He cites data from the US Census Bureau indicating that by the fourth quarter of 2007, the number of rental households surpassed the previous peak of 35.65 million in the fourth quarter of 1994. As of Q1 2008, there were 35.68 million rental households. So while the homeownership boom earlier this decade may have caused renters to flow into the single-family segment, Moody notes that the housing and mortgage market correction has cut off that spigot.

When the economy stabilizes, likely to occur in 2009, the mortgage market will loosen a bit, but it certainly won't be as lax as it was in recent years, he relates. So not only will people remain in the rental pool, but many--both owners and renters--will be uprooted by foreclosures. Still, it remains to be seen how many of those households will opt for single-family rentals or traditional apartments. However, at least for renter households evicted from foreclosed-upon single-family homes, Moody says, "Having gone through this experience may lead a significant share of such renters to seek the relative safety of larger apartment complexes rather than again renting from individual landlords in single family homes or smaller multifamily structures."

Also seeing a slowdown is the rate of household formation, mainly due to the lackluster job market and declining wages. "While such adjustments are no doubt occurring at present, it is worth noting that what household growth that does remain is concentrated in rental housing units, as the number of owner-occupied households has fallen" since midyear 2007, points out Moody. And when household formation does pick up, he adds, it's reasonable to assume that most will opt for rentals.

But for now, Moody expects the rental supply situation will likely get worse before it gets any better. Between single-family rentals and reverted condos, vacancies have skyrocketed. Just as the number of vacant single-family homes went up between year-end 2007 and March 2008 to 2.28 million homes, the rental inventory also rose to a record high--4.06 million units--during that period, representing a 5.9% uptick. "The sheer magnitude of the increase--while the number of multifamily units intended for rent completed in each quarter was the same--can be taken as a sign that such shifts from the for-sale to the for-rent segments of the housing market were in full swing, which is likely to continue over the next few quarters," says Moody.

The good news is that any threat posed by this will be small, and hardships will probably be limited to specific segments of the market. For instance, reverted condos would impact the luxury segment of the market, and large numbers of for-rent single-family homes will probably be concentrated in specific geographic areas, such as the suburbs.

As of the first quarter, 29% of all vacant units were single-family homes, and 34% were in properties with 10 or more units. Comparatively, single-family accounted for 18% of all rental vacancies in the first three months of 1995. So same-store vacancy in traditional multifamily properties, for all intents and purposes, did not increase. The numbers also show that much of the construction in the past decade has focused on the single-family market versus traditional multifamily.

"There are, of course, those who argue that construction patterns merely followed the prompts of the market and, as such, would not agree that resources had been misallocated," says Moody. "But the sheer numbers of vacant housing units, mortgage loan delinquencies, and home foreclosures seem an abundantly clear signal of market, not to mention regulatory, failure. The consequences of this failure will take years to correct."

While that happens, the economist maintains, the traditional multifamily sector will only benefit. Even the excess supply of rentals on the market is a boon, as it will lead to restraint by developers, he points out. "To some extent, this restraint will help insulate the apartment industry from the fallout of the rising number of vacant housing units," explains Moody. "While the sheer number of vacant rental units suggests that rental rates could remain under pressure for some time to come, the extent of this pressure greatly depends on the particular type and location of rental units under consideration. These supply side pressures will dissipate well before the growth in the various drivers of demand begins to fade, so that the long-term outlook remains favorable to the apartment industry."