Throughout the housing bubble, you probably heard stories of friends or acquaintances buying second, third, or fourth homes to "flip." When real estate values were enjoying double-digit annual appreciation, it didn't take much to make a handsome profit if you got out at the right time. As a result, investors played a big part in the housing bubble. Yet anecdotal evidence suggests that investors continue to have an impact, often scooping up great deals on distressed properties. How has their influence changed?

To better understand the role of investors in residential real estate, we can turn to some data provided by the National Association of Realtors. Let's start with a chart that shows the percentage of existing home sales purchased by investors:

investor home sale percentage 2010.png

Here, the red squares represent annual numbers, as prior to October 2010, NAR's data was not kept on a monthly basis. The points in pink are monthly percentages kept since that time.

There are a few observations you can make from this chart. First, it's pretty clear how much influence investors had during the boom time. Their purchases accounted for an amazing 28% of all existing home sales in 2005. Second, it's interesting to see that they pulled back rather abruptly in 2006. They may have smelled the problem before other home buyers, as their buying plummeted to 22%, matching their proportion of buying activity way back in 2003.

So what happened when the bubble burst and the financial crisis ensued? Investors' buying appears to have lessened -- but did it? You can see mostly lower proportions of investor activity starting in the monthly data. But it's important to remember that something significant changed in 2009: the government introduced a home buyer credit. Investors did not qualify for it, but many other groups of home buyers did.

As a result, from 2009 through mid-2010, while the credit was in effect, demand was pulled forward for homes purchased by people who intended to live in the residence. That was likely a major factor that drove down the proportion of investor purchases -- all the way to just 9% in July 2009.

This hypothesis is confirmed by looking at what happened after July 2010 -- once the credit ended. The investor proportion suddenly leaped from 13% in the month prior to 19%. It has hovered around 20% ever since.

So the current slowdown we're seeing in home buying isn't likely entirely due to investors. But make no mistake -- their buying activity is way down if you look at the numbers. Here's another chart that uses the existing annual and monthly annualized home sales to determine how many homes investors were buying:

investor home sale number 2010.png

In 2005, investors purchased about 2 million existing homes. That number was cut nearly in half by 2008. For comparison, the non-investor buyers' demand didn't decline by nearly 50% over that period. Their purchases fell from just over 5 million in 2005 to 3.9 million in 2008, a mere 24% drop.

This begins to show why the housing market was flying so high during the bubble -- and why it is having so much trouble now. Investors were crazy about residential real estate. Since the bubble burst, however, not even great deals on distressed properties can get them nearly as interested as they were back in 2005.

Of course, that makes sense. Those big returns they were enjoying from buying homes turned out to be temporary and unsustainable. This isn't really a bad thing, however. All that investor activity is part of the reason the market got so overinflated. Without the presence of investors hoping to make a quick buck on residential real estate, the market can return to what it was before the madness: a place where people can buy a home to live in or to rent out to others, without unrealistic expectations of wild real estate appreciation.

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