The Rent Is Too Damn High
How Increasing Vacancy Rates Creates Affordable Housing
If you were paying attention to the 2010 NY Governors race, or just to the thousands of jokes it spawned you know the phrase “The rent is too damn high!” What you might not understand is what vacancy rates are and how keeping them low ensures that rents will stay high. In this post I will use the words of landlords themselves to help regular people understand this so we can push for a world of housing abundance and affordable rents.
What Is A Vacancy Rate?
First off we need to understand what a vacancy rate is. Simply put, it’s the % of units that are unrented over a period of time. It is usually calculated across a whole year, so if a home was vacant for 36 days out of 365 it would have a vacancy rate of around 10%. Now calculating a vacancy rate for an individual home isn’t very useful. Instead we want to calculate it for a whole building, a neighborhood, or even a whole city.
Moving Takes Time
One common misunderstanding about vacancy rate, is that a home which is being cleaned out or renovated between renters is considered vacant. This is why pretty much no city has a 0% vacancy rate, because someone is always moving out somewhere. It almost always takes a few days or even weeks after a move out for a home to be cleaned up and rented again.
There is a chance that a new renter would sign a lease that starts the literal day after the last lease ended, but that’s unlikely because they’d be paying for an apartment that wasn’t even cleaned. If you see that happening it is a clear sign that there aren’t enough apartments available in that area and renters are willing to either accept a dirty apartment, or lose out a day or two of living there to ensure that they get a place.
Who Benefits From Low Vacancy Rates?
So now that we understand what a vacancy rate is, we must ask ourselves, who benefits from keeping vacancy rates low? The main beneficiaries of a low vacancy rate are landlords. Don’t take my word for that though, let’s listen to a landlord explain it himself.
If you don’t want to watch the whole video here are a few key quotes.
“If a vacancy rate is zero in a particular town or a particular building, then that probably means the landlord set the rent too low... Time to increase the rent.”
“The properties that I buy, I try to keep them at about a 4% to 5% vacancy rate. So that means when we have a tenant leave the property, a few short weeks after paint and carpet, we have a tenant moving right back into that property.”
“Another thing that I look for is over building. I personally like to invest in areas where there's almost no building going on.”
But We Built Stuff And The Rent Is Still High!
This is a common complaint that is trotted out to prevent additional building. Vacancy rate does a good job of answering it though. If new homes are built, and those homes are quickly filled, then the vacancy rate stays low and the rents stay high. The answer there is to not stop building, but actually to build even more such that the vacancy rate actually rises.
What If We Overbuild?
Okay, so you’ve heard me call for more building, but there must be some limit right? Homes take months, or even years to construct, so what happens if we finally build enough housing to drop vacancy rates and rents and there are still thousands more units under construction? Well we don’t have to guess about that, because it is happening right now in multiple cities in America, like Las Vegas and Austin. Don’t take my word for it though, here’s another landlord straight up telling you that increasing housing supply results in higher vacancy rates which leads to lower rents.
How Vacancy Rates Affect Home Prices
We’ve finally gotten to the real reason many people oppose lowering vacancy rates, they fear it will drop their own home prices. The landlord in the above video certainly thinks this is the case. He notes
The history of the U.S housing market says that when rents go down home prices go down and the mechanism that's going to cause the price is going to go down is landlords selling because right now lots of them are losing money with their cost of debt.
Who Loses Here?
Think of all the articles you’ve seen about AirBNB landlords raising housing prices/rents because they’re taking homes off the market, or companies like Blackrock buying up large numbers of homes and raising rents. What we’re seeing in Vegas is those landlords being forced to sell those exact homes (potentially at a loss) because the vacancy rate raised and the rents they could charge dropped below their costs to maintain those properties.
It’s also possible that the large developers who are in the process of building thousands more homes in these cities will lose out. They may finish their projects only to find that they sell for less than the cost to build. In the worst case scenario these builders will realize this part way through construction and abandon a half completed structure. This can cause real issues, but good blight ordinances can allow municipalities to seize this land either demolish the unfinished structure, or better yet, complete it into something useful.
What About Homeowners?
Big developers aren’t the only ones who own homes though. There are also millions of regular people who own homes in America. What happens to them if home prices drop? Well it certainly isn’t going to feel good if the home that you had thought was worth $500k is actually only worth $350k. This creates a situation where moving or taking out more debt both become much harder because mortgages are underwater. This happened to millions of people, including me, during the great recession and it certainly wasn’t fun, but there are currently millions of people who are drowning due to high housing costs right now. Which is worse?
Hidden Benefits Of Housing Abundance For Homeowners
Building more homes to create higher vacancy rates and lower home prices does produce some benefits to existing homeowners as well though. First off, if a home’s assessment drops then the amount it’s charged in property tax will also drop. Now, your town may delay assessing or raise property tax rates to prevent this, but that is really a function of how good your elected leaders are and how much your municipality has to spend. If the new homes in your community were built in an area that already has infrastructure like roads and pipes then the extra cost to the town’s budget for those homes is minimal. They’ll actually provide a surplus of value to the community and allow lower property taxes, increased municipal services or both. This is covered well in this Not Just Bikes video based on Strong Towns’ work.
A Way Out For Homeowners Who Overpaid
Loosening zoning also gives homeowners who may have overpaid for their homes a way out. If your town just made it legal to build 12 homes on a plot of land that had previously only allowed one home then developers are going to want to buy that plot of land and build 11 more homes on it. Competition between developers here will lead to a period where existing home prices go up even higher, because the demand for homes hasn’t been met and there is a huge demand to build more.
Allowing 12 homes to be built where 1 once stood means that even if a developer might overpay $600k for what had been a $500k home. That’s because the cost for land for each of the 12 new homes they’ll build on that land is just $50k so the extra cost isn’t much per new home.
A homeowner who paid too much for their home could likely sell it for a profit during this time. Eventually though, enough homes will be built and home prices will drop back to lower levels. This affordability is a good thing in the long run though, and the homeowners who stay and continue to live there will benefit from others being able to afford to live in their communities too, like the teachers at their kids schools, the drivers of their buses and the people who take our their trash.
A Final Note on Quality
The fastest way to increase the vacancy rate is to build a bunch of cheaply made, low quality homes on already vacant land. I think this is a mistake too though, because these homes will quickly become trash and require either extensive remodeling or even demolition. These buildings will still claim to be “luxury” but anyone living there will show you how that isn’t the case.
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This also goes for the location of the housing. We need to build homes near where people actually want to live, which is largely influenced by jobs, family, and weather. Attempting to increase the vacancy rate in a city by building far off, low quality sprawl housing just leads to abandoned suburbs that can’t support the cost of the roads and pipes they require. These can and do become abandoned and stop contributing to the housing supply after a few years. We would do well to update our code to require higher quality homes, with better insulation, air sealing and noise blocking, and to keep using zoning to prevent far flung farms and forests from being turned into suburban sprawl.
Conclusion
Let’s use our laws to not just allow, but actually encourage quality homes in desirable places. This is a key step to making homes more affordable, but it’s more than that. Denser homes are inherently more energy efficient than detached homes because they have fewer exterior walls. This also means that they require fewer materials to build and convert less farmland and wild land into housing. We should all work together to encourage sustainable housing like this to increase vacancy rates and improve affordability so everyone can profit greenly!
P.S. If you got this far and want to learn more about dense, sustainable housing, check out this great video by Climate Town.
Nice to see you back and am enjoying your pivot to land use/housing!
Also, wow, it took two emails and six steps to post a comment...
Preach it