Second, wannabe flippers are becoming reluctant landlords.

Many neophyte real estate investors poured into the market during the boom, snapping up townhouses, single-family homes, and tower condos. They expected to resell these properties for big profits.

Now, nothing’s selling. And every month, these “investors” are being forced to shell out thousands on mortgage payments, taxes, and insurance.

Rather than leave their properties vacant and unsold forever, more and more are trying to go the landlord route. You can see it every day in the newspaper — instead of saying “for sale,” a lot of ads now say “for sale or for rent,” listing a sale price and a per-month rental rate.

How much vacant property is out there waiting to be converted? The answer will shock you. About 2.5% of all of the nation’s homes were sitting vacant in the third quarter, according to the Census Bureau.

Not only is that up from 1.9% a year earlier, it’s also the highest since the Census started keeping track in 1956.

Third, even market participants are talking about a less robust market.

For example, the National Multi Housing Council (NMHC) represents apartment owners, managers, and financiers, and publishes a quarterly index of market conditions.

The NMHC’s measure of market tightness dropped sharply from 85 in July to 70 in October. That’s the lowest reading since January 2005. Moreover, the percentage of respondents saying rental market conditions are looser than three months ago shot up to 14% from just 6% in July and 2% in October of last year.

Bottom line: Apartment REITs may be reaching fresh all-time highs, but their fundamentals have been getting worse. It’s like investors are saying,

“Valuations? We Don’t Need
No Stinkin’ Valuations!”

At their current prices, apartment REITs are looking frothy. And as they keep going up, their dividend yields are sinking toward nothingness. Archstone-Smith is a good example ...

The stock currently trades at a whopping price-to-earnings ratio of 58.7. That’s more than triple the 17.6 P/E of the S&P 500!

Now you might argue that earnings aren’t the best way to value REITs because investors are more concerned with a different measure of profitability called funds from operations (FFO). Think of FFO as a measure of a company’s core earnings because it excludes potentially distorting events like the sale of a building.

Well, Archstone-Smith is trading at 24.2 times its 12-month trailing FFO. Not only is that up from 20.2 a year ago, it’s the highest I can find going back to at least 1994. And if that ratio holds for the full year, it’ll be the most expensive ASN has been since at least 1991.