Tuesday, February 3, 2009

More On Homeowner and Renter Vacancy Rates

This is the summarized data on the troubling vacancy rates:

Homeowner Vacancy Rate 2.9% (in Q4)
Rental Vacancy Rate 10.1% (in Q4)
Pending Home Sales +6.3% (in Dec) vs. consensus flat

Some analysis from Goldman on this data. None of it is good:

1. Homeowner vacancy rates remain very elevated, which is quite bad news for the housing market. These increased to 2.9% in the fourth quarter, an increase of 0.1 percentage points from the 2.8% rate in the third quarter. The increase puts the homeowner vacancy rate at the top end of the range they have been in since the end of 2006. At over a percentage point above the average vacancy rate before the housing bubble, this corresponds to an excess supply of over a million homes. Moreover, the slight increase from the third to the fourth quarter means that there is no sign that reduced homebuilding has started to work off that excess supply, a prerequisite for stabilization in the housing market. We expect the excess supply to continue to put downward pressure on house prices over 2009.

2. There is also excess supply in the rental market, where the vacancy rate also increased. Rental vacancies increased to 10.1% from 9.9%. The high rental vacancy rate shows that the excess supply in the owned housing market is part of an overall problem of too much housing, not just a change in the mix of housing demand. That is, the transition of homeowners to renters is not putting significant pressure on the rental market because there is excess supply there too. Part of that probably stems from the fact that the size of the rental market has increased, as some housing units have transitioned from the owner occupied to rentals. Consistent with the other data, the homeownership rate decreased by 0.2 percentage points to 67.5% -- nearly 2 percentage points below its peak.

3. Pending home sales increased by 6.3% in December; the increases is a surprise to the consensus, which had expected them to remain flat. The bounce comes after three months of sharp declines, and is probably partly due to (1) easing in mortgage financing as Fed actions have pushed rates down, (2) increased sales of foreclosed homes, and (3) mean reversion given the earlier weakness. The increase was concentrated in the Midwest and South, both of which saw double digit increases. The Northeast and West remained very weak as sales in both areas declined. With sales of existing homes already reported up by a similar 6.5% in December, we do not read much into the pending home sales as an indicator of future activity.

4. In an indication that it does not expect an early return of normalcy in financial markets, the Federal Reserve Board announced six-month extensions, to October 31, 2009, for five facilities whose existence is justified by the finding of "unusual and exigent" conditions in financial markets under Section 13(3) of the Federal Reserve Act. The five include the three that support commercial paper issuance (the AMLF, the CPFF, and the MMIFF), the Primary Dealer Credit Facility (PDCF), and the Term Securities Lending Facility (TSLF), the extension of which was approved jointly by the Board and the FOMC. The FOMC also extended the reciprocal currency agreements ("swap lines") currently in place for 14 central banks. The planned expiration of the yet-to-be inaugurated Term Asset-backed Securities Lending Facility (TALF) was left at December 31, 2009; other facilities, such as the Term Auction Facility, do not have a fixed expiration.
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