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The next wave of the US Housing Market Crash - Apartment REITs

Housing-Market / US Housing Mar 09, 2007 - 09:24 AM GMT

By: Money_and_Markets

Housing-Market

I told you about the housing sales and pricing declines before they happened …

I told you that the subprime mortgage industry would end in disaster before the stocks blew up …

And today, I want to tell you about the next major group of companies that I think are going to get hit from the housing bust. I'm talking about apartment Real Estate Invest Trusts (REITs).


The Rental Market Has an Achilles Heel: Too Much Inventory

I first mentioned these companies this past November in “ Apartment REITs Ready for a Fall? ” I told you then how investors were flocking to REITs, especially companies that own and manage apartment complexes.

As I explained, their basic investment thesis was:

  1. Housing is unaffordable, and both sales and prices are falling.
  2. Since people have to live somewhere, they'll end up renting.
  3. That will push demand up, supply down, and rental rates through the roof.

I was skeptical. I said if you'd already made big money in the run up, it was a good time to bag your gains.

Today, I'm more convinced than ever that apartment REITs are primed to fall, maybe sharply. Why?

You see, the bulls argue that traditional apartment construction has been weak. And to a certain extent, they're right — companies haven't been building all that many 200-unit or 300-unit rental complexes.

But here's the problem with that argument: Too many homes, townhomes, and condominiums WERE built — and sold to buyers as investments. In other words, they were sold to people who were going to turn around and rent them out anyway!

And even more homes were bought as “flips” — houses that would be quickly fixed up and resold. Heck, some buyers never even thought they'd have to go through the fix-up stage … they figured they'd be able to sell for higher prices with no additional work whatsoever.

Unfortunately, the housing market plunge has turned many of these flippers into unintentional landlords. They can't sell, and they can't afford to pay mortgages, insurance, and taxes while their houses sit there empty, either. So they're trying to rent their properties to staunch the cash flow bleeding.

In other words, while the construction of traditional apartment complexes may have lagged during the boom, plenty of town homes, condos, and single-family homes were churned out along the way. The result: Hundreds of thousands of those units are now sitting empty!

The U.S. Census Bureau says 2.7% of the country's homes were vacant in the fourth quarter of 2006 — the highest percentage in U.S. history!

It's Not a Tight Market Anymore … So Watch Where You Invest

All those excess, empty homes have created a gigantic glut of “shadow” supply in the rental market. And that's causing apartment fundamentals to deteriorate. The evidence is everywhere:

  • The National Association of Home Builders (NAHB) publishes an index tracking apartment availability — the higher the number, the “looser” the rental market is. That indicator jumped to 54.8 in the fourth quarter of 2006 from 38.9 a quarter earlier. That's the weakest showing for this measure in two years.
  • About 9.5% of the apartments covered by the NAHB survey were sitting vacant as of the fourth quarter of 2006. That's up from 6.3% a year earlier.
  • A separate survey from the National Multi Housing Council confirms the deteriorating outlook. The group's quarterly “market tightness” index slumped to 54 in January 2007 from 70 in October 2006. That's the lowest reading in three years.

In other words, it's getting easier to find an apartment these days, which means landlords are being forced to offer more concessions or reduce base rents to attract tenants. The major apartment REITs will likely see their earnings suffer.

Most of the stocks in this sector, like AvalonBay Communities, kept rising after my initial piece. But they peaked in early February and have since given back essentially all of those gains. The next big leg down could be fast approaching.

Bottom line: I don't think this rental market storm is over, so if you've got a stake in this segment of the housing market, I urge you to act accordingly.

Until next time,

By Mike Larson

This investment news is brought to you by Money and Markets. Money and Markets is a free daily investment newsletter from Martin D. Weiss and Weiss Research analysts offering the latest investing news and financial insights for the stock market, including tips and advice on investing in gold, energy and oil. Dr. Weiss is a leader in the fields of investing, interest rates, financial safety and economic forecasting. To view archives or subscribe, visit http://www.MoneyandMarkets.com


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