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%.