Home Sweet Windfall

A growing number of Southern California homeowners, believing the booming housing market has nowhere to go but down, are selling and cashing out.

Some are trading down to cheaper homes. Older homeowners are stepping up retirement plans or taking the money and running to lower-cost places like Nevada and Arizona. Others are opting to rent, pocketing the huge equity gains of recent years and hoping to buy again when the frenzy has passed.

“We’re reaching that threshold where people are saying, ‘I can’t keep hanging on to the house. It’s too much money to let go,’ ” said Woody Harper, an agent at Prudential California Realty in Orange. About a third of his 19 sales in the last three months involved cash-outs, he said. “We haven’t had a time in history when this much equity has been built in such a short period.”

After staying fairly flat during much of the 1990s, the median purchase price of a home in Southern California has nearly doubled in the last five years, to $357,000 in the first quarter, according to DataQuick Information Systems. That has made this region one of the nation’s hottest markets -- so hot that many can cash out with hefty profits even after owning a home for only three or four years.

Excluding broker fees and any equity drained through second mortgages, people who bought homes three years ago and resold them in the first quarter of this year made an average profit of $138,000, based on median sales prices. Sellers who had owned for 20 years walked away with an average gain of $256,000.

As more owners find such sums hard to pass up, it will add to the supply of properties available for sale. That could help ease an inventory crunch as the busy summer home-buying season gets underway. But it could also signal that prices are indeed peaking. After several years of double-digit annual increases, more prospective buyers are struggling to afford what’s out there. And mortgage rates already are starting to rise.

That was certainly on the minds of Steven and Robin Fox, a couple in their mid-40s with three children.

They had been watching the dwindling number of “for sale” signs in their Northridge neighborhood. When there were hardly any in January, they put their 2,400-square-foot home -- which they had bought five years earlier for $293,000 -- up for sale. The 1967-built house wasn’t in great shape. There was a hole in one of the bedroom walls. The kitchen door leading to the garage wouldn’t shut. Yet the day after it was listed for $515,000, three offers came in. The next day it was sold for $15,000 above the asking price.

The Fox family is now renting a house in nearby Granada Hills.

“I’m going to pay off bills and sock the rest away for when the market turns,” said Robin Fox, who manages the office at her husband’s bankruptcy law practice in Encino.

For Fox, the region’s housing bust in the early 1990s wasn’t a distant memory. She remembered when she and her former husband bought a house in Van Nuys. They paid $231,000 in June 1989, and 18 months later it had fallen to $165,000. “We can see the writing on the wall,” she said.

Most economists and people in the housing industry think things are different this time, that the market is fundamentally sound and won’t come crashing down. Unlike a decade ago, there hasn’t been an overbuilding of homes or a downsizing of a major industry such as aerospace. Southern California’s economy is more diversified, and developers have taken steps to limit speculative activity. The population is growing briskly.

Beyond that, the region’s housing boom is being driven by a variety of special factors: the lowest mortgage rates in a generation; historically low supply of homes available for sale; money coming into the market from well-off immigrants, and wealth inherited by baby boomers.

“There are still many more buyers than sellers,” said Kirk Frieden, a Coldwell Banker agent who has been working in the West Hollywood area for 28 years. At the same time, he noted, it was hard to tell how long the market could keep up its frenetic pace. “It might end any day or it might go on like this for another year. Who knows?” he said.

When Frieden tallied his recent deals, he was surprised to find that about half of them appeared to be cash-outs. One seller was moving to Arizona, another to Nevada. One pair, he said, had racked up such big equity gains that “they are going to Thailand to enjoy life.”

Although there are no figures on how many home sales involve cash-outs, reports from brokers and apartment managers and migration data suggest that those numbers are increasing.

Mark Verge, owner of WestsideRentals.com, one of the region’s largest apartment listing agencies, said he noticed a spike in homeowners cashing out in the last six months and looking for places to rent. “People are surprised by how much they’re getting for their homes,” he said.

To be sure, such transactions still account for a small share of overall sales. Most sellers trade up to bigger homes. Many other homeowners have refinanced or taken out home equity loans to the point that a sale wouldn’t net that much, so they’re staying put. Others don’t want to pay high rents or take the risk of selling too early or without another home lined up, knowing there’s a chance they may not find anything, or could pay even more later for the same house.

“It’s a tough call,” said Arne DeWitt, a broker with Remax in Aliso Viejo. He said one of his clients, thinking the market had topped, unloaded his south Orange County house a couple of years ago and became a renter. Now, DeWitt said, “he’s angry he sold it so soon.”

