The Global Rail

By Dave Holloman

March 4, 2010

Vacancy rates are the new neighborhood problem. The worst of the foreclosure crisis appears to be behind us.  Home prices are stabilizing and are, moderately, on the rise.  A recent report tracking home prices indicates fewer home sellers are cutting their prices.  The Case Schiller index, the authority on US home prices, has shown significant improvement in the last calendar quarter of 2009.  As the bottom of the housing collapse moves into the rear-view mirror, we are entering into a new phase where the housing crisis becomes a vacancy crisis.

While the storm of the housing crisis may have passed, neighborhoods are coming to grips with its aftermath.   The trend in homeowner vacancy rates tells the story.   Looking at data collected by the US Census Bureau, the recent collapse of the housing market has translated into record vacancy rates. 

Home vacancy rates have skyrocketed to record levels in the current economic recession.  Conservatively, a record 14 million homes are unoccupied in the US.  What is unique in this recession is the kind of neighborhoods affected by vacancy rates.  This recession is affecting vacancy rates in neighborhoods everywhere on the economic spectrum.  Homes priced above $500,000 have similar vacancy rates as those priced lower.   The vacancy rate for new homes, built after the year 2000, have 3 times the vacancy rates as the national norm. 

Combine these two facts into a new reality; neighborhoods that 5 years ago held the promise of high quality living are now littered with empty homes.   The first to feel the brunt of foreclosures were newly built, exurban communities.   Many of these communities were located in high foreclosure states, like California, where consumers stretched equity and went farther outside metro areas to obtain a home.  Another type of neighborhood feeling the impact is those  in transition.   During the housing boom, neighborhoods were being upgraded with new housing infrastructure, often increasing the price tier of the housing supply.   When the boom went bust, lots were left empty as builders stopped construction, old houses prepared for tear-down were left vacant, and new homes nearly finished were left that way.    My current neighborhood looks a lot like this.  When my family moved into our neighborhood several years ago, we found what many look for, nice neighbors and good schools.  Today, it is less populated than it was and has its fair share of homes gone bust.  One block over, there is a stretch of 3 homes which are vacant.  In one of those homes, anything not part of the foundation and the walls is gone, leaving a shell of what once was.  Stripping of foreclosed homes has become a common practice.  On another block, a vacant house has developed mold and is uninhabitable.  While the neighborhood remains a good place with more than a few white picket fences and the American dream intact, it will take us some time to get back where we once were.  This is the aftermath of the housing crisis.  According to Standard & Poor’s, high vacancy rates in the housing market will likely be with us for at least the next 3 years. 

In this timeframe, the foundation of the quality of life in these neighborhoods will be more fragile.  In his 1996 book, George Kelling outlined his now widely-known broken windows theory.  This theory asserts that small offenses such as litter, empty lots, and yes, broken windows, leads to an environment where more serious threats to quality of life can grow.  Although his work was focused on urban communities, the basic concepts hold anywhere, even in prosperous suburbia.   Some of the wealthiest neighborhoods in the US are not been immune.  Case in point is Winnetka, IL.  Winnetka is, by any measure, one of the wealthiest communities in the US.  With an average house price that tops $900,000, it’s inaccessible to most.  Winnetka’s vacancy rate is 3.5%, significantly above the national average.   Saratoga, California is another example.  Average house price is about the same with a vacancy above the national average of 3%. 

The foreclosure storm’s aftermath is resulting in communities working together.   The New York Times recently reported that several big cities are using tax dollars to purchase foreclosed properties in order to stem neighborhood decline.  Home owners in communities are pooling dollars to do the same.

Time will surely work through these issues.  Asset prices are becoming attractive once again.  Distressed properties will be purchased, restored, and sold.  Development will continue and quality of life will regain its solid footing.  In the meantime, neighborhood residents are uniting and working together to protect their communities.  Perhaps this is the silver lining in the vacancy crisis.  Neighbors will get to know each other better as they tackle a common problem and communities will strengthen as a result.