Bubble watch: Investors are 51% of Southern California’s homebuying surge

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Bubble Watch” digs into trends that may indicate economic and/or housing market troubles ahead.

Buzz: Half of Southern California’s homebuying surge this summer can be tied to a big jump in the purchasing pace by investors.

Source: My trusty spreadsheet reviewed Redfin estimates of investor activity locally and in 40 major metropolitan areas in the third quarter, defined as purchases made by entities with corporate-sounding names or descriptions. 

The Trend

Surging home prices with gains of 30% in two years have clearly been a draw for investors to the four counties covered by the Southern California News Group.

Investors bought 8,900 residences in the summer or 17.7% of all purchases. These weren’t fixer-uppers, by the way, as the typical sales price for these deals was $898,000.

Compare that with one year earlier, when homebuying was swiftly rebounding from a locked-down spring. Investors bought 6,758 homes in the summer of 2020, or 14.6% of the market. That’s a 32% jump in investor purchases.

Or look at ballooning bets this way: Local investors bought 2,142 more homes this summer vs. 2020’s third quarter — or 51% of the region’s 4,228 overall sales increase.

The Dissection

Let’s start by saying that if this Southern California speculator surge looks bold, it’s tame when viewed using a national yardstick.

This summer, 90,215 of the 495,000 U.S. homes sold in 40 major markets were acquired by investors — up 80% from a year earlier. And that speculator feeding frenzy equaled 72% of the big metro jump in homebuying in the past year.

Perhaps much of this housing speculation is simply U.S. investors catching up to SoCal’s thirst for real estate assets.

This summer, 18.2% of all homes in the 40 metros bought were by investors vs. 11.4% a year earlier. But even after that buying binge, the 40-metro investor’s slice of the market isn’t much higher than the 17.7% share seen locally.

That said, investors were another wrinkle for a Southern California house-hunting market already crowded with residents seeking larger living quarters in the pandemic era.

The biggest speculative growth was seen in Riverside and San Bernardino counties where investors gobbled up 2,756 homes — up 49% in a year. That eye-catching burst ranked as only the No. 22 increase of 40 big metro areas tracked by Redfin. Inland investors represented 15.3% of all deals vs. 10.9% in summer 2020.

Investors bought 8,900 residences in the summer across Southern California or 17.7% of all purchases. These weren’t fixer-uppers as the typical sales price for these deals was $898,000. (File photo: Orange County Register)

Of course, Riverside and San Bernardino counties are home to the relative house bargain, where the median price paid by investors for all types of residences was $510,000.

In Los Angeles County, investors bought 4,385 residences with a $1.1 million median. That buying pace was up 28% in a year, ranking it the No. 27 gain of the 40. Investors were 19.1% of the market vs. 17.3% a year earlier.

And in Orange County, there were 1,759 investor deals with a $1 million median. Investor buys were 19% higher more than summer 2020 — the ninth-smallest gain of 40. — and equaled 18.7% of all deals vs. 15.8% a year earlier.

Another view

There is lots of investor money in play.

In the 40 metros, $63.6 billion was spent in the summertime spree, of which $13.8 billion went to SoCal’s four counties — $8.9 billion in LA County; $2.7 billion in Orange County and $2.2 billion in the Inland Empire.

Quotable

“With cash-rich investors taking the housing market by storm, many individual homebuyers have found it tough to compete,” Redfin analyst Sheharyar Bokhari said. “The good news for those buyers is that the housing market has started to cool. Bidding wars are on the decline, and if home-price growth continues to ease, we may see investors slow their roll.”

How bubbly?

On a scale of zero bubbles (no bubble here) to five bubbles (five-alarm warning) … FIVE BUBBLES!

The battle to buy pitting investors vs. hopeful homeowners is nothing new. And speculators — whether looking to flip the property or to become a landlord — aren’t necessarily all bad.

Of course, investors do make mistakes and can be quick to exit. Like Zillow did with its half-billion-dollar flipping flop.

Investors tend to be momentum addicts, too. They often fade from the market — if not, become sellers of what they own — when appreciation dries up and sales activity cools.

That’s why future price gains — by no means guaranteed — are the secret sauce for those betting on housing.

Jonathan Lansner is the business columnist for the Southern California News Group. He can be reached at jlansner@scng.com