REQUIRED READING: The boom and bust in housing that is a hallmark of the recent economic cycle has resulted in an unprecedented volume of foreclosures that has, in turn, left us with an extraordinary level of vacant and distressed properties. Even after the official end of the recession, home sales and house prices continued to decline for several years, and residential investment languished.
All of this has resulted in a slow recovery in housing, which is one of the primary reasons why our overall economic recovery has been so sluggish. In order to see the robust economic recovery we all want, we need to deal effectively with the large volume of vacant and distressed properties throughout the country.
Our housing crisis has many dimensions and will require a full spectrum of policy actions to restore health to the housing market, our economy and, most importantly, to neighborhoods and communities across the country. The Federal Reserve System has been active in studying various aspects of the crisis, bringing together community leaders and market participants to share experiences in forums such as this, and using data to identify areas of particular need. I would like to focus on the problems posed by an elevated level of vacant properties.
Since the beginning of this year, there have been signs of improvement in aggregate housing market conditions nationally. Sales of new and existing homes have risen, and home prices have turned upward. So far this year, house prices have risen sufficiently to move a noticeable number of underwater households – that is, those who owe more on their mortgages than the market value of their homes – from negative equity to positive equity.
However, housing markets differ greatly both across regions and within metropolitan areas, and the positive signs in the aggregate data do not apply to all neighborhoods equally. For example, even within those metropolitan areas that have experienced rising average prices over the past year, one-fourth of ZIP codes saw a decrease in prices over the same period.
Moreover, those ZIP codes with falling prices have also experienced rising vacancy rates more often than in other ZIP codes. These struggling high-vacancy areas provide evidence of the hard work that remains even as housing markets show signs of improvement.
Although many of these areas share a high level of vacancy, they differ significantly in other characteristics: the concentration of vacancies, age of the housing stock, cause of the problem and even the demographics of the residents. By looking more closely at the differences, we will gain a better understanding of these markets and of the policies or program solutions that will address their vacancy issues most effectively.
One measure that is frequently cited when describing recent improvements in the national housing market is the inventory of vacant homes for sale. This measure had fallen to 1.6 million units in the second quarter of this year, substantially below its peak of about 2 million units in 2010 and the first half of 2011.
However, many vacant homes are not on the market at all. These vacant units include properties that are in the foreclosure process, bank-owned properties that are not yet for sale, as well as properties for which the cause of vacancy has no connection to the foreclosure process. Indeed, the stock of non-seasonal homes held off the market is nearly two-and-a-half times as large as the for-sale vacant stock.
But unlike the inventory of vacant homes for sale, this stock remains stubbornly elevated relative to pre-crisis numbers and has not gone down at all over the past year.
Moreover, vacant units are not evenly distributed throughout the U.S. Some neighborhoods suffer disproportionate numbers of them. Specifically, one-tenth of all census tracts account for nearly 40% of the entire vacant housing stock. By comparison, the overall housing market is only half as concentrated with only 20% of the aggregate housing stock found in the 10% of census tracts with the largest total number of housing units.
The new blight
Why focus on vacant homes? Vacant homes can be more than just an eyesore; they can have substantial negative impacts on the surrounding community – impacts that are felt most acutely by the neighbors and communities that must cope with the dangers and costs of vacant buildings. Since vacant properties tend to be concentrated in a relatively few number of neighborhoods, some communities are adversely affected much more than others.
Homes that have been vacant for a long time tend to fall into severe disrepair. Such physical blight can invite more property crime – as vacant houses are an appealing hideout and target for criminals – and the absence of residents can mean fewer eyes in the neighborhood to look out for suspicious activity.
In fact, counties that experience a large increase in the number of long-term vacant homes tend to see an increase in burglary in the following year. This correlation holds even after controlling for other county characteristics, such as changes in unemployment, changes in population and changes in violent crime.
In turn, blight and crime make these neighborhoods less attractive to potential buyers, renters, and businesses. Calculations by Federal Reserve staff indicate that ZIP codes with a larger increase in long-term vacancy experience smaller increases – or larger decreases – in house prices in the next year. Falling home prices can harm both neighboring homeowners and local municipalities that are dependent on property tax revenue.
Research conducted by the Federal Reserve Bank of Cleveland has shown that a home that is simply foreclosed, but not vacant, lowers neighboring property values by up to 3.9%. However, if a home is foreclosed, tax delinquent and vacant, it can lower neighboring property values by nearly two-and-a-half times that amount.
Moreover, properties that have been vacant for a substantial period of time can impose even larger costs on the community, and all too often, the private market is not likely to solve the problem on its own. In such cases, government authorities and public resources may be required.
Of course, not all vacant properties pose a problem for the local community, as some homes become briefly vacant during the usual process of changes in ownership. But the longer a home stands vacant, the greater likelihood that poor maintenance and the associated problems that result can become serious issues for the surrounding community. Statistics from the American Housing Survey show that properties that have been vacant for longer than two years are much more likely to have severe problems, such as cracked floors or walls, broken or boarded-up windows, and a roof or foundation in disrepair, that make these properties harder to rehabilitate and less appealing to prospective buyers.
Segmenting the inventory
Analysis by Federal Reserve Board staff has calculated the fraction of housing units in each census tract that has been vacant for at least two years – which I will refer to as “long-term” vacancy – and categorized tracts that appear in the top 10% of this distribution into three types.
The first category of high long-term vacancy census tract is an area where a large percentage of housing units were built post-2000 and, therefore, can be thought of as “housing boom” tracts. These locations also have a higher median income, higher median house value, and a larger fraction of residents with at least a college degree than other high long-term vacancy census tracts. Examples of metropolitan areas with a large number of tracts in this category are Denver; Orlando, Fla.; Las Vegas; and Phoenix.
The second category of high long-term vacancy census tract has a large share of older housing stock built before 1960, low median income, a high poverty rate, a high unemployment rate and a large share of residents with less than a high school degree. These tracts can be called “low demand” locations because these characteristics are frequently associated with areas suffering from persistent job loss and a decline in housing demand. Metropolitan areas with a large number of tracts in this category include Detroit; Cleveland; St. Louis; and Baltimore.
The third and final category of high long-term vacancy census tract has a low density of housing units per square mile, high shares of owner-occupied and single-family housing units, and a high fraction of white non-Hispanic residents. We can think of these neighborhoods as “traditional suburban” areas. Examples of metropolitan areas with a large number of tracts in this category are Charleston, W.Va.; Des Moines, Iowa; Peoria, Ill.; and Oklahoma City – locations not often mentioned in national media coverage about the housing crisis.
As I mentioned earlier, we should endeavor to achieve full recovery in all of the many diverse housing markets around the country. The private market will likely drive recovery in many locations and, in those locations, the appropriate role of government may be to monitor local activity and ensure that the actions of the private markets improve neighborhoods and provide opportunity for all families, regardless of income, race, ethnicity or housing tenure.
However, some neighborhoods likely will not recover without the assistance of government, and in this time of scarce resources, it is critical that the public sector has the information and tools necessary to ensure that any assistance that is provided is effective and efficient. Doubtless there will be costs associated with solving these problems, but it is important to also consider the costs of doing nothing.
For example, it costs local taxpayers to let vacant buildings decline, it costs money to tear them down and it costs money to convert them to a better use. Ultimately, a policy of neglect will be just as – or even more – costly than finding and implementing constructive solutions to the vacancy issue.
We must ask ourselves, can we create policies that fairly distribute those costs? What are the limitations? What innovations can create more effective, scalable solutions? With funding scarce, how can we identify solutions that will ultimately be most cost-effective?