The housing market is a key component of the economy. A strong housing market (construction and sales) contributes to robust economic growth while an interruption can pull the economy into a recession, as occurred preceding the Great Recession. Two measures of a housing market’s health are homeowner and rental vacancy rates. Low rates signal to investors that additional housing or rental stock may be necessary, and the resultant construction helps empower economic growth.
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The U.S. Census Bureau measures Utah’s vacancy rates each calendar quarter. It defines the homeowner vacancy rate as the percent of homeowner inventory currently vacant and for sale. The rental vacancy rate is similarly defined—the percent of Utah rental inventory vacant and for rent.
From an economic standpoint, these rates’ signal to investors and the construction industry the demand for additional homes or rental properties. For example, a low rental vacancy rate expresses a high demand for rental properties, which kindles investor evaluations that additional apartment space may be profitable. Apartment construction activity follows, stimulating the economy.
Historically, Utah tends to have lower vacancy rates than the U.S. average; hence Utah has a healthy history of construction activity (the Great Recession not withstanding). Yet in the first quarter of 2014, Utah’s rental vacancy rate leapt above the U.S. average, equaling Mississippi for second highest in the nation at 13.9 percent. Only Alabama was higher at 16.1 percent. In the third quarter of 2013, Utah’s rental vacancy rate was only 8.8 percent, implying an increase of 5.1 percentage points in the first quarter of 2014.
Is this rapid rental vacancy rate change a market transformation or an anomaly? The Census Bureau estimates are based on survey sampling, so there is always the possibility of collecting a non-representative sample, and thus an anomaly. However, if the higher rate were to hold in subsequent quarters, it would signal some sort of market-based shift. This might naturally slow construction of more apartment stock in the immediate future.
In dialogue with those involved in the Utah housing rental market, the Census data comes across as an anomaly. Particularly in Utah’s metropolitan corridor, many speak of dynamic rental-building opportunities. There are many proposals for rental expansions in front of local authorities. These are savvy investors with money on the line, and making such proposals if the Utah apartment rental market was overly vacant does not harmonize with sound investment strategy.
This high rental vacancy rate might be a short-run phenomenon, with the rate returning to the historical average over the next several quarters. It may come under revision and be exposed as an anomaly. Given Utah’s history, it is hard to envision this increase being a market-shift long-term trend. But the course of this vacancy rate’s trend throughout the remainder of 2014 will set the stage for the rental construction picture in 2015 and beyond.