Rental Housing Markets, the Incidence and Duration of Vacancy, and the Natural Vacancy Rate

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Rental Housing Markets, the Incidence and
Duration of Vacancy, and the Natural Vacancy Rate

• Written by
• Stuart A. Gabriel
• Frank E. Nothaft
• Presented By
• James Czarski

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New Data

• Bureau of Labor Statistics
• Consumer price index (CPI)
• Rent price change
• Every six months
• Information is collected on length of occupancy
• Allows us to get spells of vacancy
• With housing stock gives us incidence
• With Incidence
• We can get Average duration

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Vacancy

• Vacancy Incidence Duration
• Unoccupied unit available for sale or rent
• Starts when occupant moves out or unit enters the
  market
• Ends when unit gets rented or it is removed from
  the market
• Equilibrium vacancy rate
• AKA Natural vacancy rate
• Neither excess demand nor excess supply
• Constant level of real rent
• Real rent increases 0

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Observed vacancy rate

• Larger proportion with shorter Duration ?
• Smaller proportion with longer Duration ?
• Decomposition
• Incidence
• The probability that a unit will become vacant
• Useful in indicating variation over time space
• Duration
• The length of time a unit remains vacant
• Provides insight into systematic variation in
  length of time
• Yield new info
• Allows for a more complete explanation of
  variation
• Source of fluctuations
• Risk
• Separate contribution to the price adjustment
  mechanism

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Persistence

• Some units are more susceptible to vacancy
• Local economic condition demographic
  characteristics
• Characteristics of the apartments themselves
• Complete persistence
• The same group of units vacant again again
• Greater persistence
• Greater portion of units continuously occupied
• Incidence Turnover
• Duration ? Turnover ? Persistence ?
• Persistence ? as observation period lengthens
• Units with higher duration persistence
• Are withdrawn from the rental stock

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Decomposition of vacancy

• Mi Number of months apartment i is vacant
• Vi Number of spells of vacancy
• H the rental housing stock
• Market vacancy Rate SiMi / H
• Incidence SiVi / H
• Average Duration SiMi / SiVi
• Vacancy rate Incidence Average Duration
• SiMi / H SiVi / H SiMi / SiVi

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• Incidence
• Determinants
• Population Mobility
• Population growth
• Demographics
• Public housing availability
• Below market rents are a disincentive to relocate
• Metropolitan poverty status
• Duration
• Higher duration reflects mismatch between the
  characteristics or location of the unit and the
  demands of potential tenants
• Determinants
• MSA housing cost
• Higher median housing costs
• Higher potential gains from longer search
• Greater opportunity cost to landlords (more
  significant)
• Housing heterogeneity
• Larger variety
• Tenant search costs

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Deviation of observed vacancy from equilibrium

• Cause prices to adjust
• Lower vacancy
• Lower incidence and/or Shorter duration
• Elevated returns
• Reduced risk
• Higher vacancy
• Greater incidence and/or Longer duration
• Lower returns
• Increased risk

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Deviation from Equilibrium

• Excess demand
• Pushes observed incidence and/or duration below
  long-run equilibrium
• Rents rise
• Prompts additions to rental housing stock
• Excess supply
• Rent fall
• Decreases rate of new construction
• Unanticipated population growth
• Lower vacancy rates
• Expected population growth
• Higher vacancy incidence from increased new
  construction
• Local business cycle affects incidents and
  duration of vacancy

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Intercity Model of Incidence

• Ini Equilibrium incidence in metro area I
• Ii Observed incidence in metro area I
• Xi City-specific factors which cause Ii to
  deviate from long-run equilibrium
• Ii bo b1 Ini S bJ XJi ei

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Intercity Model of Duration

• Dni Equilibrium duration in metro area I
• Di Observed duration in metro area I
• Xi City-specific factors which cause Di to
  deviate from long-run equilibrium
• Di ao a1 Dni S aJ XJi ei

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Rental-price adjustment

• Vn Natural vacancy rate
• Vt Natural vacancy rate at time t
• R Rent
• ?Rt g(Vn Vt)
• More general expression
• Given V I D
• ?Rt h(In It) k(Dn Dt)