow.

Regarding the economically viable stock, only when housing production turns up significantly will we know when we have hit the limits of the economical housing stock. This will most likely be sooner than when vacancy rates reach their "normal" pace. In combination, these factors provide a glimmer of hope that housing will recover sooner and stronger than our basic analysis indicates. Nevertheless, prudence requires the wood products industry to plan conservatively, but to hope for a betterthan-consensus outcome.

- Bob Berg, is principal economist for North American lumber at RISI, a leading information provider for the global forest products industry. RISI works with clients in the wood products, timber, pulp and paper, tissue and nonwovens industries to help them make better decisions. Visit RISI at www.risi.com.