From a small northwestern observatory…

Regular readers will recall that we’ve linked continuous decline in home ownership rates to price instability. In short, prices won’t start rising again until home ownership rates stabilize. (They’re down from about a recent peak of 69.5% to about 66%, and we believe they will continue to fall to about 64%). One MORE piece of important data just hit our desks, in the form of the Census Bureau’s 1st quarter home ownership survey.

The report is full of useful data. For one, the number of owner-occupied units in the U.S. actually fell from 1st quarter 2010 to 1st quarter 2011 (as we would expect), while rental occupancies continue to increase. Rental market supply (in essence, construction of new apartments) is keeping pace with demand, and rental vacancy is just below 10%, slightly lower than the 10% -11% range we’ve seen in the past few years, but not so low as to put inflationary pressure on rental rates. (Of course, this varies from one part of the country to another.)

Among “owner-occupied” homes, though, the vacancy rate continues to rise. See the chart below for a vivid explanation —

If this was a classroom exercise, I’d ask the students to identify the pre-recession equilibrium level, which appears to be about 1.6% to 1.8%. We can then identify the point-of-inflection signalling the impending disequilibrium in the housing market (when vacancy rates increased significantly — 2005). This inflection point, of course, signaled a great time to start shorting mortgage-backed securities, since it signaled the beginning of an increase in default rates. Of course, once can point at this and say “hindsight is 20-20”, but we know that the folks inside many of the banks, who were hawking mortgage-backed securities to their customers, were reading those very tea leaves back mid-decade, and shorting the very same securities they were promoting as safe investments.