Amidst continued pessimism about the U.S. housing market, director of economic policy studies Kevin A. Hassett evaluates recent record homeowner vacancy rates. While the current number of vacant homes is dramatic, the sharp increase in inventory is mainly due to the surge in homebuilding since 2000. This analysis shows that in order to restore equilibrium in the housing market, the excess inventory of new homes will either be converted to rental property or will continue to drop in price. Meanwhile, owners of established homes may avoid the housing crunch.

Senior Fellow  Kevin A. Hassett

The problems in the housing market continue to put downward pressure on the economy. Economist Larry Lindsey, my colleague at AEI, recently noted in The Weekly Standard that things are likely to get a lot worse before they get better. Lindsey pointed to a sobering statistic. There are currently 129 million homes in the United States, and 18.5 million are empty. Prices clearly will have to come down a lot to clear such an inventory.

It can take hundreds of thousands of dollars to build a home. How can it be that so many came to be empty?

The nearby chart plots the movement in the vacancy rates for two types of homes: those built before 2000, and those built after. The vacancy rate for homes built before 2000 has ticked up only a smidgen, to about 2 percent. That level is about the type of inventory one would expect to see in a healthy housing market. But the vacancy rate for newer homes has skyrocketed, and now stands above 10 percent.

The chart tells a simple story. As prices rose over the past decade, new homes were built in more and more questionable areas. With prices high in Washington, D.C., for example, massive housing developments popped up in parts of northern Virginia that are a painful commute from downtown. When prices started to turn the other way, those homes became extremely unattractive.

Downtown D.C., meanwhile, saw a surge in construction of new condominiums, which are generally less attractive than single-family homes. When prices for single-family homes began to level off, speculators who had built the condos were stuck holding the bag.

How will this all work out? The answer is clear. The downtown condos will become rental units, and the houses in outlying areas will plummet in price. Then supply and demand will be matched again. There are already signs that these changes are occurring fairly rapidly. The proportion of individuals who rent their residence has skyrocketed over the past year.

The chart has another implication for readers who live in established neighborhoods: The housing crunch may well pass you by.

Kevin A. Hassett is a senior fellow and the director of economic policy studies at AEI.