Vacancy Rate

A vacancy rate is the proportion of a defined housing inventory that is unoccupied and on the market. In official United States statistics the term belongs to the Census Bureau's Housing Vacancy Survey, which publishes two of them: the rental vacancy rate, defined as "the proportion of the rental inventory which is vacant for rent", and the homeowner vacancy rate, defined as "the proportion of the homeowner inventory which is vacant for sale". In property investing the same words are used for something else entirely: the allowance an owner subtracts from gross scheduled rent to reflect the time a unit is expected to be empty and the rent expected not to be collected. The first two are measurements of a market. The third is an assumption about a building.

The Census Bureau's two rates are built on different populations, so comparing them means nothing. The rental vacancy rate's numerator is the count of rental units vacant and offered for rent, measured against the rental inventory. The homeowner vacancy rate's numerator is the count of owner-occupied units vacant and offered for sale, measured against the homeowner inventory. A market can have a tight rental rate and a loose homeowner rate at the same time, because those are two separate housing markets that happen to occupy the same city. Reading one as a proxy for the other, or averaging them, produces a number with no referent.

The categories the Census Bureau excludes are where the intuition breaks. The survey sorts year-round vacant units into several groups, and only two of them feed the published rates. "Vacant units for rent" covers units offered for rent and those offered both for rent and for sale. "Vacant units for sale only" is limited to units for sale only and excludes those offered both ways. Everything else sits outside: "vacant units rented or sold", meaning units where a deal has been done and the new occupants have not moved in yet, and "vacant units held off the market", which covers units "held for occasional use", units temporarily occupied by people whose usual residence is elsewhere, and units vacant for other reasons, expressly including a home "held for occupancy of a caretaker, janitor", "held for settlement of an estate, or held for personal reasons of the owner". Time-shared units that are neither for rent nor for sale are classified as held for occasional use. Seasonal units, those intended for occupancy only during part of the year, are counted separately again. So the empty second home down the street is not in the vacancy rate. It was never supposed to be.

That is why the rate answers a narrower question than people ask of it. "How many homes in this city are sitting empty" and "how much of the housing that is for rent has not been rented" are different questions, and the published rate answers only the second. The first is a question about the whole vacant stock, including the seasonal and off-market categories the rate deliberately leaves out, and it needs a different table.

The third meaning is an assumption dressed as a statistic. When a property's projections deduct a percentage for vacancy and credit loss from gross scheduled rent, that percentage is a judgment about one building, made by whoever prepared the projection. It reflects that building's turnover, its lease terms, its management and its tenants. It is not derived from the Census rate and cannot be. Substituting a national or metro rental vacancy rate for it is the most common error in this area: different population, different denominator, no predictive relationship to any individual property. The arithmetic of that deduction, and what it leaves behind, belongs to the pages on rental cash flow and the capitalization rate rather than here.

Two features of the published series affect how it should be read. It moves quarterly, so any figure quoted anywhere is a point in a series rather than a standing fact, and the current one should be read at the source. And the Census Bureau notes that its metropolitan-area definitions have changed over time, which means metro-level readings from different eras are not directly comparable to each other even within the same series.

The Census Bureau interviews a sample of housing units each quarter, classifies every vacant unit into one of its defined categories, and computes the two rates by dividing the relevant vacant count by the relevant inventory. For its by-characteristic tables it states the denominator rule explicitly, excluding year-round units rented but awaiting occupancy. An investor's vacancy allowance is computed the other way round: someone decides what share of a year's gross rent will not arrive, and subtracts it.

A hypothetical example of the measurement, using invented counts and the denominator rule the Census Bureau states for its by-characteristic rates. A market contains 82,000 renter-occupied units, 4,300 vacant units offered for rent, 900 units rented but awaiting occupancy, 2,100 seasonal units, and 1,600 units held for occasional use. The numerator is the 4,300 offered for rent. The denominator is the renter-occupied units plus those vacant-for-rent units, or 86,300 (82,000 plus 4,300), with the 900 rented but awaiting occupancy excluded. The rate on that stated rule is therefore about 5.0 percent (4,300 divided by 86,300, or 4.98 percent). Note what is absent: the 2,100 seasonal units and the 1,600 held for occasional use are genuinely empty and appear nowhere in the calculation, and neither does any owner-occupied home for sale, which belongs to the other rate entirely.

Pros

• The published rates come from a long-running federal survey with stated definitions, so what they count can be checked rather than guessed at.
• A rental vacancy rate is a useful description of how tight or loose a rental market is, which is context for a rent negotiation or a relocation decision.
• The category detail behind the headline number is published, so a careful reader can see exactly which empty homes were and were not counted.

Cons

• The name suggests the share of homes standing empty, and it is not that. Seasonal, occasional-use and off-market units are excluded by design.
• The rental and homeowner rates measure different inventories and cannot be compared with each other or averaged.
• It is a quarterly series, so any figure quoted in an article has a date attached whether or not the article shows it.
• Metropolitan-area definitions have changed over time, so long comparisons at metro level are not like-for-like.
• Used as an input to one property's projections, a market rate imports an assumption about a population into a decision about a single building.