(2/5/2007) Number of vacant U.S. homes for sale reach four decade highs
Article by Sam Mishra, MBA (MIT Sloan)
In the final quarter of 2006, about 2.1 million vacant U.S. homes went on sale, as per the census bureau. The census bureau has tracked the number of vacant U.S. homes for the last four decades, and U.S. home owner vacancy rates have never been higher: the rate currently stands at about 2.7% (+- 0.1%) , as per the bureau.
For the same quarter in 2005, the rate stood at 2%. Since then, this rate has steadily climbed in 2006, with the vacancies being 2.5% at the end of Q3 of 2006, and now at 2.7% at the end of Q4 of 2006. Since data older than forty years is not available, this could well be the highest vacancy rate ever in more than half-a-century. Prior to 2006, the record never broke above 2%. Compared to the previous high of 2% at the end of Q4 of 2005, this is a 35% increase in vacant U.S. homes. This is a significant jump!
Vacant homes, unlike homes where people live, are typically owned by speculators, who buy homes to sell, not to live. However, this speculative buying jacks up the number of housing starts, which, when normally increasing, is a measure of a robust economy. However, the current robustness of new home constructions, and consequently the robustness of the current economy, has been artificially propped up by these speculative buyers and sellers of vacant homes.
New home starts did decline 13% in 2006, but vacant homes still went up by 35% in 2006! This signifies a real-estate bubble. Housing starts will have to further decline in 2007 for vacant homes to return to their previous highs of 2% or less. If this happens, a decline in new home constructions for the second year in a row will take its toll on the employment levels in this crucial sector of the U.S. economy, bringing down the ability of Americans to buy that first home. If this does not happen, the speculative real-estate bubble will increase further, and nothing could be worse.
With rising home prices in the last five years, Americans are increasingly getting pinched to buy that first home. Those who bought their homes four to five years ago when the interest rates were at historic lows are reaching the end of the five-year fixed mortgage terms. Since interest rates are higher compared to four to five years ago, their variable mortgage rates are higher, forcing many of these first-time home buyers to default on mortgage payments, and consequently putting their homes up for sale. In fact, the number of foreclosures for January 2007 went up by 45% compared to the foreclosure numbers for January 2006. These extra homes up for sale because of foreclosures and / or inability to make mortgage payments on time, combined with the 2.1 million vacant U.S. homes up for sale, has created a supply overhang in the housing market…
Consequently, I recommend that first time home buyers
do the following:
1. Be cautious in your approach while buying your first home / condominium.
2. Negotiate hard with the seller, because there is extra
supply in the housing market. Try to maximize your returns on your
negotiations not only with your seller, but also with your real-estate
agent. Please check our article on the Pareto Frontier on maximizing your value in business negotiations.
3. There is a positive correlation between Fed funds rate and
mortgage rates. Monitor the moves of the Fed, and the speeches of Fed
Chairman Ben Bernanke, closely. As long as he keeps the interest rates
steady, or hikes them very slowly, the mortgage rates won't increase
further. Alternately, we publish the latest mortgage rates from the
Mortgage Bankers Association on the top of this page for your
convenience, so please
bookmark this site focused on analysis and insights on the current real-estate bubble and the housing market meltdown.
4. Use the time to do your research on your new home, while saving
for a good down-payment. One reason foreclosures are at record highs are
because gullible first-time buyers fell for creative financing and zero down-payments;
you don't want to be on the same boat!
Note: Recommendation is not advice. Please read our Terms of Service.
|
|
|
|
|
|
|
|
