Five years into the housing downturn, the latest data show little sign that a rebound in housing prices or volume is in the offing. The S&P/Case-Shiller index, amongst the most widely cited measures of home values, fell to an eight-year low in the just-released report of March 2011 activity. Distress continues to play a significant role in exerting downward pressure on prices; a larger overhang of foreclosures relative to demand for owned housing suggests that the index will trend even lower. Anticipating higher residential mortgage rates over the next year, significantly stronger job growth is a necessary but unlikely condition for housing market stability.

Apart from its drag on the broader economy, housing’s woes have clearly shaped the recovery in the apartment sector. Setting aside more stringent underwriting and the failure of many of the recession’s housing policy interventions, the prevailing perception of homeownership as a risky investment is amongst the key drivers of current apartment market trends. Why buy an asset when you expect prices to decline in the short-term? In 2010, ownership was down from its peak by over 500,000 households. Meanwhile, renters increased their ranks by almost 4 million households between 2005 and 2010.

With so many new renters, a relatively slow expansion of the rental inventory, and varying rates of substitution between the rental stock and various subsets of the shadow inventory, it is hardly surprising that the apartment sector was the first to record an inflexion in fundamentals. At a national level, apartment occupancy reached its nadir in 2009. Momentum has been building in the ensuing period. Just before the Memorial Day long weekend, Axiometrics reported that the national occupancy rate increased to 93.8 percent in April; effective rents were roughly 5 percent higher than a year earlier.

The shift in tenure bias away from ownership and towards renting, the improving apartment fundamentals that have followed on stronger demand, and competitive credit conditions have converged to support investment in the sector. In coastal markets, in particular, recent high-rise property sales suggest that the top-end of the market is priced to perfection. Emboldened by rising asset values and expectations of continued improvements in cash flow, lenders are now financing an uptick in construction activity. In some cases, underwriting assumptions belie any potential for the pendulum to swing back, even in part, to ownership.

While a degree of enthusiasm is certainly warranted amongst apartment market participants, investors and lenders should be careful not to ignore the medium- and long-term risks embedded in the sector’s current trajectory. After all, our industry’s own history is replete with evidence that unabated enthusiasm can ultimately prove destructive. Looking to the future, housing finance reform will keep more Americans in the rental pool, even if homeownership remains a central feature of the American Dream. But a diminished role for the government-sponsored enterprises in subsidizing mainstream multifamily credit is almost certainly a part of that bargain. For many of today’s buyers, the landscape of apartment finance could change dramatically before they refashion themselves as sellers.