Open houses: Vacancy rates put pressure on prices; rentals challenge neighborhood cohesion

    The latest vacancy rate data from the U.S. Census Bureau are ugly.  Nationwide, the rate rose to 2.8% in the fourth quarter of 2007, up from 2.7% in the third quarter.  In formerly hot markets, the numbers are considerably worse.  In Orlando, for example, 7.4% of all homes are unoccupied, the highest such rate in the nation.  Miami/Ft. Lauderdale (4.4%), Las Vegas (4.9%), and Phoenix (3.7%) are bad too.
    The story of how these markets got to this point is well documented.

With lots of funny money pouring into these hot markets, developers rushed to build condos and planned communities, speculators and others moved in to buy the units (with zero or a few percentage-point deposits), additional demand evaporated, inventories rose to glut levels, and prices consequently dropped.  Since the speculators had very little skin in the game, they bailed, leaving banks and developers holding the empty bags, and depressing prices.  Increasing foreclosures added accelerant to the problem.
    Many of the vacant units have been rented which, on the face of it, would seem a good thing.  But developers are so desperate for a little cash flow that they are renting homes in their fledgling communities at such bargain-basement prices that they are attracting people with no investment in the local neighborhood.  In markets like Orlando, vacant actually may be a better alternative than rented.  
    "[Our] neighborhood was going downhill as people had been buying the homes and renting them out to some real [expletive deleted]," said one former Orlando resident on a real estate discussion board, congratulating himself on selling his home in 2005.  He complained about "people who do auto repairs in the street in front of their house and then throw used motor oil in the grass in their front yard..."
    That is certainly an extreme case, but hints at an unintended consequence of filling vacant homes with renters.  If you are contemplating the purchase of a home in a new community in one of the areas hit by high vacancy rates, the advice here is to proceed with caution.  You might insist on a contingency with the developer that covers you in the event a certain percentage of the community's homes are rented.  That may have seemed farfetched just a few years ago, but these are desperate times, and these are desperate developers.

    The Wall Street Journal has a recap of the national vacancy rate crisis, including an interactive map that shows rates in selected metro areas.  Click here to see the article.