Vacancies as a Function of the Rebalancing Process

The favorite vehicle for foreign investment into the United States over the past two years has been mortgage backed secuirities. Fannie Mae and Freddie Mac offer a guarnatee that their secuirities will make their payments, which creates an impression of safety for a huge portion of the MBS market. Money pouring into MBSs has fueled extreme levels of housing construction, to the point that American builders have been adding far too many homes to the market. This shows up in the vacancy data released today:

Vacancies for rent rose steadily from 2000 through 2003 in bad economic times, while the sharp uptick in vacancies for sale has likely been a more recent function of the end of the speculative bubble and the mortgage squeeze. Vacancies are likely to continue rising both because the market and economy are continuing to weaken and because homebuilders haven't reduced construction enough. Today MDC Holdings released their numbers and they show an increase in homes under construction without buyers (year over year):

This is true for virtually all the builders, as they have too much land on their books and too many communities still opening up. They ignored the building inventory problems and in 2005 got extremely aggressive with their expansion plans just as the market hit its peak. MDC is still opening up new communities in the worst markets:


As the rebalancing process proceeds, Americans will continue to lose purchasing power. That should be incorporated into the homes they live in. Just as people will have to downside their consumption of imported goods, they'll have to downsize their homes. Single family detatched housing was the biggest product of the housing bubble. The vacancy rate for 1 unit homes is up to 2.5% from 1.5% just 2 years ago. Stress will continue to build in this area as builders like MDC add to inventory at a time when fewer Americans can afford to live in McMansions.