What would an influx of 3.8 million entry-level homes do for housing affordability?
Limited inventory and strong demand continue to push home prices higher in America’s hottest housing markets, leading to declining affordability. Forecasters are raising their predictions as tight inventories of homes, particularly lower priced properties, keep first-time buyers on the sidelines.
Those 3.8 million homes, nearly twice as many as the total listings currently on all of the nation’s MLSs, are vacant. They do not include the 1.3 million vacation homes occupied part of the year or the 2 million used only occasionally.
These are units being held off the market by their owners for any number of reasons, such as repair or bank-owned properties not yet on the market for sale or rent. Many are foreclosures that fell through the cracks and ended up in in such bad condition and bad location that it doesn’t pay their owners to rehab them for sale or rental. Some are on ice because the investors, lenders developers are waiting for better ties or can’t get it together to get them back on the market. A large proportion of them are literally lost. The Census Bureau admits that a “large proportion” of vacant units that it classifies in the “other” category might not be properly classified due to “the difficulty on the part of the enumerators to determine the status for these vacant units.”
Concentrated in Urban Counties
Although vacant homes can be found throughout the country, they tend to be concentrated. According to HUD, nearly 40 percent of the nation’s vacant homes are located in just 10 percent of all census tracts. More than half of the census tracts with vacancy rates of 20 percent or higher were in just 50 counties, most of them in metropolitan areas. Wayne County in Michigan and Cook County in Illinois, for example, each have more than 200 high-vacancy neighborhoods.
Which is why they don’t hold much promise for helping to dampen overheated markets. It’s worth for an owner in Denver to rehab a derelict when prices for lower tier homes are zooming at a double digit pace. However, the tight supplied are not universal. “The tightness of the for-sale inventory varies across cities,” said CoreLogic’s Frank Nothaft recently. For every Denver or San Francisco, where entry level prices are soaring, there’s a Baltimore, where prices are down more than 15 percent or a Philadelphia where the median age of inventory is older than 80 days.
Many foreclosures were abandoned before they became foreclosures by defaulting owners who fled before the process was completed. RealtyTrac calls these properties “zombie foreclosures” and reports that in the second quarter some 127,021 homes actively in the foreclosure process had been vacated by the homeowners prior to a completed foreclosure, representing 24 percent of all active foreclosures. Zombie foreclosures represented 24 percent of the 527,047 U.S. properties in foreclosure. One in every 1,040 U.S. housing units was an owner-vacated zombie foreclosure. Zombie foreclosures occupy the lower end of the foreclosure market; the estimated market value of an owner-vacated foreclosure is 22 percent below the average estimated market value of an owner-occupied foreclosure.
One-quarter of Foreclosures are Zombies
“A growing number of states and cities have enacted public policy measures to combat the problem of zombie foreclosures, and we are seeing the results of those efforts in the overall decrease nationwide as well as in several hard-hit markets such as Chicago, Miami and Cleveland,” said Daren Blomquist, vice president at RealtyTrac. “Still, as banks push through long-deferred foreclosures that are more likely to be owner-vacated this year, we are seeing a somewhat surprising increase in zombie foreclosures in markets with overall low foreclosure rates such as Los Angeles, Houston and Boston.”
Abandoned homes are festering sore on urban America. Across the nation, cities are Detroit owns 16,000 vacant homes as a result of tax lien foreclosures, in which homeowners failed to pay their property taxes and other municipal fees. There are more than 16,000 vacant homes in Baltimore, according to the city. Philadelphia has 40,000. The 55,000 abandoned homes in Cook County, IL are considered a catastrophe that ranks with the Great Chicago Fire. In and around Cleveland, nearly 6,000 foreclosed and abandoned homes are being destroyed in an effort to save neighborhoods from blight, crime and sinking home prices. Last year, Buffalo started selling its 16,000 empty lots and 4,500 vacant homes for $1 each.
