“WASHINGTON (MarketWatch) — The number of vacant homes waiting to be sold surged 34% to 2.1 million at the end of 2006 compared with the end of 2005, by far the fastest increase ever recorded, the Census Bureau reported Monday.

A year ago, 1.57 million homes were vacant and awaiting a sale.

The vacancy rate for owned units jumped to a record 2.7% from 2.0% a year earlier. From 1965 to 2005, the homeowner vacancy rate had never been above 2%. The long-term average is 1.4%.

`We have more than a million housing units of excess supply,’ said James O’Sullivan, an economist for UBS. `If you are looking for evidence that the worst is over for housing, you’re not going to find it in this report. This argues that housing starts need to go down more.’

In the past 12 months, housing starts have slumped 18% to a seasonally adjusted annual rate of 1.64 million.

In 2006, the number of housing units in the United States rose by 2.14 million, or 1.7%, to 126.7 million. The number of units occupied, however, rose by less than half as much — 1.04 million.

Meanwhile, the homeownership rate (the percentage of homes occupied by their owners) was essentially steady at 68.9%, the government said, close to the all-time high of 69.3%.”

So the absorption rate was 1.04 million, and that was the result of scraping the subprime bottom of the financial barrel. The build rate is 1.64 million and the inventory is a million units above average. Just to achieve stable inventory, housing starts probably need to fall by half. To work off the inventory (which is still increasing), they need to fall by two-thirds for three or four years. And that’s the bullish case, where there is no real wipeout in housing, just a slowdown in absorption to maybe 500K units per year.
If you can read that without saying “Gulp!” then you’re more phlegmatic than me. But the bearish case is that there is so much fraud and over-commitment out there that absorption goes to zero or negative - remember a lot of these units are being counted as “second homes” and so forth, or the borrower has simply lied about them being owner-occupied to get a better rate.