A recent forum post (Dollar-Cost Averaging Applied to Rental Property Acquisition) has me thinking about market phases: Recovery, Expansion, Hypersupply and Recession. (Boring and academic, I know. Bear with me.) Many markets are going gangbusters with new construction, but the markets I follow are continuing to see decreasing vacancy rates (which leads me to believe we're in the Expansion phase). As those additional units are absorbed, supply will catch demand, eventually. According to this market phase model, when we see vacancy rates spike, we will be entering the Hypersupply phase. Given that construction lags and new units will continue to come online, even after supply begins to outpace demand, Hypersupply will tend to lead to Recession. The question I'm hoping to get your thoughts on relates to our ability to see transitions in price trends coming. Do you think vacancy rate is a leading or trailing indicator for price? Put another way, when we see vacancy rates spike, do you expect median sale prices to have already started dropping, or do you think increasing vacancy rates will precede a price downturn?
I don't have the answer for you but I am interested to know what it is. Based on human nature that people tend to be reactive instead of proactive, I would guess that vacancy rate spikes would be a leading indicator. I would like to hear some input from someone more educated than myself.
I also wonder how accurate/realistic/predictive the four-phase market cycle model is. For instance, I'm not sure where to find vacancy rates leading up to the 2007/08 meltdown. My understanding is that the meltdown was driven by the mortgage markets imploding, not necessarily oversupply, which would be indicated by increasing vacancy rates. What was the vacancy rate trend leading into the 2007/08 crash?
OK, I should have known that The Google would help me find vacancy rates pre-bubble-pop. According to these numbers, vacancy rates didn't rise until the market drop had started. Trailing indicator it is, in that case at least.
Yeah, I see that too. I think that the increased vacancy rate seen after 2007 was because the real estate investors who owned the rentals weren't educated enough and/or didn't have enough foresight to see that their rents wouldn't cover the mortgage payments after the adjustable rates kicked in. They couldn't afford the houses anymore, so they walked.
I like this one more because it gives a bigger picture in order to compare the post 2007 bubble-pop to a longer trend.
Wow, @Marshall Easlick ! According to that chart, vacancy rates started rising steeply about ten years prior to the 07/08 crash! Perhaps the indicator did lead.
I'm not a macroeconomist but I think we would have to correlate this metric with other data to really get a good idea if rental vacancy rate is a leading or trailing indicator. How much do you know about economics?
I'm really digging the FRED economic data, @Marshall Easlick ! I'm not an economist either, but I am a data junky and I work with scientists everyday. They have rubbed off on my a bit :) The correlation I'm interested in is how indicators like vacancy rate map to prices. In particular, I'm looking to indicators that moved in advance of price moves in the past. Vacancy rate appears to have done that leading up to the 07/08 downturn. Another indicator I've been interested in is number of building permits. The FRED data you shared shows that this too had movement that led the 07/08 price movement: https://fred.stlouisfed.org/series/PERMIT.