What Do Vacancy Rates Tell Us about the Shortage of Housing?

Vacancy rates are one of the key statistics NAHB Economics tracks to judge the health and direction of the housing market. The currently low homeowner and rental vacancy rates are typically interpreted as a sign of tight housing markets, with lower vacancy rates signaling a greater housing shortage. NAHB’s analysis of the latest 2017 ACS vacancy data highlights the metropolitan area markets where unusually low vacancy rates signal deeper supply-demand imbalances.

Looking at vacancy rates over the last decade and going back to 2005, when the Census Bureau’s American Community Survey started generating these data, we estimate the “long run” average vacancy rates that serves as a proxy for normal, or natural, vacancy rates. There are numerous reasons why normal vacancy rates may differ across metropolitan areas. For example, areas with mobile labor markets and higher population turnover will consistently have higher vacancy rates. Vacation destination housing markets also have naturally higher vacancy rates that reflect more volatile seasonal housing demand.

For example, according to NAHB estimates, the rental vacancy rates in Ocean City, NJ and Sebastian-Vero Beach, FL fluctuated around 20% since 2005. The averages were even higher in Panama City, FL, approaching a quarter of the rental stock, and even greater in Myrtle Beach, SC. In sharp contrast, multiple areas in California, including Santa Maria-Santa Barbara, San Luis Obispo-Paso Robles-Arroyo Grande, Oxnard-Thousand Oaks-Ventura, and Los Angeles-Long Beach-Anaheim, CA, registered long-term rental vacancy rates below 4%.

In case of homeowner properties, natural vacancy rates are, typically, lower simply reflecting slower housing turnover with owners moving in and out less frequently compared to renters. It is important to keep in mind that owned seasonal (occasional use) properties do not affect the homeowner vacancy rate. In this case, the vacancy rate is the share of vacant units for sale in the combined stock of homeowner occupied, sold but not yet occupied, and for sale units. Nevertheless, the long-run homeowner vacancy rates tend to be higher in resort areas. Once again, Ocean City, NJ and multiple metro areas in coastal Florida register some of the highest long-run owner vacancy rates. In Naples-Immokalee-Marco Island, FL, Punta Gorda, FL, Sebastian-Vero Beach, FL, Cape Coral-Fort Myers, FL owner vacancy rates fluctuated above the 4% mark since 2005. In Ocean City, NJ they averaged 6.7%. At the opposite end of the spectrum is San Jose-Sunnyvale-Santa Clara, CA where owner vacancy rates were below 1% most of the time.

The gap between the “natural”, or long-run average, and current vacancy rate allows estimating the number of rental and for sale units needed to bring the vacancy rates back to the long-run equilibrium. Not surprisingly, large metro markets show the largest shortage of rental and for sale vacant units simply due to the sheer size of these housing markets. In these areas, even a small percentage drop below the long run average vacancy rates results in a shortage of thousands of vacant units.

As of 2017, Atlanta-Sandy Springs-Roswell, GA, Dallas-Fort Worth-Arlington, TX, New York-Newark-Jersey City, NY-NJ-PA, Phoenix-Mesa-Scottsdale, AZ all needed in excess of 25,000 rental units just to bring the rental vacancy rate back to normal levels.

Similarly, the biggest shortages of vacant units for sale were registered by large metropolitan areas, including Atlanta-Sandy Springs-Roswell, GA, Miami-Fort Lauderdale-West Palm Beach, FL, Phoenix-Mesa-Scottsdale, AZ.

Adding up the vacancy shortages across metro areas with abnormally low vacancy rates, there is a shortage of about 1 million vacant units (600,000 rental and 400,000 units for sale) nationwide.

Our analysis also shows that the vacancy rates serve as a critical indicator of what is happening and going to happen to housing affordability. Stacking our estimates of owner vacancy shortfalls against NAHB’s HOI data show that the metro markets with abnormally low vacancy rates are associated with worse current (3Q 2017) and future affordability (3Q 2018).

Below-normal vacancies and worsening affordability are some of the outcomes we would expect in light of recent estimates that production of new housing has been running below levels needed to meet demand. As builders struggle to overcome multiple supply constraints and ramp up the housing inventory, housing shortages continue. Many adults, and especially young adults, find themselves unable to find homes and apartments they can afford and continue sharing housing with their parents and roommates. The above estimates thus only evaluate shortages of vacant units needed to bring the current vacancy rates back to the normal levels and do not attempt to include the additional housing shortfall due to pent-up housing demand or need to replace the aging stock.

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7 thoughts on “What Do Vacancy Rates Tell Us about the Shortage of Housing?

  1. these areas, even a small percentage drop below the long run average vacancy rates results in a shortage of thousands of vacant units.

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