Interest Rate Roundup

Tuesday, October 31, 2006

rental/vacancy thoughts

A recent question on another blog got me thinking about something: How many past speculators are still bagholders (i.e. still holding the cash flow negative properties they bought during the boom), and how many have moved on (dumped "at the market" to wipe their hands of the whole affair). I think we're much closer to the beginning of this process than the end. I think we're starting to see the price cuts we need to move inventory, but we've got much more room to go, and many more "stuck" owners that haven't capitulated yet.

Don't forget: Last year, 40% of the existing homes purchased were bought as either vacation homes or investment homes, per the National Association of Realtors. That was the highest percentage of non-owner-occupant purchases ever. In other words, we likely have more non-owner-occupants than ever before.

Here's something else to consider: The Census Bureau recently reported that the home vacancy rate has climbed to its highest level in history. That would be 2.5% in Q3 -- up from 2.2% in Q2. Considering that the data goes back to 1956, that's quite a feat. The definition of a vacant unit is as follows:

"A housing unit is vacant if no one is living in it at the time of the interview, unless its occupants are only temporarily absent. In addition, a vacant unit may be one which is entirely occupied by persons who have a usual residence elsewhere. New units not yet occupied are classified as vacant housing units if construction has reached a point where all exterior windows and doors are installed and final usable floors are in place. Vacant units are excluded if they are exposed to the elements, that is, if the roof, walls, windows, or doors no longer protect the interior from the elements, or if there is positive evidence (such as a sign on the house or block) that the unit is to be demolished or is condemned. Also excluded are quarters being used entirely for nonresidential purposes, such as a store or an office, or quarters used for the storage of business supplies or inventory, machinery, or agricultural products. Vacant sleeping rooms in lodging houses, transient accommodations, barracks, and other quarters not defined as housing units are not included in the statistics in this report."

That gets me to my next point. There's been a lot of commentary about how the poor housing market is creating a booming rental market. People have to live somewhere, and when they can't afford to buy, they'll rent. That, in turn, will drive down rental supply and drive up rental rates.

Rents have clearly risen. I won't dispute that. But think about the supply squeeze for a minute. Part of it stems from the fact many multi-unit apartment complexes were bought, then converted to condos for sale. That tightened supply. Now, those condo conversions are falling on their face -- nobody is buying the glorified apartments. As a result, many conversions are re-converting right back into apartments. That happened to one complex right down the street from me in fact.

And what about all these new and existing homes bought up as flips? With sales falling, many owners are stuck -- they can't sell. So an increasing number of "for sale" ads are turning into "for sale OR FOR RENT" ads. I see it every day. I believe we'll see a lot more of this rental supply hit the market in the coming months.

Bottom line: Could the tight/strong rental market be poised to turn?


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