1. Rental Housing Markets, the Incidence and Duration of Vacancy, and the Natural Vacancy Rate Written by Stuart A. Gabriel Frank E. Nothaft Presented By James Czarski

2. New Data Bureau of Labor Statistics –Consumer price index (CPI) Rent price & change –Every six months Information is collected on length of occupancy –Allows us to get spells of vacancy With housing stock gives us incidence –With Incidence We can get Average duration

3. Vacancy Vacancy = Incidence * Duration –Unoccupied unit available for sale or rent Starts when occupant moves out or unit enters the market Ends when unit gets rented or it is removed from the market Equilibrium vacancy rate –AKA Natural vacancy rate –Neither excess demand nor excess supply –Constant level of real rent Real rent increases = 0

4. Observed vacancy rate Larger proportion with shorter Duration ? Smaller proportion with longer Duration ? Decomposition –Incidence The probability that a unit will become vacant Useful in indicating variation over time & space –Duration The length of time a unit remains vacant Provides insight into systematic variation in length of time –Yield new info Allows for a more complete explanation of variation Source of fluctuations Risk Separate contribution to the price adjustment mechanism

5. Persistence Some units are more susceptible to vacancy –Local economic condition & demographic characteristics –Characteristics of the apartments themselves Complete persistence –The same group of units vacant again & again Greater persistence –Greater portion of units continuously occupied Incidence = Turnover –Duration ↑ Turnover ↓ Persistence ↑ Persistence ↓ as observation period lengthens Units with higher duration & persistence –Are withdrawn from the rental stock

6. Decomposition of vacancy M i = Number of months apartment i is vacant V i = Number of spells of vacancy H = the rental housing stock Market vacancy Rate = Σ i M i / H Incidence = Σ i V i / H Average Duration = Σ i M i / Σ i V i Vacancy rate = Incidence * Average Duration –Σ i M i / H = Σ i V i / H * Σ i M i / Σ i V i

7. Incidence –Determinants Population Mobility Population growth Demographics Public housing availability –Below market rents are a disincentive to relocate Metropolitan poverty status Duration –Higher duration reflects mismatch between the characteristics or location of the unit and the demands of potential tenants –Determinants MSA housing cost Higher median housing costs –Higher potential gains from longer search –Greater opportunity cost to landlords (more significant) Housing heterogeneity –Larger variety Tenant search costs

8. Deviation of observed vacancy from equilibrium Cause prices to adjust Lower vacancy –Lower incidence and/or Shorter duration –Elevated returns –Reduced risk Higher vacancy –Greater incidence and/or Longer duration –Lower returns –Increased risk

9. Deviation from Equilibrium Excess demand –Pushes observed incidence and/or duration below long-run equilibrium –Rents rise Prompts additions to rental housing stock Excess supply –Rent fall Decreases rate of new construction Unanticipated population growth –Lower vacancy rates Expected population growth –Higher vacancy incidence from increased new construction Local business cycle affects incidents and duration of vacancy

10. Intercity Model of Incidence I n i = Equilibrium incidence in metro area I I i = Observed incidence in metro area I X i = City-specific factors which cause I i to deviate from long-run equilibrium I i = b o + b 1 I n i + Σ b J X Ji + e i

11. Intercity Model of Duration D n i = Equilibrium duration in metro area I D i = Observed duration in metro area I X i = City-specific factors which cause D i to deviate from long-run equilibrium D i = a o + a 1 D n i + Σ a J X Ji + e i

12. Rental-price adjustment V n = Natural vacancy rate V t = Natural vacancy rate at time t R = Rent ∆R t = g(V n – V t ) More general expression Given V = I * D ∆R t = h(I n – I t ) + k(D n – D t )