Empty Houses: Ownership Society Is Over


Following up on yesterday's poston the latest homeowner vacancy report, I wanted to point out a significant shift in the makeup of not just how, but where we live.

While the overall number of empty homes rose nationwide, the biggest vacancy jump was in what's called "principal cities."

These are the lower income, higher crime areas that Fannie Mae and Freddie Mac and prior administrations tried to bolster homeownership in. It’s close-in areas that are not attractive, according to Stephen East of Ticonderoga Securities.

Vacancy rates actually fell in the suburbs to 2.3 percent in Q4 '10 from 2.5 percent a year ago and 2.4 percent in Q3. The increase in the overall rate was really driven by a 3.6 percent vacancy rate in "principal cities," up from 3.1 percent a year ago and 2.9 percent in Q3.

"The increase in the vacancy rates in principal cities continues to illustrate the hangover from the 'ownership society' supported by the Clinton and Bush administrations," notes East. "We speak often to clients about the dichotomous market that does not get enough attention. Draw concentric rings around a city center. Two primary areas that drive the housing malaise—in close, out far. The sweet spot belt in nearly every city is seeing a significantly better housing market than broad numbers show. Fortunately, this is where most of today’s qualified buyers want to live."

I am not sure why that's fortunate. The "sweet spot belts" around the country have not seen nearly the foreclosures nor the price drops that the close-in and far out bands have seen, so we don't need so much demand there. There needs to be more demand in the "principal cities," but it's just not there. Prices have dropped the most, and most borrowers there are lower income and cannot qualify in today's tough mortgage market. That's why, again, apartment rentals are seeing such high demand.

Last night, Fannie Mae announcedit was really gearing up its commercial, multi-family mortgage backed securities business, offering new products.

"Fannie Mae Guaranteed Multifamily Structures, or Fannie Mae GeMSTM, an expanded multifamily mortgage-backed securities (MBS) execution that will include DUS Megas, DUS REMICs and syndicated DUS Megas." In other words, they're getting behind the apartment boom.

"Fannie Mae is a leading provider of capital and liquidity for affordable workforce rental housing, and our role is more important now than ever," said Kenneth J. Bacon, Executive Vice President, Multifamily Mortgage Business. "When many financial institutions pulled out of the multifamily financing market during the financial crisis, we stayed and increased our participation to help keep credit flowing."

Fannie is putting more than $20 billion behind multi-family financing, as builders ramp up production. The reason rents are rising so much is because there is not enough stock, unlike the single-family market. During the housing boom, many developers did condo-conversions, turning apartment rental buildings into condos to meet the over-exuberant demand. Now developers are rushing to build as fast as they can. Reis Inc. predicts 51,314 units will be completed in 2011, and 82,971 units in 2012, and CoStar predicts over 100,000 will be completed in 2012 (many of those likely starting now). All because the inner-city ownership society is no more.

I also believe it's not just the inner-city, low-income resident who is renting; as I noted yesterday, I think renting is now much more acceptable to affluent younger workers and ever more enticing to empty-nesters. Given the rise in both those populations, multi-family has nowhere to go but up and ownership will need something of a makeover.

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