Rental vacancy rates: A policy primer

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Abstract
This article examines how policy makers use rental vacancy rates as indicators of housing market condition. The common practice of assuming that any rental market is in equilibrium when its rental vacancy rate is approximately 5 percent is criticized. Based on theoretical and empirical literature, the case is made that the rental vacancy rate that prevails when the supply and demand for rental units are in balance varies among areas and types of units and is not always 5 percent. The Department of Housing and Urban Development is faulted for not recognizing these variations and, therefore, misusing rental vacancy rates in its formula allocations for the Section 8 and HOME programs. Observed vacancy rates offer meaningful insight into rental market conditions only when they are compared with empirically derived estimates of equilibrium vacancy rates. The methods for estimating these rates, however, are still being refined, and the data needed to derive such estimates are available only for a limited set of metropolitan areas. Other measures are available that policy makers could use to judge the adequacy of low‐income housing supply in local markets, but they are also somewhat problematic.