Housing Speculators Relocate to Hotter Spots

Southern California’s high housing prices have at least one silver lining. They have kept speculators like Jay McKee from driving prices even higher -- and from making them more likely to tumble.

The former technology worker from Manhattan Beach was among thousands who caught the real estate investment bug during the housing boom. He bought an ocean-view condominium in neighboring Hermosa Beach two years ago, spent $30,000 to spruce it up and swiftly resold it for a $250,000 profit.

Instead of pouring his profits back into local properties, McKee took his spoils to Phoenix. He invested in 10 properties there and started a real estate development and home-building business.

“To do it in Southern California would be much more costly,� said McKee, who has already sold some of his Arizona investments. “You definitely get more for your money in Phoenix.�

Southern California’s high housing costs have become a big turnoff to investors like McKee, who have fled for more affordable pastures.

Many analysts say that’s a good thing. Although the falloff of speculative activity probably means Southland home prices won’t surge soon, it also could keep home values from tumbling -- and lead to a much more desirable “soft landing,� or flattening of prices.

Too much speculative activity from investors hoping to turn a quick profit is perhaps the biggest sign that a market -- whether real estate or stocks or any other asset -- is in an overpriced “bubble� condition, economists say. Too many speculators drive prices too high, and when they sense that the market is topping, they tend to sell all at once, sending prices into a free fall.

Proportionately fewer homes in the Southland are bought by investors than in Phoenix, Las Vegas, coastal Florida and parts of Central and Northern California. In Los Angeles and Orange counties, investor activity peaked during the first half of 2004, when the absentee-ownership rate reached 14% of sales.

Speculators accounted for about 25% of U.S. home sales in 2005, according to the National Assn. of Realtors.

There are reasons investors have found the Southland less attractive. Speculators often prefer to buy and sell new homes, and relatively few new developments have been built here. And the median prices of homes in Los Angeles and Orange counties, now at $490,000 and $617,000, respectively, continue to rise at a steady rate year over year.

That has made the region’s market both more costly and less prone to price surges -- and quick profits -- than Phoenix and Las Vegas.

Justin Lane is seeing the consequences of other speculators’ efforts in Arizona.

After watching prices double in the 16 months since he moved into the newly built Queen Creek neighborhood east of Phoenix, Lane says he can’t afford to sit on the sidelines. So he listed his five-bedroom house for sale in November.

Six other neighbors had the same idea, including one absentee owner who priced his house about 10% below the rest. That forced Lane to reduce his asking price from $362,000 to $343,000, still well above the $165,000 he paid.

“The investors are pushing down prices,� he complained.

Nationwide, speculative investors who buy homes with the hopes they can be quickly resold, or “flipped,� at a healthy profit share much of the responsibility for real estate’s wild ride in recent years, analysts say.

As Lane has learned, Arizona is one of the biggest magnets for speculators. Close to 40% of the homes in Maricopa, Pinal and Pima counties, which include Phoenix and Tucson, were bought by absentee owners as investments or second homes last year, statistics compiled by La Jolla-based DataQuick Information Systems show.

For the nine months ended in September, investors snapped up 11,000 homes in the Phoenix area, according to mortgage data collected by LoanPerformance, a division of First American Corp. That was the largest number of investor sales for any U.S. region and a 14% increase over all of 2004.

By comparison, only 5,000 properties in the much bigger Los Angeles metro area went to investors.

Los Angeles and Orange counties didn’t crack the top 20 markets with the biggest investor share of sales. In addition to Phoenix, areas that beat the Southland included Las Vegas, parts of Central California, Sacramento and most of Florida’s east coast.

“There is no doubt that the investor has been the driving force� behind Phoenix’s white-hot housing market, said Jay Butler, director of the Arizona Real Estate Center at Arizona State University in Mesa.

Speculative buyers helped pump up Phoenix’s median home price by a whopping 40% in 2005, the highest growth rate in the nation, according to the Office of Federal Housing Enterprise Oversight. The median home price rose to $255,000 in the fourth quarter. In 2004, Phoenix ranked 60th among U.S. markets with appreciation at 14%.

Even at their peaks, Los Angeles, Orange, Ventura, Riverside and San Bernardino counties never saw home-price appreciation exceed 31% in a year, according to DataQuick, which analyzes recorded property transactions.

Riverside and San Bernardino counties became speculative hot spots as prices took off four years ago. But the investor share peaked at 28% in 2004 and has since ticked down to about 20% of purchases.

To be sure, appreciation rates have been declining in Southern California, in part because many investors who bought earlier in the cycle have cashed out.

And, like McKee, many of them have reinvested in Phoenix and other hot spots. Of absentee owners who bought in Phoenix last year, nearly one in four was from California, DataQuick found.

Phyllis Rockower is one investor who’s done with Southern California for now. Although she had been buying local real estate since 1996, the South Bay resident sensed that prices were peaking last year. So she started to unload her remaining seven properties in April, closing the final sale last month.

“People aren’t willing to overpay anymore,� she said.

Now there are signs in Phoenix that speculators with less staying power are beginning to sell in larger numbers. Rising inventories and weakening demand typically lead to softening or even declining prices.

Since August, the supply of homes for sale in Maricopa and Pinal counties has more than doubled to 38,000 as of Sunday. By contrast, in Los Angeles County -- with three times the population -- inventories have risen from 20,000 to 30,000 homes in the period.

Arizona State’s Butler figures that many Phoenix investors are looking to sell now because they are having trouble finding renters willing to pay enough to cover their mortgages.

He expects home appreciation in Phoenix to start declining this year, which could intensify if more owners decide to bail out. “It will be a question of whether there’s more panicking,� he said.

McKee sees the shift in Phoenix’s market as a buying opportunity. He’s still expanding his business remodeling existing houses and building new ones.

But he is hanging on to his first real estate investment: a single-family house in Manhattan Beach.

Southern California, McKee said, “is a great investment and a great place to live.�

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Home investment

The number of absentee owners generally has slipped in Los Angeles as real estate speculators move to areas such as Phoenix and Las Vegas.

Areas with the highest number of homes purchased by investors*

*--* Area Homes sold Phoenix-Mesa 10,981 Washington 6,099 Chicago 5,645 Los Angeles-Long Beach 5,393 Riverside-San Bernardino 5,051 Las Vegas 5,037 Tampa-St. Petersburg, Fla. 4,921 Philadelphia 4,905 Miami 4,337 Fort Lauderdale, Fla. 4,229

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*In the first nine months of 2005.

Sources: DataQuick Information Systems, LoanPerformance