Vacancies down: But can renters absorb enough empties?

The number of vacant houses has fallen by more than a third. Could this be the recovery sign that blogging realtor Jim Duncan hopes it is?

On April 20, Duncan posted an entry on realcentralva.com that noted, according to his calculations, that the percentage of vacant homes listed for sale in the Multiple Listing Service has fallen from 36 percent in 2007 to 23 percent today.

First, what's so bad about vacant homes? For starters, even under the best of circumstances, some insurance companies require an inspection before agreeing to underwrite a home that has been vacant. Other insurers demand something called a vacancy endorsement if the house is going to be uninhabited for more than 30 days after the purchase.

Potential buyers are understandably concerned about the potential neglect and deferred maintenance items that so frequently accompany homes left empty by job transfers, marriages, deaths, or other changes in family circumstances. But when a vacancy occurs due to a foreclosure or a short sale, as is so often happens in these current market conditions, concerns multiply.

A homeowner facing foreclosure may have neither the means nor the motivation to continue the upkeep, a situation that often results in significant deterioration before the bank takes ownership. Once uninhabited, bank-owned properties become susceptible to break-ins and thefts– especially of copper wiring or plumbing– not to mention occupancy by squatters.

From a market perspective, an increase in the number of occupied homes, whether owner- or tenant-occupied, would seem to indicate a return to market health. A higher occupancy rate suggests fewer deteriorating properties, which deter buyers and negatively harm nearby property values. A higher occupancy rate also signals an increased demand for housing.

However, Duncan tempers his optimism with caution, and raises a couple of compelling questions.

First of all, what about the so-called "shadow inventory"– that massive backlog of foreclosed properties that banks have yet to release? Common sense suggests that a flood of properties could saturate the market and push prices down. But when asked, Duncan declines to project.

"Nobody knows what the effect will be," he says, "and anyone who claims otherwise has information that no one else has; this remains a great unknown."

On his blog, Duncan points to an article suggesting that home ownership may be becoming outmoded. Certainly, rising rental rates (they jumped 2.4 percent last year) suggest that renting is becoming more popular these days. Factors deterring potential homeowners include fear of investing in an asset that may continue to lose value, concern about resale, worry over job security, and uncertainty about the effect of rising interest rates– all of which can be alleviated by renting.

Indeed, current statistics appear to support this gloomy hypothesis about ownership. Virginia homeownership rates slipped from 72.8 percent to 67.2 percent over the past six years. Nationwide, the rate was 66.3 percent in late 2011, down from a high of 69.2 percent in 2004, a decrease that may have helped contribute to a prediction that 2012 will be "the year of the landlord."

A spike in the number of groundbreakings for new homes late last fall evoked optimism that the housing market was starting to recover. However, most of the projects involved multi-family units rather than single-family dwellings.

It’s possible, as Jim Duncan points out, that some of the formerly vacant houses previously listed for sale in the Charlottesville MLS are now operating as rentals, but that’s not necessarily a bad thing. Investors have mortgages to cover, too, and if rental income leads to fewer defaults, that translates into fewer short sales and foreclosures, and ultimately means better overall market health.

"There's a shift away from homeownership being the primary goal for everybody," Duncan summarizes. "Hopefully we’ll see a more sustainable rate of homeownership."