In increasing numbers, buyers are acquiring real estate owned (REO) homes as speculators with the sole intention of flipping them for profit. If enough of these investors pile into the market, another jump in supply will occur once the market prices becomes good (or bad) enough to persuade them to put up the homes for sale. In Southern California, MDA DataQuick estimates that 19% of homes purchased in April 2009 were bought by investors.

first tuesday take: The California housing inventory will rise by the end of 2009, as speculators who bought property exit the market and are not replaced by more speculators, homebuyers, or rental property investors. Thus, the second shoe of this recession will drop. The first spate of flipping, which ended in the first quarter of 2006, led the initial depression in real estate volume and prices, the first shoe, which hit the bottom in the first quarter of 2008.

The coming withdrawal of speculators, and the diminishing numbers of premature homebuyers and rental investors, all of who sent California’s sales volume up in 2008 to top out the bounce by the last quarter of 2008 (while perversely driving prices down), will have a renewed depressionary effect on sales volume by the last quarter of 2009. But watch the government’s role of subsidizer-in-chief of new construction. Governments could drive MLS inventories even higher if they are not redirected to subsidize REO resales, if subsidize they must.

Right now, California speculators are again pulling inventory off the market in increasing numbers. This is divisive and contributes nothing to the real estate industry, while permanently withdrawing wealth from the owners of real estate (buyers and sellers). And speculation by design makes single family residences (SFRs) more difficult for homebuyers and rental investors to acquire.

Thus homebuyers, and particularly first-time buyers, are being driven into the arms of the builders (and pulled by the lure of tax credits designed primarily to reduce builder inventory). Meanwhile, the supply of available homes – MLS inventory – will begin to rise this Summer and on into the Fall as the REOs, having been artificially kept off the market for nearly one-half year, flood in from the yet-to-be-marketed shadow inventory of REOs and the completion of over 300,000 foreclosures by year’s end. The influx of inventory will put an end to this second round of speculation.

We won’t see another cycle of speculation like the run from 2003 through 2005 until the next boom. In the meantime, homeowners and income property owners must learn to anticipate that the volume of sales and pricing will only normalize after Californians have absorbed the approximately 500,000 vacant residential properties in California, which will take at least the next two to three years – builders and subsidy-driven new construction notwithstanding.

Re: “Flippers hogging REOs?”, from the Los Angeles Times