Consumer demand for apartments remains strong as the subprime mortgage meltdown has decreased the number of renters leaving to become homeowners, according to the National Multi Housing Council's July 2007 Quarterly Survey of Apartment Market Conditions. On average, survey respondents reported few changes in the strong market conditions recorded three months ago, with the exception of a significant worsening of debt market conditions.

One quarter of respondents said that occupancy rates and/or rents rose during the first quarter of the year, but the majority (59 percent) reported no change. As a result, the survey's Market Tightness Index was virtually unchanged at 55-it was 56 in April and 54 in January. (For all four of the survey indexes, a reading above 50 indicates that, on balance, conditions are improving; a reading below 50 indicates that conditions are worsening; and a reading of 50 indicates that conditions are unchanged.) This is the 16th consecutive quarter in which the index has been above 50, indicating improving demand in the apartment industry.

When asked specifically about the impact of the subprime mortgage meltdown on the flow of apartment residents leaving to become homeowners, 18 percent said that there has been a big decrease and 37 percent noted a small decrease. The continued strong demand conditions suggest that any supply spillover from the excess inventory in the for-sale market into the rental market has not exceeded the growing demand for apartment residences.

The biggest news in this quarter's survey was a significant deterioration in the debt market. Thanks to higher interest rates (compared to three months ago) and noticeably tighter underwriting by lenders, the Debt Financing Index dropped to 26, from 54 in April. This may be the low point for the Debt Financing Index since interest rates have retreated since the survey was conducted, unless lenders continue to restrict credit further.

"Conditions remain generally favorable in the apartment markets, with demand for apartment residences continuing its gradual, but sustained, rise" noted NMHC Chief Economist Mark Obrinsky. "While debt financing conditions took a turn for the worse, equity capital remains abundant. This could lead to a shift in the composition of the investment market, however. If current con- ditions remain in place, highly-leveraged private buyers may lose their place to REITs and institutional investors who rely more heavily on equity financing."

The tightening in the debt market had little effect on the Sales Volume Index, which was little changed at 39. This was the seventh straight sub-50 reading, meaning that there are more markets with lower sales volume of apartment properties than there are markets with higher sales volume.

"It is clear that transactions peaked in the second half of 2005," noted Obrinsky. "Sales volume is down from the record levels posted in 2006, but remains strong by historic standards."

Finally, the Equity Financing Index dipped to 48, breaking the string of 15 straight quarters above 50 (indicating improving equity financing condi- tions). Still, more than two-thirds of respondents indicated that conditions were unchanged and a small 9 percent said equity was more available than three months ago, a sign that equity capital for investment in apartments remains easily available.