Economists Fear Weak Demand
For Homeownership Will Fester

The percentage of U.S. homes that are vacant and for sale remained at elevated levels during the third quarter, and the percentage of people who own their homes continued to decline, according to a Census Department report. These are the starkest signs yet of the severity of the damage in the housing market caused by speculation, overbuilding and rising foreclosures.

The homeowner-vacancy rate, which measures the number of vacant homes for sale, rose to 2.7% -- which translates into about 2.1 million houses -- in the third quarter from 2.6% in the previous quarter. Such vacancies hit a high of 2.8% in the first quarter. Before 2006, the number hadn't risen above 2% since the government began keeping such records in 1965.

Until the beginning of the year, economists paid little attention to the homeowner vacancy rate. Since January, as the number has risen to record levels, economists have started to track the number, in part because they believe it is a better indication of excess housing supply when compared with more traditional measures, including calculations listing homes for sale by real-estate agents.

Economists say the rising supply of vacant homes means construction activity will likely have to fall further, while buyers slowly absorb these vacant homes, creating an even greater drag on prices and on economic growth. Housing starts fell 10% in September from August. In previous housing downturns of the early 1980s and early 1990s, annual starts fell below one million; in September, annual housing starts were at 1.19 million. But further declines are likely, say economists, if the vacant inventory continues to rise.

Fueling this overbuilding was a record number of speculators who bought multiples homes, hoping to resell them quickly for a profit. Many home builders said they didn't sell to investors, but the excess inventory indicates that speculators made up a larger part of the market than previously thought.

Meanwhile, the percentage of homes that are owner occupied -- the homeownership rate -- dropped to the lowest point since the second quarter of 2003, according to the Census report, as the gains in homeownership achieved during the housing boom continued to erode. The homeownership rate fell to a seasonally adjusted 68.1% in the third quarter, down from 68.3% in the second quarter. The rate peaked at 69.3% in 2004.

The latest decline in the homeownership rates indicates that this year, as many as 900,000 households moved from owning homes to renting them, says Jan Hatzius, an economist at Goldman Sachs. "It's a very big deal," Mr. Hatzius says. "It implies a very low level of housing demand over the next several years."

Email your comments to rjeditor@dowjones.com.