Investors Hold the Key
To Housing Boom's Fate

Investors are the wild card of the current housing boom.

Nearly one-quarter of all homes sold last year were bought by real-estate investors, some of whom were hoping to sell them for a quick profit. An additional 13% were bought as second homes. If these people dump their homes at the first sign of a slowdown, prices could fall faster and further than they have during past downturns.

Real-estate investor Stephen Denny has seen the signs of the slowdown and is not waiting to act. Mr. Denny calls them "bandit" signs -- hand-printed, roadside markers put up by real-estate investors who are trying to unload homes. When Mr. Denny started seeing more and more of these bandit signs around West Palm Beach, Fla., he decided it was time to sell off nearly his entire portfolio of two dozen investment properties. "There is no fire," he says. "But I'm slowly going to divest and stockpile my cash."

In four years, the former owner of an air-conditioning business had gotten rich in Florida's real-estate boom, turning a $250,000 investment into a portfolio with a net worth of $2 million. Mr. Denny buys properties before they are built, hoping to resell them quickly. He also renovates and resells older homes and manages single family and commercial rentals.

The experts trying to predict whether the real-estate market will crash are watching investors like Mr. Denny very closely. According to the National Association of Realtors, 23% of homes bought last year were bought as investments and 13% as second homes. Housing experts say that people who don't live in the homes they buy are more likely to sell at the earliest sign of trouble and minimize their losses.

"The fact that these are second homes and are not primary residences means that they are more negotiable," said Larry White, a microeconomics professor at New York University's Stern School of Business. Today's investors, he says, are much more apt to sell quickly than the developers and construction companies that gobbled up property during the real-estate boom of the 1980s.

To be sure, many people who bought investment properties or second homes won't sell right away. David Lereah, chief economist of the National Association of Realtors, divides these buyers into three groups: Second-home owners, who tend to be baby boomers who generally plan to use their homes for years; landlords who buy properties for the rental income and are also less likely to sell; and, finally, condo flippers and the like -- day traders of the real-estate world -- who might quickly pull the trigger.

"There is so much more to real estate than the highflying properties in Miami that get the headlines," Mr. Lereah says. For now, Jeffrey M. Siskind is holding on to the investment properties he owns in Florida, and plans to buy another one.

With two partners, Mr. Siskind is buying a two-bedroom condo for about $850,000 in West Palm Beach. The rental income will be less than his mortgage payment and condo fees, meaning he will lose money every month. But Mr. Siskind is betting that the condo -- with its southern exposure and water views -- will appreciate by $200,000 over the next two years. At that point, Mr. Siskind and his partners plan to sell it.

The partnership is borrowing most of the money, probably using an "option arm" loan, which has a fixed rate in the first two years and then the rate becomes adjustable and will likely rise, increasing their monthly loss on the condo.

Mr. Siskind, who is a real-estate lawyer, said he's a little nervous about the large number of condos coming onto the West Palm Beach market, but he's convinced his property will benefit from the influx of new residents to Florida and its prime waterfront location.

He proposed marketing the condo right away to see what price it would fetch. But his partner, a realtor, says they should wait for two years, as planned. Even Mr. Siskind's mother is weighing in.

"My mother calls me all the time and she says it's in the paper, we are in a bubble and you shouldn't buy anything," said Mr. Siskind. "I say don't worry. I am being conservative."

The housing boom has made even long-term owners quicker to sell.

In the early 1990s, when the New York City real-estate market was in the doldrums, Jeanne Kazel Wilcke bought more than 100 apartment units around the city and created a nice stream of rental income. An old-school landlord like Ms. Kazel Wilcke might seem suited to weather any dip in the market.

But two years ago, while skiing in the Alps, Ms. Kazel Wilcke got a bad feeling. "I don't know if it was the high altitude and lack of oxygen, but I came home and said it's time to get out of the way," she said.

She started selling half of her New York portfolio. In deciding to sell, she relied partly on gut instinct and partly on math. It would take her 15 to 18 years of rents to reap the same profit that she could get by selling in 2003 and 2004. If more investors follow her lead, the market could turn quickly.

"Better to sell on the way up then not be able to sell on the way down," she says.

Email your comments to rjeditor@dowjones.com.