An Inventory Shortage, NOT a Housing Shortage
In November 2013, when tight inventories were driving up prices at a double digit rate, Jed Kolko, former chief economist at Trulia, posted an analysis of the huge numbers of vacant ownership homes reported by the Census Bureau. “We have an inventory shortage, NOT a housing shortage,” he concluded.
“How can the for-sale inventory be relatively low while the vacancy rate is high? Because the share of vacant homes being held off the market – that is, neither for sale nor for rent – is rising. In 2013 Q3, 53.5% of vacant homes were held off market, up slightly from 52.9% in 2012 Q3 and from a low of 45% at the height of the housing bubble in 2006,” Kolko said.
Kolko found that the rate of vacant non-rental homes is higher today than it was before the bubble in 86 of the 100 largest metros. In October 2013 vacancy rates at the metro level ranged from a low of 3% in San Jose to a high of 19% in Detroit – a huge gap. No other metro approached Detroit’s high vacancy rate, but the other highest-vacancy metros included two types of metros: (1) other Rustbelt towns, like Gary and Cleveland, and (2) Sunbelt spots like Las Vegas and several Florida metros. Detroit, Gary, and Cleveland all faced slow economic growth over several decades, and metros with slow growth (or worse, declining population or employment) tend to have more vacant homes, Kolko said. In contrast, Las Vegas and the Florida metros suffered from overbuilding during the housing bubble. In addition, Florida led the nation in having the highest share of homes in the foreclosure process, which included many vacant homes.
Many of the vacant homes now being held off the market won’t stay off the market forever. Homes under repair or being prepared to be sold or rented could come onto the market. These homes would then be added to the active inventory, which would slow down or even reverse price and rent increases, while giving house hunters more housing options. However, the trend in the vacancy rate also depends on how fast vacant homes fill up, which hinges on the growth in the number of households. The Census survey showed that household formation, at 380,000 over the past year in Q3, remains below the normal level of 1.1 million; the underlying survey data showed a slight year-over-year increase in the share of Millennials (age 18-34) living with their parents. Without more new households, vacant homes will fill up slowly.
Homes Held off Market are Increasing
Kolko predicted the vacancy problem would ease as distress sale homes under repair or being prepared to be sold or rented would return to the market and be added to the active inventory. However, in the 22 months since Kolko’s post, the number of homes held off the market has not fallen but increased slightly, from 3.67 million in the third quarter of 2013 to 3.82 million in the second quarter, according to HUD’s Housing Market Fact Sheet (below).
So, the 3 million plus properties being withheld from local markets—the dry rot in America’s housing stock- are not contributing to tight inventories. They are located largely in depressed markets with excess inventories where their return would only make bad situations worse, depressing prices further and discouraging new home construction. One dollar sales and other similar tactics by local governments won’t attract many investors until there is a glimmer of hope for a turnaround in the real estate market, raising values in a reasonable time frame. Even risk-takers who see gold where others see floss will need serious cash and patience to buck a brutal real estate market.
Silver Lining in Moldering Vacancies
A rising tide lifts all boats, but the most difficult to boats to lift in urban real estate markets are boarded up homes in undesirable neighborhoods. However, American cities are full of examples where the right economic conditions, enlightened city governments and investors with deep pockets turned rows of boarded up wrecks into new urban hotbeds: Washington’s Capitol Hill, Chicago’s Printers’ Row, Philadelphia’s Center City, and Atlanta’s Kirkwood.
Wherever local economies, redevelopment, renewal or gentrification can attract demand, especially among today’s new generation of buyers hungry for close-in, affordable opportunities, America’s vacant homes will actually provide a boost to local real estate economies by limiting supplies and putting upward pressure on prices to ignite appreciation. At the end of the day, there’s a silver lining in the millions of moldering vacancies plaguing America’s Rust Belt.
As the real estate recovery progresses in the months to come, it won’t be a truly national recovery until it includes the central city neighborhoods of Detroit, Cleveland, Philadelphia, Chicago, Baltimore and Buffalo; places that were so important to America’s past and today hold the keys to housing America’s future.