Apartment Bubble Inflating Fast

By Diana Olick, CNBC Real Estate Reporter

NEW YORK ( CNBC) -- Housing construction numbers for September were "blowout" and "smashed consensus," according to analysts who follow the sector. Single family starts rose 11% from August and are up nearly 43% from a year ago. This from the depths of the housing recession.

Multi-family starts and permits, however, garnered a different headline: "Headline Risk as Data Cross 10-year Averages," came the report from Cantor Fitzgerald.

Building permits for multi-family buildings, which means five units or more, and which will be rental buildings, not condos, jumped 93.4% from a year ago to 323,000, which is above the 10-year average of 296,000.

"While the silver lining is good news for the broader 'housing recovery,' the elevated permitting activity in the 5+ unit segment may set off alarms in apartment-land," write David Toti and Gaurav Mehta in the Cantor report. "We expect the multifamily REITs could be under pressure today."

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These include Equity Residential ( EQR), Avalon Bay ( AVB), Apartment Investment and Management ( AIV), UDR ( UDR) and Mid America Apartment Communities ( MAA) to name a few.

They offer the caveat that the group has been underperforming of late and that fears around supply are already priced into current valuations. But it all begs the question, as single family home building recovers, are investors throwing too much cash at new rental apartments? This new construction won't come on line for at least two years, when housing may be surging again.

In order to answer the question, we need to put a few things in perspective about these total housing starts stats:

Peter Boockvar of Miller Tabak: "At a starts level of 872,000, it comes close to matching the level of starts at the depths of the 1991 recession when starts fell to 798,000 and before that, starts bottomed at 837,000 in the recession of 1981. This of course is not adjusted for population growth where we had about 250 million people in 1991 and 225 million in 1981 versus 310 million today."

The bottom line is we're up, but we are up from the very bottom, so these big single family starts percentage jumps don't mean that we are anywhere close to even normal times. What's driving the starts? Demand, plain and simple.