How long will the housing market take to hit bottom? A lot depends on whether people will want to occupy millions of empty homes.
Five years after the housing bust began, the market is still groaning under the weight of a near-record 14.3 million vacant residences. That’s about 3 million more than what was normal before the bust — a glut that could take more than 13 years to eradicate, given the depressed rate at which Americans have been starting new households and assuming construction of new homes remains at April’s low annualized level of only 551,000.
With so many homes waiting to be occupied, it’s hard to imagine how prices nationwide could recover anytime soon (though, of course, the experience of individual local markets can differ). The only hope, and a perverse one, is that many of those homes are actually phantom inventory — built in such awful locations, or in such disrepair, that nobody will want to live in them. Such an outcome could precipitate heavier losses for the people or banks that own the homes, but it could also mean a quicker recovery for the market as a whole.
Even if a big chunk of the U.S. housing stock can be written off, though, that might not be enough to generate a rebound in house prices. The bust has eroded many peoples’ faith in housing as an investment, mortgage loans are harder to get, and the millions of families still in or near the foreclosure process typically won’t be in a position to buy. As more people choose or have no choice but to rent, the U.S. homeownership rate is heading down. As of the end of March, it stood at 66.5%, the lowest point since 1998.
Most likely, renters will be the first to feel any recovery in the housing market — in the form of higher rents. Some large landlords are already reporting the lowest vacancy rates they’ve seen in more than a decade, and say they’re planning significant rent hikes this year. Given the fact that rent makes up nearly a third of the Labor Department’s consumer-price index, that suggests the housing market has the potential to produce a highly undesirable economic combination: a drag on growth and a boost to inflation.