For Apartment Investors, Risks in Unabated Enthusiasm

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.