News about the declining national rental vacancy rate have flooded the internet since the COVID-19 pandemic back in 2020. The same goes for the homeowner vacancy rate, which is also declining as you read this article.
You can check the Census Bureau, which reports both the national rental vacancy rate and the homeowner vacancy rate for each year. All the information is in the American Community Survey/Housing Vacancy Survey.
Moreover, the Census Bureau reports the number of vacant/occupied homes in a certain area. The Census Bureau has gathered and reported data on rental vacancies since 1956, so people can take it as a trustworthy source.
Even though rental vacancy rates are much lower today, you'd be surprised to know that they have been declining over the past decade. Why is this happening?
There are many reasons why rental and homeowner vacancy rates are declining each year, and we'll analyze them all in this article.
The Current Rental Vacancy Rate
Let's address general data first. According to a Housing Vacancies and Homeownership report, the current US rental vacancy rate is at 5.80%. The rental vacancy rates over the past few months were 6.00% in the past quarter and 5.60 in the past year (2022).
The vacancy rates have seen a steady decline, and although they increased slightly in the third quarter of 2022, they fell again.
In comparison, the long-term average for vacancy rates is 7.29%, so it's safe to say that these rates have fallen dramatically recently.
To put things in perspective, the rental vacancy rate for 2013, which was 10 years ago, was 8.60%.
It's important to note that the rental vacancy rate refers to the percentage of residential units in the US that don't have any tenants. Overall, a high vacancy rate can indicate a low demand for renting vacant units and vice-versa.
Homeownership Vacancy Rate
On the other hand, homeownership vacancy rates refer to the number of homes or units in the US that are currently owned by their occupants. You can get this number by dividing the number of owner-occupied units by the total number of occupied units.
Currently, the home ownership vacancy rate is sitting at 65.90%. While the rate is lower than last quarter (66.00%), it's still higher than the long-term average, which sits at 65.26%.
Even though foreclosures have increased and unit values have decreased over the last few years, people are still favoring rental units over purchasing.
While this article will mostly cover the current rental vacancy rate, it's also vital for you to understand the homeowner/homeownership rates too, as they will serve as a reference when evaluating the reasons why everything is declining.
Evaluating the Homeowner Vacancy Rate
Finally, let's cover home vacancy rates or homeowner vacancy rates. These are also following the declining trend of the other two rates.
Currently, the homeowner vacancy rate is sitting at 0.80% Last quarter (and last year in general), the rate was at 0.90%. Considering the long-term average has been 1.55% over the past few years, we've seen a considerable fall in these rates.
Low/High Rental Vacancy Rates
What does a property's vacancy rate tell you? In this section, we'll explain it in the easiest way possible.
If you're in an area that has several vacant units, buyers and prospective tenants will be at an advantage, and the average vacancy rate will increase. Why?
In that case, these people are at an advantage because they can choose among many different options and choose the best or cheapest one. Here, landlords will be at a disadvantage, as they will have to compete with each other to attract new buyers/tenants.
This competition will often involve being forced to lower rent prices or enhance the property so that it's more attractive than other landlords'.
Now, what happens when the scenario is the other way around? If there's a shortage of rental vacancies, the landlord will be the one with more power instead of the tenant.
When the housing markets indicate a shortage of rental vacancies, tenants will likely compete with each other to get that "spot" in the landlord's unit, so the landlord will feel at liberty to increase rent.
However, this can also cause other landlords nearby to adjust the prices for their rental property accordingly, which drives up the average prices.
In a nutshell, we end up with two different roads:
- If there's a low vacancy rate, rents increase.
- If there's a high vacancy rate, rents either increase a little or don't increase at all.
While rent is a huge factor in the housing market, it's not the only one that affects the rental vacancy rate.
Decrease Over the Years
Both the rental vacancy rate and homeowner vacancy rate are at historic lows. These rates started to decline between 2009 and 2019 when the US started to recover from the foreclosure crisis.
However, the housing supply tightened when the pandemic of 2020 happened, which affected vacant housing units even more.
Upon evaluation, you will find out that the pandemic isn't solely responsible for this decline in the rental and homeowner vacancy rate. Historically, there have been quite a few reasons why prospective tenants aren't looking for housing anymore.
Let's cover some possible reasons:
Homes for Sale
As mentioned before, the homeowner vacancy rate was around 0.90% and 0.80% in 2022. In essence, this tells us that there are fewer houses for sale than before.
Even though a 0.10% dip in the rates doesn't mean much, you should know that this is the first time in 66 years that the rates have been as low.
It's hard to name one general reason why this is happening, but the recent economic history of the US suggests that many homeowners stopped renting their property and transitioned to a life of ownership.
Supply and Demand
Supply and demand will always be two crucial factors in evaluating the current national vacancy rate.
