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Investing in Apartments: 3 Reasons Why Now Is a Great Time

Everywhere one looks today there are growing signs that investing in apartments is a smart idea now and will be for the next several years.

The part of the American Dream that includes a white picket fence and your very own home is fading for many. In the second quarter of 2010, only 66.7% of households owned their own home. That’s the lowest number recorded since the last quarter of 1999. Many of those former homeowners are now renting their homes, and some have gone back to apartments.

In fact, when a Trulia survey recently asked, “Is home ownership a part of your American Dream?”, only 72% responded, “Yes”, compared to 77% just six months earlier.

In a May 2010 survey of over  2,000 U.S. adults, the National Apartment Association found that 76% of the respondents now believe that renting is a better option than owning. This is up from 71% in 2008. Half of the people cited financial reasons, while a full 64% enjoy having no maintenance responsibilities.

In addition to the positive signs from these surveys of American’s attitudes, current apartment owners are reporting improving conditions. The National Multi Housing Council performs a quarterly Survey of Apartment Market Conditions. One section measures “market tightness.” A Market Tightness Index reading above 50 indicates that, on balance, apartment markets around the country are getting tighter; a reading below 50 indicates that market conditions are getting looser; and a reading of 50 indicates that market conditions are unchanged. The July 2010 index stood at 83, up from 38 in January and 11 recorded in January 2009. This is a clear trend showing fewer vacancies in existing apartments.

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Greg Willett, VP of MPF Research claims that, “Demand is stunningly high in the first half of 2010.” The number of occupied units increased by 215,000 in the 64 largest U.S. markets through June. That’s almost twice as many as in all of 2009. The overall vacancy rate in the same markets declined to 6.6% from 8.2% in December. Closer to home, the Colorado Springs vacancy rate dropped to 5.8% in the second quarter, the lowest rate recorded since the 5.4% reported for the third quarter of 2001.

The third main reason smart money is moving into apartment investing is the tsunami of new renters coming of age in the next few years. These “echo boomers”, children of the original baby boomers, are now in their 20s and 30s, typically prime renting years.

The Baron’s cover story of July 26, 2010, entitled Renter Nation, claims that, “Roughly 10 million extra folks could be moving into rentals in the next five years.” In addition, the National Association of Home Builders chief economist believes the 83 million echo boomers entering the market over the next decade is a positive demographic trend for the apartment market.

Since improving apartment market conditions usually follow job growth, experts are speculating as to why this improvement is happening without it. Maybe the economy has stabilized to the point that young workers have enough confidence in their current job to move out of home or split up from their roommate, but not enough to put a down payment on a home (if that’s even a goal).

So, because of changing American attitudes about home ownership, decreasing vacancy rates, and the demographic bubble approaching, it’s looking like a great time to be investing in apartments.

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Demand for Apartments Growing in U.S.

In spite of relatively low housing prices and near-record low mortgage rates, many people in the United States still can’t afford to buy a new home. According to the Center for Housing Policy, the income needed to buy a median-priced home dropped in 93% of the 200 housing markets they studied. Unfortunately for the would-be homebuyers, that still was too high a barrier for them.

The Center further reports that in response to these conditions, more people are choosing to rent homes. However, in 89% of those same markets, the demand has driven up the home-rental costs. The greatest contrast was found in Florida, where in 12 markets the income needed to buy a median-priced home dropped 20% at the same time the average rent for a two-bedroom home rose by 6%.

With foreclosures still near record levels and even rental homes becoming unaffordable, many people are turning to multifamily homes. This is causing some housing experts to warn Congress that help may be needed to insure funding is available to create additional units. Recently, Bob DeWitt, CEO of GID Investment Advisers, testified to Congress on behalf of the National Multi Housing Council (NMHC), that government support is needed for the apartment industry. He warned lawmakers not to create a capital shortage for the lower-income sector as they consider ways to reduce taxpayer exposure to the secondary market.

He noted that housing expert Professor Arthur Nelson of the University of Utah projects that “half of all housing built over the next 10 years will need to be rental housing to meet the dramatically changing landscape of demand.”

This is further evidence that now is a good time for multifamily developers to start doing their due diligence on location and funding.

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