A Guide on Vacancy Rates and How It Helps to Predict a Housing Market
The ebb and flow of title holders and property constantly creates information about ownership, residence and vacancy. Over time, all of that information builds trends, which in turn can be used to make predictions about the property market of an area as a whole. Those predictions can have a big influence on the local housing market in terms of pricing, competition, and availability. Vacancy rates really do matter quite a bit and we’ll explain why below.
What is Vacancy Rate?
The term comes up as a technical label, and those in the know immediately acknowledge vacancy rate as an information value, but many outside that inner circle hear it and assume it’s a just a required detail in paperwork. In reality, a vacancy rate is much more, but it starts with basic residency information and math. A vacancy rate is, fundamentally, a metric of a supply and demand market. Where there is a lot of supply, the potential for vacancies goes up. Where there is little supply, vacancies are small or none, and then demand shoots up. This is economics 101 applied to real estate and home buying. But people don’t need homes filled to sell a property, so why is vacancy an influence?
Breaking Down Vacancy Rate
A vacancy rate isn’t a simple population count of filled homes versus total homes. The math involved is a bit more involved because it involves factors outside of just the actual physical presence of a given property.
What Does it Represent in Real Estate?
A vacancy rate can be used in a number of ways; it doesn’t have a single interpretation or definition. The obvious application is as a metric of supply and demand, but that shouldn’t be taken as an absolute because many vacant homes are not available for sale and title turnover. It can also mean that there are external elements causing vacancy to be present, things that have nothing to do with property and equity value. And it can also be seen as a gauge of interest in the area, whether a neighborhood is desirable or not. It’s best not to try to apply a hard definition to a vacancy rate and instead to use it within a context of the overall area being examined for a real estate move.
How is Vacancy Rate Calculated?
A vacancy rate is absence of a filled home over time, not whether it is vacant at a specific point in time. Long story short, the measurement looks at how many months out of a 12-month year a home has been sitting “idle” versus lived in and active. That’s a very different measurement than a home that might be vacant on a given day when a snapshot measurement is taken. With the number of vacant units per year counted, then the population counted can be divided by the total number of homes in the same neighborhood multiplied by 12. The formula looks as follows mathematically:
Vacancy Rate= (total number of units vacant)/ (number of units available x 12)
One can see right away, just because a single home is vacant the entire year doesn’t mean the neighborhood of ten homes automatically has a 10 percent vacancy rate. It could be less or more depending on the partial status of the other homes in the same mix. That single home itself, empty for one month, can be an 8.3 percent vacancy rate, but in a neighborhood of 20 homes the rates drops even farther because now the denominator has grown larger. Either way, though, the formula produces an objective metric for a set group of homes.
Why Do We Care About Vacancy Rate?
Local loan officers will be interested in this information as they keep a close eye on any factors that influence price. Consumers, on the other hand, should keep watch as well because a large vacancy rate can mean big savings in house prices (lots of supply available) versus little vacancy meaning big costs in buying a home (everyone wants to live in that location actively).
How Do Vacancy Rates Help Predict Housing Markets?
Given the relationship to supply and demand, no surprise, vacancy rates are one of a key set of barometers smart market watchers use to analyze local housing markets. For example, market trend analysis continues to predict that the San Francisco housing market will keep inflating sales prices. It’s not just because the asking prices are higher; the conclusion is also supported by the fact that many neighborhoods have no movement, little inventory, and stuffed-to-the-gills occupancy in the Bay Area city.
Property Owners can use it as a Metric for Analysis
As a metric, a vacancy rate for a neighborhood can also be a signal for the general market health of the area. Generally, a 5 to 8 percent rate is considered typical and average behavior in a housing market. This level continues to provide inventory for sale, but the changeover is not dramatic, and the neighborhood has stability. In the 1 percent range the neighborhood is essentially off-limits to any newcomers. The existing owners are entrenched, not going anywhere, and newcomers are not welcome. 10 percent and higher, something is causing home sales to happen briskly. 20 percent and there’s clearly something driving people out of the neighborhood. Fire sales are happening left and right.
How Vacancy Rate is Used as an Ecumenic Indicator of Market Health
The term “ecumenic” is a religious one referring to the level of relationship-building between different people, religions and parties. Where a vacancy rate is high, people are probably not well-connected with their neighbors. That can be a negative thing because it could be signaling a loss of community. As folks are well aware, how connected a community is internally can make a big difference in the enjoyment of life in that neighborhood. Where vacancy rates are low, ecumenic levels tend to be high as people know each other, they are connected and build relationships, and they support their local community in an integrated fashion.
How Vacancy Rates Affect Rent and Prices
Home vacancy rates have a tendency to drive up the frequency of rentals. Usually, there’s a reason why the home is vacant – the owner is on extended travel, has a second home, or the property is just an investment. Either way, having it on the market as a rental increases value by making the property also turn into a revenue generator and one that holds real estate value. So, when vacancy rates go up, so do the number of rentals to capture profit from available space. Vacancy rates rising also mean there’s more supply available for use or sale, and that means prices for sales goes down. Demand is not heavy, and it takes a lower price to attract a buyer. Unfortunately, that doesn’t mean the home can be a great deal. The factor driving the vacancy could be a bad element in the neighborhood, like a crime problem, and that in turn is causing people to leave and sell cheap. Buying in may just mean getting trapped in a money pit. So the “why” is just as important as the high or low of a vacancy rate.
What is a Good Vacancy Rate?
Again, a good vacancy rate is one where there is a healthy exchange of inventory, but the majority of the neighborhood is stable, typically between 5 and 8 percent. Homes sell but the overall neighborhood is solid, which in turn causes a steady increase in property valuation and equity.
Where to Find the Data?
With a good idea now of how vacancy rates work, the last thing to know is where to find the relevant information as a consumer and homebuyer. If you want to see a statewide picture for California or just about any other state in the union, then you want to reference FRED, the economic database provided by the Federal Reserve Bank of St. Louis.
YCharts is another quick source, but it seems to be primarily focused on national metrics versus state or local ones.
If you’re the data geek type who likes to play with lots and lots of charts, the Census provides numerous slices of home vacancy data at different levels, but the information tends to be dated as the measurements are only run every couple of years. It’s important to understand the Census gathers data in three major categories: rental vacancy rates, homeownership rates, and homeowner vacancy rate. So when researching, make sure you are using the right database for your query.
And finally, there are numerous private firm sites. Monmouth University was nice enough to compile a collection of private resources for research on real estate and put them together in one place, along with government agencies as well.
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