Transcript Czarski_Gabriel_Nothaft

Rental Housing Markets, the Incidence
and Duration of Vacancy, and the Natural
Vacancy Rate
Written by
Stuart A. Gabriel
Frank E. Nothaft
Presented By
James Czarski
New Data
• Bureau of Labor Statistics
– Consumer price index (CPI)
• Rent price & change
– Every six months
• Information is collected on length of
occupancy
– Allows us to get spells of vacancy
• With housing stock gives us incidence
– With Incidence
• We can get Average duration
Vacancy
• Vacancy = Incidence * Duration
– Unoccupied unit available for sale or rent
• Starts when occupant moves out or unit enters the
market
• Ends when unit gets rented or it is removed from
the market
• Equilibrium vacancy rate
– AKA Natural vacancy rate
– Neither excess demand nor excess supply
– Constant level of real rent
• Real rent increases = 0
Observed vacancy rate
• Larger proportion with shorter Duration ?
• Smaller proportion with longer Duration ?
• Decomposition
– Incidence
• The probability that a unit will become vacant
• Useful in indicating variation over time & space
– Duration
• The length of time a unit remains vacant
• Provides insight into systematic variation in length of time
– Yield new info
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Allows for a more complete explanation of variation
Source of fluctuations
Risk
Separate contribution to the price adjustment mechanism
Persistence
• Some units are more susceptible to vacancy
– Local economic condition & demographic
characteristics
– Characteristics of the apartments themselves
• Complete persistence
– The same group of units vacant again & again
• Greater persistence
– Greater portion of units continuously occupied
• Incidence = Turnover
– Duration ↑ Turnover ↓ Persistence ↑
• Persistence ↓ as observation period lengthens
• Units with higher duration & persistence
– Are withdrawn from the rental stock
Decomposition of vacancy
• Mi = Number of months apartment i is vacant
• Vi = Number of spells of vacancy
• H = the rental housing stock
• Market vacancy Rate = ΣiMi / H
• Incidence = ΣiVi / H
• Average Duration = ΣiMi / ΣiVi
• Vacancy rate = Incidence * Average Duration
– ΣiMi / H = ΣiVi / H * ΣiMi / ΣiVi
• Incidence
– Determinants
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Population Mobility
Population growth
Demographics
Public housing availability
– Below market rents are a disincentive to relocate
• Metropolitan poverty status
• Duration
– Higher duration reflects mismatch between the
characteristics or location of the unit and the
demands of potential tenants
– Determinants
• MSA housing cost
• Higher median housing costs
– Higher potential gains from longer search
– Greater opportunity cost to landlords (more significant)
• Housing heterogeneity
– Larger variety
• Tenant search costs
Deviation of observed vacancy from
equilibrium
• Cause prices to adjust
• Lower vacancy
– Lower incidence and/or Shorter duration
– Elevated returns
– Reduced risk
• Higher vacancy
– Greater incidence and/or Longer duration
– Lower returns
– Increased risk
Deviation from Equilibrium
• Excess demand
– Pushes observed incidence and/or duration below
long-run equilibrium
– Rents rise
• Prompts additions to rental housing stock
• Excess supply
– Rent fall
• Decreases rate of new construction
• Unanticipated population growth
– Lower vacancy rates
• Expected population growth
– Higher vacancy incidence from increased new
construction
• Local business cycle affects incidents and
duration of vacancy
Intercity Model of Incidence
• Ini = Equilibrium incidence in metro area I
• Ii = Observed incidence in metro area I
• Xi = City-specific factors which cause Ii to
deviate from long-run equilibrium
• Ii = bo + b1 Ini + Σ bJ XJi + ei
Intercity Model of Duration
• Dni = Equilibrium duration in metro area I
• Di = Observed duration in metro area I
• Xi = City-specific factors which cause Di to
deviate from long-run equilibrium
• Di = ao + a1 Dni + Σ aJ XJi + ei
Rental-price adjustment
• Vn = Natural vacancy rate
• Vt = Natural vacancy rate at time t
• R = Rent
• ∆Rt = g(Vn – Vt)
• More general expression
• Given V = I * D
• ∆Rt = h(In – It) + k(Dn – Dt)