The National Multi Housing Council, a trade group for apartment owners, has released its quarterly index, and it shows that vacancies are up. This means that rents are likely to continue to be under pressure.

The data is presented in the table below (from The key index with respect to the future course of rents is the market tightness index, which rose to 20 in the most recent quarter (their quarters are not aligned with calendar quarters, but the data shown covers May, June and July, and I will refer to it as the second-quarter data) from 16 in the first quarter and just 11 in the fourth quarter. This is one of those indexes like the ISM where any reading below 50 indicates weakness and anything above 50 represents strength.

The other three indexes relate to the ability to buy or sell apartment buildings and get the related financing. They too have shown remarkable improvement since hitting extremely low levels in the third quarter of last year, yet remain well below the 50 break-even point. Unfortunately, this is a relatively short data series, going back only to 1999, and thus we have only one prior recession to look at versus the current conditions.

In the last recession, the market tightness index fell even lower than this time, but it did not stay down for long. The other three indexes stayed well above the levels they hit this time around. It is very apparent that all of these series are very volatile, particularly with respect to the ability to get financing to invest in apartments.

The weakness in the market tightness index is particularly bad news for the Apartment oriented REITs like Apartment Investors (AIV), Avalon Bay (AVB) and Equity Residential (EQR). If an apartment is vacant, it means the owner is not collecting the rent, and if lots of apartments are available it means that when leases come up, they will not be able to increase rents and may have to cut them (often in a disguised way, by including a month’s free rent, for example).

More significantly for the national economy is that apartments compete with owner occupied housing. Indeed, the key measure of housing inflation for owner-occupied housing is not the price of a house, but the implied value of not having to pay rent, known as owners-equivalent rent.

One of the most important indicators warning that we were in a housing bubble during the middle part of this decade was the disconnect between the price of houses and the level of rents. Over the long course of history there has been a very stable relationship between them. After all, a house is an asset, and the value of an asset is the present value of the future cash flows it generates. In the case of a house, those cash flows are avoided rents.

Thus, if rents are falling, it means that housing prices are shooting at a moving target as they try to get back to normal levels. The more and longer housing prices fall, the greater the destruction of wealth for the vast majority of people in the country. It means more houses underwater, and more foreclosures and walkways. It means still more problems for the banks.

On the other hand, falling rents are great news for tenants. On average, renters are far less wealthy and have much lower incomes than are home owners. This might actually be a rare case where a bad economic trend actually helps the people at the bottom of society.

Renters are more likely to spend the extra income from lower rent than save it (simply because they tend to be lower income) thus helping to stimulate other areas of the economy.Stores catering to lower income people, like Family Dollar (FDO) and Wal-Mart (WMT), are probably the most likely beneficiaries of this.

Zacks Investment Research