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A Caution for the Raging Apartment Sector

Apartment Building
Apartment Building

It seems all this help for the housing market may impact negatively the one area of housing that's actually doing well right now, the apartment sector.

On Friday Treasury Secretary Timothy Geithner began selling the Administration'splans to overhaul/eliminate Fannie Mae and Freddie Mac. Obviously that's not going to happen overnight, or even in several years of overnights, but in the meantime the government will try to reduce its involvement in the single family housing market.

Today we saw signs of that in the release of the Federal Budget. While the budge requests $19.2 billion for a voucher program to help "extremely low- to low-income families with rental assistance," and $9.4 billion "to preserve approximately 1.3 million affordable units through increased funding for contracts with private owners of multifamily properties," it also fuels the FHA's multifamily mortgage insurance programs. Why is that a negative for the apartment market?

Keefe, Bruyette & Woods:

"Going forward, the government will seek to expand FHA’s capacity to lend to the multifamily market with a keener focus on "affordable" multifamily assets (B- quality and lower) – an implicit negative for higher quality assets (B and higher), typically those owned by the apartment REITs.

With a historically high correlation between the cost of borrowing and asset values, the elimination of a major funding source for the sector should eventually put upward pressure on interest rates and cap rates. Historically, apartment REITs have traded at a premium valuation to the other sectors based on their superior cost, access to capital and the relative stability of cash flows."

I wouldn't say this is an overnight risk, especially given that Fannie and Freddie aren't going anywhere any time soon. In fact, both are increasing lending to the multifamily sector. We've already talked about the surge in apartment rentalsdue to the housing crash, which has resulted in falling vacancies and rising rents. It is, however, an important thing to look at if you're investing in apartment REITs for the long haul.

Questions? Comments? RealtyCheck@cnbc.comAnd follow me on Twitter @Diana_Olick