Annette Haddad of the LA Times wrote an interesting article on real estate investors. I’ve had the pleasure of exchanging emails and speaking with Annette and can tell you she knows her stuff. The link is here, but I don’t know how long it’ll stay active. I’ve copied the full article below. (Annette, I told you I’d quote you on the blog! Hopefully since I’ve provided full credit I’m not violating any copyright rules. I don’t need the LA Times copyright police knocking on my door!)
Housing Speculators Relocate to Hotter Spots
Some who scored with L.A.-area property take their profits to Las Vegas and Arizona. Their flight may soften the local market’s landing.
By Annette Haddad, Times Staff Writer
March 18, 2006
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.
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