High prices, higher interest rates, rising inventories and skittish buyers have driven speculators from the marketplace, but some investors are here to stay. While it's no longer possible to flip a home to another buyer at a substantial premium, perhaps even before taking possession, it's still possible to make money in real estate.

While such policymakers as Federal Reserve Chief Ben Bernanke and David Berson, chief economist for Fannie Mae, believe that investor involvement in housing will continue to recede, causing the housing market to soften further, it's unlikely that investors will abandon housing altogether.

Why? It's still a good time to buy a home, improve it and sell it at a profit. Homes in move-in shape are always in demand by homebuyers who wish to take advantage of tax benefits, neighborhood amenities, and the other joys of owning their home. Investors look at the numbers. They can move their operations to burgeoning markets. Austin, Texas, could be the next Silicon Valley, and so on.

Investors can adjust their strategies to the marketplace, as long as they have financial staying power. A slowing market allows investors to become occupying homeowners, so they can take advantage of tax benefits themselves. The Tax Relief Act of 1997 allows anyone to buy a home, occupy it for at least two years as a homestead, rent it for three years and sell it tax-free up to a ceiling of $500,000 gains for married couples and $250,000 for singles. Under those provisions, investors can purchase with conforming loans, which have a lower interest rate and more generous down payment terms than the stricter investor-oriented loans.

It's the slower route to wealth, but it will get you there. In fact, investors stand to gain in markets where other sellers are panicking. They can pick up choice properties at better prices.

In 2005, investor demand for housing was at a premium, largely because rising home values in many parts of the country all but guaranteed a return on investment. In some areas, investors purchased as many as 40 percent of homes for sale. A sobering one-third of homes nationwide were purchased by non-occupying homeowners, either as second homes or as investment property, which almost guaranteed a recession in housing as those properties came flooding onto the market for cash-out.

For the first time, the National Association of Realtors began to attempt to distinguish between investors (those purchasing homes they did not intend to occupy) and vacation home buyers who bought homes with the intention of using them and perhaps retiring in them, but dividing homebuyers by their intentions is problematic. Everyone sees themselves as an "investor." But, by NAR's definition, "investors" accounted for approximately 20 percent of all homebuyers, according to the buyer/seller survey for the National Association of Realtors.

In 2006, housing did indeed recede, yet still managed an anemic 1.1 percent rise in home prices to $222,000, from a median price of $219,600 in 2005, says NAR, while the number of sales dropped 8.4 percent. It was worse for new homes, the darling of speculators. New home sales plummeted to 1.061 million units sold, a 17.3 percent drop from the all-time high achieved in 2005, and the sharpest percentage decline since 1990. Despite the precipitous drop, the NAHB said it was the fourth-best year for new home sales.

NAR forecasts existing home sales to soften only slightly to 6.44 million in 2007, with sales improving to 6.68 in 2008. New-home sales are projected to decline below a million to 961,000 this year and then rise to 971,000 in 2008. Housing starts are likely to total 1.52 million in 2007, down from 1.80 million units in 2006, and then increase to 1.56 million next year, says NAR. 

The figures suggest that investors, while fewer, are still very much in the game as home buyers. What may change is their strategy.

What's missing for investors, at least temporarily, is the momentum of price appreciation, which allowed investor/speculators quick capital gains that they weren't seeing in any other form of investment. That means that investors in the current market are moving from flipping homes to buying and holding. The strategy is to take advantage of high inventories to choose wisely, hold longer term and then cash in at the next seller's market.

The only problem for statisticians is distinguishing which homebuyers are investors in homesteaders clothing and which aren't.

Published: February 19, 2007

Use of this article without permission is a violation of federal copyright laws.

Blanche is a renowned author of five real estate books. Her newest, Bubbles, Booms and Busts: Make Money In Any Real Estate Market, McGraw-Hill, was rave-reviewed by The New York Times. She was also selected from hundreds of real estate experts to contribute to Donald Trump's book, Trump: The Best Real Estate Advice I Ever Received: 100 Top Experts Share Their Strategies, Rutledge Hill Press, and is featured on page 68. Order Now Review - Honors In 2006, Blanche was selected among scores of candidates to author two consumer real estate guidebooks for the National Association of Realtors: The NAR Guide to Home Buying, and The NAR Guide to Home Selling, Wiley & Sons. She is currently planning two new books for the NAR and its members.       Known for her keen insight into real estate industry issues and for her ability to make complex subjects easy to understand, Blanche is a sought-after keynote and continuing education speaker. Real estate organizations from MLSs, to brokerages, to franchisors, to associations hire her to provide up-to-the-minute analysis of real estate industry news and advice on how to improve revenues. Her passionate delivery, peppered with stinging wit, is a huge hit with audiences and fans. Don Klein, CEO Greater Nashville Association of Realtors, Blanche Evans, Richard Courtney, president 2007, GRAR "The GNAR membership meeting last week featured Blanche Evans as the keynote speaker. Her comments and insights resonated extremely well with those in attendance and we have had many requests for copies of her PowerPoint Presentation. She was a terrific part of the membership meeting and convention program!" - Don Klein, CEO Greater Nashville Association of Realtors Coverage from WSMV, Nashville - 8-14-2007 That Interview Guy - Get Inside The Head Of Today's Generation 2007 AE Institute Session - To purchase 2006 AE Institute Session - Parts 1 2 3 4 5 6 7 8 9 HouseValues Mastermind call - Parts 1 2 Blanche's fireside chat with Jeremy Conaway, HAR - Click here. For more articles by Blanche, click here.