Will investors continue to purchase residential real estate at a record pace or will they return to the stock market where analysts believe moderate gains are on the horizon?

If there is a wildcard in the nation’s housing for 2006, it’s the investor market, according to the nation’s foremost housing analysts.

“We can't find a period when the investor share of home sales has been higher than in the last year,” says David Berson, chief economist with mortgage company Fannie Mae, the largest player in the lending industry’s secondary market.  “However, in the fourth quarter, it looked like investors were starting to step back. We just don’t know for certain how far that’s going to go.’’

Nor do they have a handle on the number of all-cash deals that investors might swing via a tax-deferred exchange or a word-of-mouth transaction.
“We obviously track the mortgage activity and understand that overall share, but we don’t focus on how many homes are being purchased by investors without a mortgage,’’ Berson says. “That could be a more interesting part of the housing picture.’’

While some middle-class rental markets could feel the investor influence, high-priced home markets and condominiums will be the hardest-hit by an anticipated slowdown in investment activity. That could be troublesome for markets such as San Diego, Miami, Las Vegas, Phoenix, and Orlando where investors buy nearly 30% of all homes sold. Nationwide, investor and second-home purchases total at least 20% of the market.

Berson, along with chief economists David Seiders of the National Association of Home Builders and Freddie Mac’s Frank Nothaft, are predicting a dip in home sales in 2006. They point to affordability issues brought by slightly higher interest rates and soaring home prices, plus the investor factor.

"We expect housing activity to drop about 8% this year – it's primarily because of the investors' slowing purchases," Berson says. "And, it appears the condo market is slowing considerably. It's no surprise because that's the type of housing investors most favor – there is no lawn to mow and you don't have to shovel the snow.’’

The intriguing factor of the investor component is sales. When will they place properties on the market and why? Is it time to flip and run? (Seiders says this “hidden inventory” is critical in the next 12 months.) Or, are more investors in a desperation situation where the market has softened, renters are difficult to find and the investor/owner has little equity in the property?

Banking regulators have scrutinized low-downpayment mortgages for the past two years, yet lenders have not significantly curtailed “exotic” programs to investors. The subject often fuels the controversial question if lenders have gone too far in extending credit to consumers.
“In some cases, they probably have,’’ Berson says. “Yet in another situation, the consumer will use the same loan to really benefit their situation. It’s never an easy call as to what is going to work and what is not.’’

While delinquencies and foreclosures have increased in low-employment regions like Michigan, Indiana, Kentucky, Virginia, and Ohio, Nothaft predicts that improved employment numbers nationally will reduce delinquencies in prime markets – specifically along both the east and west coasts.

Mark Dotzour, chief economist with the Texas A&M Real Estate Center, predicts the Texas real estate market will remain strong throughout 2006. Dotzour adds that any housing-bubble burst on the east and west coasts, should it happen, would actually benefit Texas. Dotzour, who has a long track record of actually being right, believes the media have focused waytoo heavily on the housing-bubble story. “Fears of real estate values plummeting in California and along the eastern United States could actually spur investors to look more at Texas,” asserts Dotzour, “where prices remain attractive and the real estate market is very stable.”

The national housing experts also eschew the media’s doom-and-gloom reports. “Strong house price growth and low interest rates have helped with loss mitigation,’’ says Nothaft, who predicts average homes will appreciate 7% in 2006. “We are expecting consumer loan delinquencies to be near the lows we experienced in 1999-2001. The exception has been in some FHA and subprime loans where the default rate has been as high as eight times that of prime loans.’’

Berson, Seiders, and Nothaft did not see anything on the horizon that would boost long-term mortgage interest rates. All three expected 30-year, fixed-rate loans to remain near the 6.5%-6.75% range for the remainder of the year. (NAHB’s early forecast for 2007 has fixed-rate loans at 6.7%). The exceptions would be the unexpected, surprise spikes resulting from high oil and energy costs.

“This has been an incredibly resilient U.S. economy and housing has been a significant piece of that,’’ Seiders says. “The hurricanes provided a very significant risk but we have seemed to have come through that. Despite the risks that might be present in the near future, I’ll throw my cards into this economy simply because of how it’s performed.’’