While apartment owners are experiencing rising demand amid falling home ownership rates, they also face more competition as houses and condos go on sale at below-cost prices and other dwellings get moved to the rental market. Therefore, it's important to study the oversupply of housing.

There were 6.2 million units of vacant housing as of the second quarter of 2008, according to the U.S. Census Bureau. Of that total, 2.2 million units were for sale and 4 million units were for rent. Not all of these vacant units are excess inventory. It's necessary to have some vacant units for markets to function smoothly.

The rate of for-sale housing, called the homeowner vacancy rate, has averaged 1.5% since 1965. There were an estimated 825,000 excess vacant single-family homes and 125,000 excess vacant condos in the U.S. in mid-2008. To assess the significance of these figures, compare them with the level of new production.

For the 1990s, new single-family starts intended for sale averaged about 725,000 per year. That means the current excess inventory of 825,000 vacant single-family homes is actually greater than an average year of production in the 1990s. Looked at another way, it is about 75% of the average annual production level in the 2000s.

For condos, the problem is more severe. The excess vacant stock of 125,000 units is about three times the average annual production during the 1990s and about 10% more than the single biggest year of new construction in the 2000s.

Lack of equilibrium

Sales patterns round out the picture. In 2006, sales began to slow sharply but completions did not. Even when completions of for-sale houses dropped off sharply beginning in the first quarter of 2007, they did not do so quickly enough.

Consequently, completions overall continued to exceed sales, adding to the oversupply. During the last several quarters, sales seem to have stabilized and completions have fallen to match that level. But this only means that the excess inventory is holding steady, not diminishing.

In addition, there's also an excess supply of existing unsold owner-occupied homes.

The inventory of existing homes for sale (single-family plus condo) on average has been equal to about six months' worth of sales. The most recent inventory is close to 10 months' supply. For existing single-family houses that are occupied, there is a 9.6 month supply of inventory. For existing condos that are occupied, the inventory is 13.8 months' worth of supply.

GSE insulation?

The apartment sector has had greater access to credit than other sectors because it has benefited from debt capital through Fannie Mae and Freddie Mac. Even the federal takeover of these government-sponsored enterprises (GSE) hasn't restricted mortgage capital, which funded more than $1.2 billion in multifamily mortgages during the first two weeks of the conservatorship in September.

The National Multi Housing Council (NMHC) and the Harvard Joint Center for Housing Studies convened a symposium in November on the future of multifamily financing. It was primarily intended to discuss the future of the secondary market for mortgages after the conservatorship of the GSEs ends.

We are working to avoid reductions in the capital available for multifamily mortgage financing. This will become critically important when the GSEs, in order to meet a congressional mandate, begin to shrink their retained investment portfolios at the end of 2009. Whatever the size of their portfolio, the GSEs' capital won't insulate the apartment sector entirely.

For instance, NMHC's indices that track equity and debt financing both hit record lows in our latest Quarterly Survey of Apartment Market Conditions in October. Both indices declined to 4 on a scale of 1 to 100, where a number below 50 indicates worsening conditions. This contributed to a record-low reading for property sales activity. And 11 months of job losses through November, or 1.9 million jobs, affect apartment demand.

While favorable demographics and a lower homeownership rate will benefit apartments over time, we have to work through the current economic downturn before we see the benefits of that increased demand. It's hard to see how that will happen before 2010 at the earliest.

Mark Obrinsky is vice president of research and chief economist for the National Multi Housing Council in Washington, DC.