Robert Traphagen, 52, isn’t mad but is a little wistful. He and his wife, Colleen, sold their 1,370-square-foot house in Fullerton for $405,000 last fall. Since then, he said, median prices in that neighborhood have gone up an additional $75,000. Still, Robert Traphagen has no complaints. He said they bought the house in 2001. And after the sale, the couple netted about $120,000 -- enough to pay cash for a mobile home by the harbor in Dana Point. Without the appreciation, he said, they might have waited to make the long-planned move.

“Because the market was ideal, everything timed out perfectly,” he said.

Homeowners like the Traphagens, as well as those who are single, may be the most likely to sell and trade down or rent. It’s easier for people without school-age children to move, and, if they were planning to retire elsewhere anyway, they would want to walk away from their homes with as much cash as possible.

William Frey, a demographer at the Brookings Institution, said the rapid rise in home prices in Southern California, greater Washington, D.C., New York and a few other places could very well be accelerating the widely expected retirement and moving of baby boomers, the oldest of whom will be 58 this year.

“The stock market decline in the last several years has made people think much more carefully about their nest egg,” Frey said. With houses as their main asset now, he said, older Southern Californians are asking themselves: “What does it mean in terms of making a move? Will the [housing] market crash at some point?”

Southland seniors have long been moving to cheaper places in the Sun Belt -- and that trend could be picking up along with surging home prices. Frey’s analysis of Census Bureau data shows, for example, that the growth rate of those age 65 and older has increased in Las Vegas in recent years, while that rate has held fairly steady for the Los Angeles area.

Experts who track housing in the Las Vegas area say equity-rich Southern Californians are buying so aggressively there that prices in that area recently grew at an even faster pace than for the Southland. The median price of a home in Las Vegas was $210,000 in the first quarter, up 27.3% from a year earlier. That compares with a 21.8% gain for Southern California. For the nation, the median price rose 11% in the quarter.

“Clearly, there’s a big influx [to Nevada] from Southern California -- and a lot of them are cashing out and going to Vegas,” said DataQuick analyst John Karevoll.

Dale and Katie Holtkamp, who are in their 50s, aren’t leaving California, but they are speeding up plans to move to a smaller dwelling because of the real estate market. Nine years ago, they bought a 3,000-square-foot house on 2.5 acres in a planned community near Hesperia. The couple paid $155,000 and over the years invested $25,000 for upgrades. Home values in the San Bernardino County community hardly moved during most of those years, Katie Holtkamp said, but have shot up in the last two years.

So on April 25, the Holtkamps listed their property for $339,900. Three days later, they sold it for the full price. With the equity, the couple is buying a mobile home in Victorville for $75,000. Dale Holtkamp plans to leave his job as a diesel mechanic and go into semiretirement, perhaps acquiring a laundermat or another business.

“With the market at the opportune time, we decided to do it now,” said Katie Holtkamp, who operates a small computer-training business in Hesperia. “At this point,” she said she found herself asking, “How long is the market going to hold? We see these types of cycles rarely.”

Before the current run-up, the biggest annual increase in Southland home values was in 1989, when the median price jumped 22% between the first quarter of that year and the same period of 1988. But it went up just a little higher in 1990, then languished for the next five years before climbing again. The last two years have been unparalleled, with the median price spiraling upward by $100,000.

Harper, the real estate agent in Orange, says that sudden appreciation prompted one of his clients to take a job transfer to Texas so he could cash out paper gains. In recent days, Harper said, that buyer sold his Orange County condo, which he had purchased just a year ago, pocketed about $60,000 and was getting ready to move into a single-family house in the Fort Worth area for about $130,000.

Boyd Smith, a Prudential California Realty agent in La Jolla, likens the current Southern California housing phenomenon to the tech-stock boom market a few years ago.

“At some point, the madness has to stop and level out,” Smith said, although he doesn’t see that happening until after the November election.

One of his clients, Jim Patrick, believes that prices are going to fall soon. That’s why the 41-year-old single man put his Pasadena house on the market April 19. Patrick bought the four-bedroom, four-bath house in June 2000 for $580,000. He says he put in about $120,000 -- to install new floors, tear down three walls and remodel the swimming pool. It was listed for about $1.2 million. Three written offers came in during the week, and on Monday evening, Patrick and his agent sat down in the large living room of the U-shaped house overlooking the Rose Bowl and opened the bids.

The first one was at the asking price. The second for $5,000 over that amount. The third: $1.3 million, which he accepted.

Patrick says he’s expecting proceeds of about $1 million after escrow closes. He’s signed a one-year lease on an apartment in downtown San Diego, where he plans to move and start a new business.

“Who knows what’s going to happen,” he said of the housing market. “I would like to be on the sidelines.”

Smith, too, sold his home recently and is now renting. But his windfall wasn’t anywhere near Patrick’s.

“As a real estate agent, I can kick myself,” Smith said with a laugh. “I should have bought” Patrick’s house.