Lakeshore Analytics

The U.S. rental vacancy rate stood at 9.8% in the third quarter of 2011, up slightly from the previous quarter, but down from a bubble-era high of 11.1%, seen in 2009.

Rental vacancy rates increased dramatically over the period of 2000 to 2009. From 1965 to 2000, the average quarterly vacancy rate was 6.7%; from 2000 to 2009 it was 9.5%. During the real estate bubble, many households transferred from renting homes to owning homes, including new construction, increasing the homeownership rate and, as a result, reducing the number of households in rental housing.

Rental vacancy rates will be affected by a few forces:

• New household formations — During the recession, many young people stayed with family, and other households combined to save money. As the economy recovers, these consolidated households will unwind and demand for either homes for sale or rent will increase. Immigration and the population of working-age people also affect new household formations.
• Foreclosures — As banks unwind their foreclosure backlog, some families will move from “owning” their homes (even if they are not paying their loans) to renting apartments or houses. The backlog is several years, according to some sources.
• Development of multifamily apartments — Few houses are built specifically to rent, so the increase in supply of rental housing comes mostly from new apartment buildings. While apartments are one of the few
• Credit and other deleveraging — New households find it more difficult to move from rental housing to buying homes, so many households will stay in rental housing for longer.
• Owner-occupied housing converting to rental housing — Some houses occupied by owners today will be purchased by investors and rented out. This is more likely to increase the supply of rental housing, and with it may put pressure on rental vacancy rates. Renters of large (2- or 3-bedroom) apartments in walkup buildings may be tempted by the attractive rents offered in houses newly offered for rent.

Vacancy rates in the Midwest region largely tracked the U.S. average until about mid-2001. The Midwest reached its peak vacancy in Q3 2005 at 13.4%. The U.S. would not reach its peak vacancy rate for four years, hitting 11.1% in Q3 2009. In recent quarters, the Midwest has started to trend back to the national average.

The U.S. homeownership rate ticked up slightly in the third quarter, but this is likely a seasonal fluctuation. The rate was 66.3% (up from 65.9%) of U.S. households and 70.3% (up from 70.0%) of Midwest households.

The rate was steady at between 62% and 65% until 1995, when rates increased to a U.S. maximum of 69.2% in 2004. They have since fallen steadily, notwithstanding the slight increase last quarter.

Some media outlets questioned whether this signaled a “reversal” in declining homeownership; however, the chart shows about five clear incremental increases in the homeowner rate during the period in which it has fallen overall. The U.S. is still about 2 percentage points above the historical average.

The future stable homeownership rate is likely to be above that historical average because of innovations in housing finance, including securitization, which will likely not go away after the market settles.

The NAR’s pending home sales index trended down last month, and though it remains above year-ago levels, year-ago levels were especially depressed due to the effects of homebuyer incentives.

Overall, the index declined 4.6% from last month. In the Midwest, the index dropped 6.2%, the sharpest drop of all four regions. Several press reports indicated that the index is above year-ago levels. While true, the pending sales a year ago were especially depressed as buyers rushed in previous months to sign contracts eligible for homebuyer incentives.

A more appropriate comparison than year-over-year would be with January or February 2010, before the rush to sign contracts began. Compared to early 2010, the index is down about 11%.

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Improvements for the bottom tier of homes drove the almost imperceptible increase in the Chicago Case-Shiller index announced this morning. The charts below show that the index remains 6% below year-ago levels and increased just 0.3% over the last month. The latest release covers June, July, and August 2011, so there is a lag and monthly effects are smoothed.

Nationally, home prices fell very slightly from last month and remain about 4% below year-ago levels.

The Chicago condo index increased slightly last quarter, but is 10% above its level a year ago.

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The third quarter, covering months of July, August, and September, is usually the strongest quarter for real estate sales as families move ahead of the beginning of the school year. But even by the standards of a strong third quarter, the three months ending September 30 were strong for the city’s housing market.

Comparing the third quarter to the second quarter in each of the last five years shows an almost unambiguously strong third quarter of 2011, likely due to depressed market conditions earlier this year.

This comes in the face of national trends going the other way. The third quarter of 2011 had a seasonally adjusted annual rate of 4,880,000 homes sold, while the second quarter had 4,883,000 homes (based on the SAAR average of the three months in each quarter). So while nationally the pace of home sales actually slowed slightly in the third quarter, Chicago’s home sales increased significantly.

Sales of existing homes slowed slightly last month, but still remain above the levels of September 2010, based on recently-released data from the NAR (“Existing-Home Sales Off in September but Higher Than a Year Ago”, Oct. 20). The survey covers the entire U.S. and is preliminary.

Sales data showed a pace of 4,910,000 homes per year last month. The actual number of homes sold was 433,000. The SAAR is 3.0% below the same reading for August 2011, but is 11.3% above the figure for a year ago. Sales of homes in the Midwest region were down just 0.9% from last month and are up 17.2% over September 2010 on a seasonally adjusted annual basis.

The NAR estimates that there is now an 8.5 month supply of homes on the market, based on a total inventory of approximately 3.5 million homes. The total inventory of unsold homes is 2 percent lower than last year and 13 percent lower than a year before. This inventory includes homes currently listed for sale and excludes the “shadow inventory” of homes in foreclosure waiting to be put onto the market.

The attached charts show the sales on a SAAR, broken out by region, plus the estimated inventory and months supply.

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