7/28/2010
By David Urani, Research Analyst

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The past few months have definitely been dismal for housing, as the withdrawal of the nationwide homebuyers' tax credit caused a massive plunge in housing demand to new record low levels for new home sales. Not to mention the near-record high levels of foreclosures that continue to plague the market month after month. That being said, even though the recession has hurt everyone's wallet, the U.S. population is still on the rise just as it always has been. There's still a need for shelter, and with housing in the gutter at the moment, it seems as though apartment rentals could be taking the baton, at least for the time being. Reports from apartment research firms MPF and the National Multi Housing Council (NMHC), as well as from various apartment owners, all suggest an awakening in the apartment market.

The NMHC's quarterly survey on apartment activity shows a surge in tightness (a combination of rent raising and low vacancy rates) ever since bottoming out in the fourth quarter of 2008 during the economic collapse. In the second quarter, tightness leapt as the market has apparently become more and more attractive. With housing still in the dumps and the much sought-after economic recovery now very iffy, there seems to be a demand for individuals to find a place to live, but cautiously. That's especially true for the homeowners that have been expelled from their homes through foreclosure. Those individuals are likely to search for a less expensive alternative, and if they are not willing to move in with family an affordable apartment is a good choice. Also consider a young couple with new jobs that are looking for place to live. In the current market, it seems quite apparent that prices for homes are falling, or at the very least in great danger of falling. Therefore, many people are going to feel uncertain about buying a home if they think the prices are just going to go down soon after and put their mortgages underwater.

That tightening in the apartment market runs opposite to the past couple months in the housing market, which has fallen off a cliff since the expiration of the nationwide tax credit for homebuyers at the end of April. Now that the $8,000 incentive is gone for buying homes, apartments may be gaining favor. It's not an unheard of phenomenon either; in the late 70's and early 80's during the banking crisis, the economy fell into recession, but by historical standards rental vacancy rates held at low levels. This time around, the picture looks a bit different which could be a factor of more apartment construction during the housing boom adding vacancies, as well as the particularly sharp decline in economic activity during this recession that purged existing renters from their apartments as they lost their jobs. Note also that various conflicting reports have found a significant decrease in vacancy rates (for historical comparison, we used Census Bureau data).

Even though the housing market seems to have died down again, the fact that we are in a transition period in the economic recovery, with cautious hiring and with  a chance of double-dip, means we could be entering a butter zone for renting. In fact, major apartment developers such as AvalonBay Communities (AVB) and Equity Residential (EQR) are reporting rising rates, even as home prices have remain subdued (source: Bloomberg). In fact, those companies reported their first rise in revenue in the first quarter since the recession began, and their sales are expected to continue to rise in the second quarter.

Living cautiously is a prudent step in the current economy, and perhaps that attitude will become ground into America's psyche after we overextended ourselves into expensive homes. The "stigma" of living in an apartment rather than owning your own home has surely been diminished over the past couple of years. Heck, take a look at New York City where rents for one room studios rival mortgage payments for a decent sized home anywhere else; apartment living has always been the norm there. It's no secret urbanization is the trend in our country so it's possible the big housing bust is even a kick-start for compact European-style living.

David Urani
Wall Street Strategies