Speculators who have been partly responsible for housing's wild ride over the last few years could be responsible for the sector's demise if they all at once decide to cash in their chips.

So far, housing is cooling off "in an orderly fashion," and David Seiders, chief economist of the National Association of Home Builders, thinks it will continue to slow at a gradual pace.

But that hasn't stopped him from warning things could turn ugly if speculators dump their holdings, or if rates spike on the so-called exotic mortgages that also have had a hand in the record number of new and resale houses.

"If you are looking for a trigger, that would be it," Seiders said at the NAHB's annual convention in Orlando earlier last week. "If there is a sudden unloading by speculators, or if interest rates go up by more than a few points, it could spark a quick reversal."

The wild card is that no one knows for certain exactly how many houses were snapped up over the last four or five years by investors looking for quick capital gains.

Estimates suggest that as many as four out of every 10 purchases in some places were by investors, some of whom Seiders believes are depending solely on appreciation to float their boats and are not even renting their units.

Other events could provoke a catastrophic spiral, too. Foreign investors could "all of a sudden" dump their investments in Treasury securities, for example. Or oil and energy prices could climb even higher.

But Seiders and other housing economists are far more worried that housing market itself could lead to its own downfall -- and possibly even that of the overall economy.

"Many people who look at risk now consider housing to be the biggest risk, not just to itself but to the entire system," the NAHB economist said. "The downside risks to the economy reside largely within the housing sector."

Seiders painted a rather scary picture of what could happen if speculators pull out of the market as quickly as they swooped in. Such a scenario could "provoke sizeable house price declines, cut into housing equity and provoke a snapback in the personal savings rate that would seriously cut consumer spending," he told the convention.

Actually, builders have been concerned about the rise in speculative buying for the better part of the last 12 months, and some have gone to great lengths to stop it.

For the most part, those who don't want investors in their communities will sell only to owner-occupants, refuse to allow sales contracts to be "flipped" to other buyers prior to closing and/or prohibit resales within the first year of ownership.

But a smaller percentage have taken even stronger steps. Some require that they be given the right of first refusal on all resales within the first 12 months of ownership. Others prohibit rentals for a year under a penalty of up to $50,000. Some limit the number of investor sales, and some go so far as to sell only one house to someone with the same last name.

Despite these precautions, however, the issue has made its way onto the list of single-family production builders' Top Ten concerns because they fear their markets could be "rocked" if prices stop rising and what they call "hidden" inventory comes back on the market all at once or too quickly.

And No. 10 on their list of worries is that rates on the unconventional forms of adjustable-rate mortgages will rise enough to force investors' hands. While they seemed to have had no qualms about Interest-only loans and pay-option ARMs when they were the seller, they are now concerned that such financing vehicles "promote investor buying instead of real home ownership."

Of course, investor activity is partly justified by the demographics. With the huge number of baby boomers, there should be -- and has been -- an increase in second home sales. But economists have been underestimating the strength of the housing market for several years, largely because of speculators.

At the 2004 builders' conclave and again at the 2005 meeting, Seiders and his counterparts at Fannie Mae and Freddie Mac, David Berson and Frank Nothaft, forecast that housing would trend down. But in both years, just the opposite has occurred.

Indeed, 2005 was the fifth consecutive year of records for new home sales and production. And a big part of it -- an estimated 20 percent nationally -- is because of investors and speculators.

"I can't find a year when it has been this high," Berson said at the NAHB convention. "We thought investors would pull out of the market at the beginning of last year, but they didn't start to step back until the fourth quarter."

But that in itself could be double-edged sword, and "bears some careful watching," Fannie Mae's chief economist added. "When investors stop buying, they usually start selling," he cautioned.

The markets that are said to be the most vulnerable to an investor-induced downturn are those with the highest share of such buyers.

According to Loan Performance, a San Francisco company which studies the mortgage market, the share of second home and investor purchases has been between 31 percent and 39 percent in eight metro areas -- Las Vegas, San Francisco, West Palm Beach, Phoenix, Tucson, Orlando, Honolulu and Monterey.

Other problematic markets with a 25-30 percent investor share include Miami, Tampa-St. Petersburg, Fresno, Riverside, San Diego, San Jose, Jacksonville and Santa Rosa/Vallejo.

Published: January 19, 2006

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When Lew Sichelman first started writing about housing in 1969, he was the youngest real estate writer in the country. Now, 37 years later, he's one of the oldest -- and most decorated. He has been rated the top housing columnist in the country by the National Association of Realtors as well as by his peers in the National Association of Real Estate Editors. Indeed, NAREE has recognized his work on numerous occasions. One year - due to his advancing age, he can't recall which one - he earned top honors in the annual NAREE Journalism Contest in three out of the four major writing categories. It was the first time one writer has won so many NAREE awards in a single year. Known for his ability to make even the most difficult topics understandable, Sichelman also has been honored by the National Association of Home Builders and the Mortgage Bankers Association. He began providing in-depth coverage of and consumer-oriented information about housing and housing finance at the Washington Daily News, where he was real estate editor. He held that same position for nine more years at the Washington Star, which purchased the News in 1972. The Star, a so-called "writer's newspaper" which also had the misfortune of being an evening paper, was put out of its misery in 1981, and Sichelman, who had begun self-syndicating his column in 1978, decided to become a full-time columnist. Today, his column, "The Housing Scene," is distributed by United Media to newspapers throughout the country. He also is on the staff of National Mortgage News, an independent newspaper which is considered the bible of the mortgage business. And he writes for numerous other publications, including MarketWatch.com, where he answers readers questions once a week, Sports Illustrated (don't ask), RealtyTimes.com, BigBuilder and others. Sichelman is married, the father of five and grandfather of eleven.