Interest Rate Roundup

Tuesday, March 06, 2007

Apartment market conditions deteriorating

One point I've been making for a while is that apartment investments aren't a perfect "housing hedge." That includes apartment REITs. These shares took off after housing boom went bust on a very simple thesis: 1) Everyone needs a place to live and 2) If they can't afford a house, they'll rent.

To some extend, that's true. But it ignores a simple fact: A huge chunk of the homes bought during the boom were snapped up as investments -- meaning they were bought by people who intended to rent them out. Still more homes that were initially bought as flips have ended up as "unintentional rentals." The speculators who bought them can't sell, so they're renting to staunch the cash flow bleed.

Put another way: Lots of condos, town homes, and single-family homes were built to meet speculative demand, and now those units are being dumped on the rental market. That, in turn, is causing apartment market conditions to deteriorate.

You can see the evidence in a just-released multifamily report from the National Association of Home Builders (available on this page) ...

* The group's index that measures apartments available for rent jumped to 54.8 in Q4 2006 from 38.9 in Q3 2006. The higher the number, the "looser" the rental market is. According to this indicator, rental conditions haven't been this loose in two years.

* A subindex measuring asking rents dropped to a seven-quarter low of 62.2, while a subindex measuring effective rents (net of concessions) has slumped to a five-quarter low. A lower reading means more survey respondents said rents were lower in the current quarter than in the previous quarter.

* Apartments aren't being filled as quickly, either. The percent of new apartments rented within 90 days dropped to 42.6 in Q4 2006. That's the worst reading going back to at least Q4 2002 (the earliest I have data for).

* Lastly, 9.5% of the apartments were sitting vacant as of Q4 2006, according to the NAHB. That's up from 6.3% a year earlier and the worst going back to at least the end of 2002.

These findings come on the heels of a separate survey from the National Multi Housing Council. The group's quarterly "market tightness" index slumped to 54 in January 2007 from 70 in October 2006. That's the lowest reading in 12 quarters, or three years. The percentage of respondents who said conditions were looser than three months ago jumped to 21%f rom 14% in the October survey and just 4% in the January 2006 poll.


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