In a general sense, if there was a higher supply than demand for rental vacancies, the rate would be higher. However, the low rental vacancy rate suggests that there's a low supply of rental vacancies and a high demand among tenants.
Keep in mind that a low rental vacancy rate doesn't necessarily mean a shortage in the housing market. Many experts compare low rental vacancy rates to unemployment rates; a low unemployment rate doesn't mean that there's a shortage of people.
Rent and Purchasing Power
Something that many people overlook when evaluating vacancy rates is prices.
Even though your first thought may be to jump to the conclusion that there are fewer homes to rent, that may not be it. You could have the same number of rental units and renters and still get a declining vacancy rate, why is that?
A repricing trend in the housing market can often lead to a decline, as you would also see a fall in the number of advertised homes. Let's make a comparison with the labor market again.
When there's a period of market adjustment, you may see a decline in "jobseekers," advertising their goods/services.
In essence, a low rental vacancy rate doesn't mean that there are too many renters or not enough units to rent. Historically, periods of adjustment may result in a "housing shortage," as owners and landlords take their property off the market.
Remember that a vacant home not on the market is different from a vacant home on the market.
Now, let's talk about purchasing power. In a nutshell, it may simply mean that many people currently can't afford to purchase a home, which affects housing vacancy rates as they try to look for rentals.
In this case, the low housing vacancy rates would mean that rent is higher, right? Not necessarily. The lack of jobs and stable income has made it hard for some landlords to increase rental prices too much.
However, this isn't the case for every state and city in the US. Areas like San Jose and San Francisco, for example, have had the largest rent increase rates over the past few years.
Currently, the average rent in San Jose is $1,685.72 a month, whereas, in San Francisco, it's $2,043.02 per month.
New York is still the most expensive place to rent in the country. Its average rent sits at $3,049.32 per month.
Keep in mind that while rent has increased, it hasn't increased as much as you may think. Take New York, for example. Its average rent has only increased by 0.9% over the last year.
Many experts have projected rental prices to increase from 4% to 5% in most states, but due to all of the reasons stated above, it has become harder.
We've already mentioned how a property on the market isn't the same as a property off the market. While some people stopped renting their property because it wasn't profitable anymore, others stopped because the units are under renovation or newly built.
Other properties may haven't even been sold or leased, which also affects the rates. Finally, keep in mind that renting a property as a vacation home or AirBNB isn't the same as regular renting, so that also plays a role in how the rates change.
Mortgages and Interest Rates
Overall, mortgage rates have increased significantly over the past year, especially in the third quarter.
To put things in perspective, January 2022 gave us an average 30-year fixed rate of 3.45%, and December 2022 got it all the way to 6.36%. Currently (February 2023), the FRM is sitting at approximately 6.32%.
These increases allegedly come from the Fed's actions to combat inflation. Overall, the Federal Reserve has continually increased interest rates, and it has shown interest in raising them continually.
While, technically, high interest rates can fight increasing prices, they can also increase the cost of borrowing, making mortgages, loans, and credits much harder to get.
What does it all mean? As these rates increase, constructors and developers aren't as interested in new construction as before. On the contrary, these people are trying to finish existing projects through affordable financing, and once they're done, renting them.
However, as these projects are being completed, that could mean there may be a higher housing vacancy rate in the following years, and therefore, lower rental prices. That will depend on how future wages hold up and how the economy stabilizes, though.
While all of those reasons can play a part in the average rental vacancy rate, remember that we can just speculate based on what the data tells us.
There are many different factors that can affect the rental vacancy rate, and even then, the rate can change depending on the state and city, as not all of them go through the same circumstances.
How Do You Calculate It?
We've already talked about the rental vacancy rate in general, but how do you take that information and use it to manage your property?
If you're planning on making your rental property available, then the first thing you need to do is calculate the rental vacancy rate of your suburb or area.
Generally speaking, you will need two pieces of information to get started:
- Number of vacant properties in your area
- Number of rental properties in your area
Then, you will divide the number of vacant properties by the number of rental ones. Multiply the result by 100. That's your rental vacancy rate.
If there are 1,000 properties in your area, for example, and 50 of them are vacant, then your vacancy rate would be 5%. You can use that information and compare it with the national or state average.
A high rental vacancy rate will suggest that your area, in general, is having trouble renting well. On the contrary, a low rental vacancy rate will suggest that the property or area is doing well surrounding rentals.
Why Does Calculating It Help You?
There are many reasons why calculating a rental vacancy rate is a great option. First, you can use it to project your ROI for a certain property.
Moreover, calculating your rental vacancy rate will give you an idea of how your property is performing compared to the area's vacancy rate.
Finally, the rental vacancy rate can help represent broad market conditions and trends.
