More people are renting now, in the aftermath of the housing bubble, and this is pushing rents higher. Homeownership in the U.S. is down to around 63% as opposed to 69%, where it peaked in late 2005 and early 2006.

Additionally, multifamily housing starts dropped dramatically during the recession, and only in mid-2012 began to exceed their current average since 1990.

Moreover, using the data set from 1959, multifamily housing starts are now barely above that longer term average.

A good example of the trend is found in AvalonBay Communities’ AVB, -3.39% most recent earnings. The report revealed another staggering display of rent increases, especially on the West Coast, which accounts for almost half of the company’s net operating income.

Avg. rent change % of NOI New England 3.40% 14.3 Metro NY/NJ 3.80% 25.4 Mid-Atlantic 0.40% 15.4 Pacific NW 7.40% 5.1 No. California 10.00% 21.1 So. California 6.20% 18.7

For the second quarter of 2015, on a year-over-year basis, the firm raised rents by a staggering 10% in Northern California.. The firm also raised rents in the Pacific Northwest by 7.4%, though it only derives 5% of its net operating income there.

In Southern California, where the firm derives 19% of its net operating income, rents increased by 6.2%,. The firm has the upper hand in West Coast cities, where homeownership has long been or is becoming unaffordable to most potential buyers.

In the New York/New Jersey Metro Area, where AvalonBay derives 25% of its net operating income, rents rose by 3.8%. New England and the Mid-Atlantic, where the firm derives 14% and 15% of its net operating income combined, saw rent increases of 3.4% and 0.40%, respectively.

Overall, the firm raised rents by an impressive 5%.

“ The risk-reward trade-off in the apartment sector isn’t in your favor. ”

No letup in rent increases since recession

AvalonBay’s rental revenue bump this past quarter continued a string of increases since the end of the recession, but this is likely a rare event.

The firm’s quarterly year-over-year rent changes since 2010 are 3.7%. This is well-above inflation (measured by CPI) over that period, which averaged 1.7%.

AvalonBay’s year-over-year quarterly changes since 2005, a period that includes the financial crisis when rents declined, are 3.4%.

Finally, AvalonBay owns real estate in famously supply constrained markets, where it’s difficult to build, in any case. There are laws, for example, against buildings reaching certain heights in many parts of coastal California.

Valuation question

So are shares of AvalonBay and its apartment REIT competitors good buys right now? Despite currently strong fundamentals, valuation suggests they’re not.

AvalonBay recently traded at 21.43 times trailing twelve-month Funds From Operations (FFO), a REIT cash flow metric that adjusts net income for property sales and depreciation. Also, a list of six of the largest apartment REITs is trading at an average of 21.35 times FFO, with Camden Property Trust CPT, -2.66% bringing up the rear at 18.67 times.

Essex Property Trust ESS, -3.37% is a pure West Coast REIT, and that’s where rents are growing like gangbusters, so it makes sense that it would have the most expensive valuation (26.62 Price/FFO).

Despite prodigious recent rent growth, it would be difficult to call any of these companies cheap right now.

Company Price/FFO AvalonBay Communities 21.43 Equity Residential EQR, -4.23% 22.09 UDR UDR, -5.16% 20.22 Camden Property Trust 18.67 Apartment Investment & Management AIV, -5.18% 19.05 Essex Property Trust 26.62

Additionally, shares of these firms are all yielding around 3% to 3.3%. The market seems to have priced them all similarly as investors accept a bit more than the 10-year U.S. Treasury TMUBMUSD10Y, 0.668% .

It may be worth it to receive only a modest yield bump from these REITs over the 10-Year Treasury if they can continue to generate boffo rent increases. But even AvalonBay’s executives admitted on the firm’s most recent conference call that investors shouldn’t anticipate 10% year-over-year rent increases from the firm’s San Francisco properties.

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Also, additional supply, though by no means increasing at a torrid clip, is above average now. This should mitigate future price increases.

Finally, it’s not clear that median household income is increasing. And there are only so many rent increases tenants can handle if their incomes don’t increase as well.

REITs, including apartment REITs are flat for the year, after surging in the years since the end of the financial crisis. If interest rates remain stable, it seems the best you’ll do with the apartments is clip the 3%+ coupon. If rates go up a bit, the possibilities are worse.

On the other hand, the possibility of price upside from here seems limited at best. Barring another gap down in rates, where the 10-Year Treasury yields below 2% again, the risk-reward trade-off in the apartment sector isn’t in your favor.