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updated 1/27/2004 2:51:12 PM ET 2004-01-27T19:51:12

For any former apartment dweller who ever shivered through cold showers or was cheated out of security deposits or found any other reason to scream, "My landlord is an idiot," the last two years have been a magical time.

Thanks largely to the interest rate cuts that Alan Greenspan put into place after the 9/11 attacks, ex-renters have since watched house prices rise rapidly, growing an average 20 percent nationwide, according to the latest figures from Cambridge, Mass., residential real estate analysis firm Fiserve CSW. Meanwhile apartment-property stock prices have risen just 2 percent. Total returns have been higher if you include dividends. But those look increasingly weak, because earnings have been in a slide and aren't coming back up.

AvalonBay Communities, an Alexandria, Va., a company that specializes in luxury apartments for well-off types who can easily afford homes, reported last week that its funds from operations fell to $3.27 per share in 2003, down 19 percent from the $4.06 per share in FFO it reported in 2001. It's hoping for FFO per share of $3.13 to $3.31 for 2004.

The picture may only get worse, too. Federal Housing Commissioner John Weicher said last week that he would ask Congress to consider creating a new mortgage program that wouldn't require home buyers to come up with any down payment at all. "Election year home owner pork = bad news for apartments," wrote Bank of America real estate analyst Lee Schalop in a report cautioning investors that the proposal is yet another reason to avoid apartment REIT stocks. A zero down payment program, he explained, is one more direct shot at a core customer base for apartment owners: would-be, first-time home buyers renting while they accumulate the funds for down payments.

Other wounds that apartment landlords are suffering have been self-inflicted. The industry is going on a development binge. Lehman Brothers analyst David Shulman reported Jan. 21 that the latest U.S. Department of Commerce figures show that in December, multifamily housing starts were up 15.7 percent from the previous month, to 397,000 units.

"Multifamily starts of approximately 400K units are twice what we would be comfortable with," said Shulman. He added that apartment stocks, despite paying an average 6 percent dividend yield, "look expensive" and reiterated his negative outlook on apartment REIT stocks.

Who's going to live in all the new apartments? Maybe nobody. Bank of America's Schalop examined the recent rise in home ownership rates, up to 68.4 percent from a 1998 level of 67 percent, and looked at a new government-supported $6 billion Bank of America lending program for lower-income home buyers and concluded there's a "secular shift" among renters in the U.S.

"Low- and moderate-income families are the bread-and-butter customer of the rental market," he explains. Schalop is convinced that the National Association of Homebuilders' estimate that 64,000 households will exit the apartment-rental market annually going forward is realistic. If the zero down payment program goes through, the number could go higher.

Today, Fannie Mae will announce plans to expand its support of a ten-year, $2 trillion, first-time home buyer lending program called American Dream Commitment. The expansion of the program, which Fannie Mae Chairman Franklin Raines and members of Congress will discuss at a midday news conference in Washington, D.C., might as well be renamed the "Landlord Nightmare Continues" program.

As it is, some landlords aren't generating enough cash to comfortably make their dividend payments to shareholders. Independent real estate securities research firm Green Street Advisors, of Newport Beach, Calif., reports that of the 14 apartment REITs it covers, seven have been paying out dividends higher than their "adjusted funds from operations," which is funds from operations minus reserves for all-important maintenance costs and other adjustments. These include companies like Apartment Investment and Management, Amli Residential Properties, Archstone-Smith Properties and Town & Country Trust.

It's not unheard-of for a REIT to maintain a too-high dividend payment for a year or two during lean times. But if it keeps up, along with the unbridled development and the flight of the apartment industry's traditional customer base, some of these landlords and their shareholders may find themselves out on the street corner with no place to go.

Still, when a market is propped up so heavily by easy credit, as the housing market is, it's reasonable to assume it won't continue. If you subscribe to Sir John Templeton's "maximum pessimism" theory of investment, you might consider remaining wary of the housing market and keep an eye on apartment REIT stocks. An improving economy and the coming flood of government debt issues could lead to higher interest rates and cool the housing market.

Most analysts are projecting a recovery for apartment-REIT earnings in 2005. Green Street Advisors has been recommending its clients considering buying Apartment Investment & Management, Avalon Bay, Archstone-Smith and Post Properties.

© 2012 Forbes.com

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