Investors typically prefer areas with a low rental vacancy rate, as it suggests that certain properties may not remain vacant for too long once a tenant moves out.
On the other hand, investors can adjust their investment strategy using the data they got from the rental vacancy rate.
What Is a "Good" Rental Vacancy Rate?
It mostly depends on the area, as each one has different housing/living conditions.
Generally speaking, a 3% vacancy rate is typically considered healthy. This is because it suggests a balanced market surrounding owners/landlords and tenants.
The slightest variation could tip the scale in one of the party's favor. A 2% rental vacancy rate, for example, suggests that there's a high rental demand, and a 4% (or higher) vacancy rate suggests there is a higher supply of rental homes than what the demand asks for.
Low vacancy rates, as mentioned before, are considered better for landlords. This is because they have more liberty to adjust rental prices, and they can also choose among different tenants that may be interested.
Is a High Vacancy Rate Bad?
It depends on who you ask. Thanks to the information we analyzed before, we can say that high vacancy rates affect landlords, owners, and investors, but that doesn't necessarily mean that there's a low demand for housing.
You, for example, may get a high vacancy rate for your property and then notice the average rate in your area is low. If this is your case, then there are some factors that you may want to evaluate.
Some of these factors include the following:
Sometimes, it's easy to overprice rent without noticing. Typically, this happens because of poor market research. If your rent price is too high compared to the competition, then you will have a hard time filling your vacant units.
Considering how hard it has become to ensure a high income, most people are looking for more affordable units to live in.
Tenants may not want to occupy your unit if you don't respond quickly or fail to provide proper maintenance to it. Since tenants don't have to renew their lease when it ends, they can move out to find something better, which can lead to your property having a high rental vacancy rate.
Competition goes beyond comparing rental prices. You can charge the same amount of rent as everyone else, but if your property doesn't offer the same amenities as the others, tenants may consider the competition instead, leading to a higher rental vacancy rate.
Following up with the last point, most tenants look for properties that have many local amenities or conveniences nearby because it saves money and time.
Tenants, for example, appreciate properties that are near schools, sports centers, retail stores, or transportation hubs. If your property doesn't have easy access to these amenities, then it may be harder for you to keep tenants.
As we've mentioned throughout this page, these factors are merely suggestions of what could be happening. If you truly want to understand how vacancy rates affect your property, then you should first understand your local market trends and prices.
Project Potential Capital Growth
Vacancy rates can give you a lot more information than you think. While knowing the national rental vacancy data is useful, knowing your local one is what's going to help you make the most out of your property.
Keep in mind that renting a property is much cheaper, faster, and easier than buying one. If you have a property that becomes appealing for people to live in, whether it's because of the prices or amenities, potential tenants will likely consider it over other options.
When that happens, your rental vacancy rate will go down, which will also make your property more attractive to investors.
Overall, once you calculate your rental vacancy rate, you will be able to evaluate your potential capital growth.
Does It Matter?
The rental vacancy rate isn't the only thing that will measure your property's "success" or investment potential.
Here are some of the factors that most investors consider when evaluating a property's investment potential:
- Projected Capital Growth
- Rental Yield
- Household Income
- Rental Stock
- Sale Listings
- Online Search Interest and Demand
- Percentage of Owners and Renters
- Median Price
- Days on the Market
Projections for 2023
As mentioned before, the rental vacancy rate is only one of many factors that can tell you about how your property is performing in the short and long term. While the pandemic of 2020 certainly affected the housing market a lot during that year, things have stabilized a bit over the past couple of years.
However, it's hard to say what will happen with the market in the future, as the economic conditions are uncertain, and the market itself is still adapting to the rising interest and mortgage rates.
Considering the actual rental vacancy rate for the country and all the other factors we just mentioned on this page, what can you expect from this year?
As people adapt to worker shortages, tight budgets, and higher interest rates, some are still optimistic about what they can expect from this market.
Some trends you can expect from the housing market this year include:
- Comeback of mixed-used properties
- Renters from multiple age groups
- Demand for diversified spaces
Unfortunately, some people still expect inflation and interest rates to continue rising in 2023 and the following years. As you may already know, high costs will definitely affect how owners keep their properties profitable.
However, as long as owners are able to do proper research and calculate their local rental vacancy rate, they may have an easier time planning out a strategy to make their property more appealing to renters without sacrificing reasonable rent prices.
That's all you should know about the rental vacancy rate decline, for now. Considering we currently have a low rental vacancy rate on average, it's safe to say that the market is becoming more profitable for some owners, whereas tenants may be having trouble competing to get a spot inside a property.
However, these trends don't last forever, and any of the factors we mentioned on this page can affect the average rental vacancy rate in the future.
The best thing you can do to get ahead of everyone is to do proper research and use it to come up with the best strategy to cover your needs.
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