More OC: County real-estate speculation jumps
Number of homes resold within six months roughly doubles from last year.
www2.ocregister.com
By HANG NGUYEN
The Orange County Register
The home purchase is complete. But the moving van never rolls around.
The residence sits vacant because the buyer bought it purely as a short-term investment. Within months - or weeks - the home is resold in the hopes of bringing the owner a nice profit.
This tactic, dubbed "flipping" in the real-estate trade, is relatively rare in Orange County. But its recent growth has industry experts concerned about the future health of the local housing market.
"That's artificial demand," said Jay Moss, president of KB Home's greater Los Angeles and Orange County divisions. "That's not true demand."
Nearly 4 percent of the O.C. homes sold in April had been owned for six months or less, according to market tracker DataQuick. That's about double the flippers' share of sales from a year ago.
More flipping, coupled with the very low affordability rate in Orange County, worries Lisa Grobar, an economist at California State University, Long Beach. "The two together suggest to me that we may be nearing the end of the current housing cycle," she said.
History might be repeating itself.
In April 1989, 3 percent of buyers sold properties they had bought less than six months earlier. Before 2004, that was flippers' busiest April in DataQuick's 17-year database.
The next month, May 1989, annual appreciation of home prices hit 24.1 percent - the cycle's biggest gain. But by September 1990, home prices were falling, and the decline continued for seven years.
FAST MONEY
Roy and Sandra Wilder of Fullerton watched home prices skyrocket. So the couple bought a three-bedroom, two-bath Fullerton residence for $725,000 in late January as an investment. Four months later, it resold for $830,000.
"It's great, but on the other hand, it's scary too," said Roy Wilder, 55. "It's like buying stock. You never know when you buy it, if the stock will continue to go up or it will bottom out."
The Wilders consider themselves amateurs when it comes to investing in real estate. Roy Wilder owns a handyman business for a living. Sandy Wilder is a housewife.
There are big barriers to flipping, such as having enough cash to do it, Roy Wilder said. The couple had to sell their investment home shortly after buying it because they couldn't stomach the $3,500 monthly mortgage.
But the Wilders aren't new to flipping. They bought two O.C. properties in 1989 that they sold for a profit less than six months later.
"I just have a knack for sniffing out good deals," he said.
One 1989 deal was a close call, but the Wilders were able to sell it shortly before the home's value fell below what it cost them to buy.
Despite such risks, Roy Wilder won't stop flipping anytime soon, even though he said it seemed "like we are right at the peak of the real-estate market."
'ANTISPECULATION' PAPERS
Development company John Laing Homes, based in Newport Beach, noticed last year that as many as 30 percent of the homes in some of their Orange County projects were snatched up by flippers.
"As soon as they close escrow, they put up the for-sale sign," said Steve Kabel, Laing's Southern California regional president.
So Laing in January began requiring buyers in its developments to sign "antispeculation" papers, saying they'll own the home for a year.
"An investor will not want to tie up their money for that long," said Antonio Fiorello, a Laing sales manager.
If the homeowner breaks the no-quick-sale promise - and hasn't gone through a death, divorce, job transfer or severe illness - the contract says a flipper must turn over the profit from the sale and any rental income to Laing.
Laing isn't alone.
Robert Gilmore, district manager for Southern California for the Department of Real Estate, has been taking calls a couple times a week from home builders who need the department to approve antispeculation clauses. These provisions - introduced to the market about 18 months ago - are most common in Orange and San Diego counties.
Builders say that flippers are bad for business.
These investors clearly aren't interested in developing a sense of community, an amenity builders actively promote. And the debatable demand from flippers can force builders to pay for extra land they might not truly need.
Gilmore says builders also see flippers as competition. Both groups are often selling to the same wave of future buyers.
"We don't like" flipping, KB's Moss said. "It's not creating neighborhoods we want. We want to build homes for families. We're not Wall Street."
But are the builders' antispeculation provisions enforceable in court?
"It depends on the circumstances," said Camellia Schuk, partner at Cox, Castle & Nicholson.
LESSON FROM THE '90s
Speculation is a sign of an overheated market for any asset, including real estate.
Normally, home-price increases are based on economic fundamentals such as jobs, mortgage rates and inflation.
But sometimes, perception takes over as some people buy homes simply because they think housing prices will continue to go up.
However, at some point, "buyers' and sellers' perceptions start to diverge," said Keitaro Matsuda, senior economist at Union Bank of California.
Then, home shoppers balk, and homes sit on the market. That forces sellers to lower prices, and the market's bubble bursts.
While the recent increase in speculative buying in Orange County raises a flag for Matsuda, he said he'd need far more detail to be worried.
His main concern would be with a growing number of amateur home-price gamblers. Bets from sophisticated investors who understand the real-estate market wouldn't be a problem, Matsuda said.
Even though flipping was more common in April than it was shortly before O.C. housing prices fell in the last cycle, Matsuda is still not worried about the real-estate market.
Still, he hopes 1989 will serve as a deterrent for the average person thinking about speculative buying.
"A lot of people watched others get burned" when housing prices fell in the early 1990s, Matsuda said. "We have that lesson from history." |
