Builder confidence in the rental apartment market sagged in the fourth quarter of 2007, according to the latest results of the Multifamily Rental Market Index (MRMI) released by the National Association of Home Builders (NAHB).

"The housing market is undergoing a significant correction and that is affecting all segments of the industry, both multifamily and single family, for rent and for sale," said NAHB Chief Economist David Seiders. "The excess inventory has to be absorbed in order to restore balance to the housing markets."

The MRMI is derived from a quarterly survey of multifamily builders and developers, in which their responses are rated on a scale of 0 to 100, with a rating of 50 generally indicating that the number of positive responses is about the same as the number of negative responses. For the fourth quarter of 2007, the measures that track builder confidence in the current supply and demand conditions for all classes of multifamily housing -- except the most affordable apartments -- fell to at or below 50.

"While some markets that are most definitely suffering from the national economic woes, there are areas in this country where multifamily properties are performing rather well for investors and those same markets could most likely withstand and absorb new supply," explained Michael Anderson, CCIM, Principal Broker and Co-Owner of RealSource. "Builders who are located in declining markets may want to consider a new business plan that affords them the opportunity to look to new markets outside their current geographic area."

The component of the MRMI that gauge demand were lower for both Class A and Class B market-rate apartments in the fourth quarter and essentially flat for the Class C (affordable) apartments. The component of the index tracking demand for Class A fell 15.8 points, from 59.2 in the fourth quarter of 2006 to 43.4 in the fourth quarter of 2007. The index for Class B slipped 6.4 points, from 55.1 to 48.7 during the same time period. The component tracking demand for affordable Class C apartments stood at 58.3 for the fourth quarter of 2007, compared with 58.6 at the same time a year ago.

"There is no better time to invest in multifamily housing. Builders who understand this and can find the right place at the right time to develop new multifamily and apartment buildings will enhance profitability," added Anderson. "The majority of our credit issues today continue to be at the residential housing level. For owners caught in the subprime loan crisis or rising defaults and foreclosures, those people will be forced to progress back into rentals."

Although not as optimistic as last year at this time, builders do expect conditions in the apartment market to improve. For the fourth quarter of 2007, the components of the index gauging expectations for demand over the next six months stayed at 50 or above: Class A stood at 50.0; Class B at 53.9; and Class C at 61.1.

"This is clearly a housing affordability issue," added Anderson. "Economic backward migration is likely during these economically challenging times. In the housing markets today, it's not 'what you want to buy but what you can afford' that is driving the market."

Anderson continued, "As Dylan once sang, 'The times they are a changing,' and that's good news for builders and real estate investors. If the Fed government continues to help rebuild the economy with sound real estate economic stimuli, we may see signs of an economic recovery as early as the third or fourth quarter of 2008."

A new study published by SMR Research Corp. appears to support Anderson's beliefs. The study reported that the 'housing bubble' is now fully deflated, setting the stage for a mild housing recovery, which SMR said would begin prior to year end 2008. "The recovery is likely to be gradual, with house prices merely firming up or increasing slightly, rather than returning to the strong growth they showed from 2002 to mid-2006," the firm said.

"Our prior forecasts were accurate but widely disbelieved when issued," noted SMR President Stuart A. Feldstein, referring to a 2004 SMR study that forecast that a 'perfect storm' in credit quality would cause an explosion in foreclosures within two years. "We similarly expect a skeptical reaction now to a recovery forecast, which is not the common view. But the numbers are what they are."

A special section in the study used home price and consumer income data from several sources to show how the bubble grew from 2002 to 2006. The same data now show the bubble has evaporated at current mortgage interest rates after 18 months of rising incomes and falling home values.

[Note: NAHB created the MMI, a quarterly nationwide survey of multifamily builders and property owners who are asked a series of questions about current market conditions as well as their expectations for the next six months, tracking builder confidence in both the for-sale condo market and the rental apartment market. Founded in 1984, SMR Research Corp. is a provider of industry research studies on mortgage and home equity loan subjects. More details about the new study's content can be found at www.SMRresearch.com.]

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