Wealthy Escape Home Market

Wednesday, April 19, 2006 | California’s wealthy investors are choosing to invest less and less in real estate, a trend that local experts say should serve as a beacon to all real estate investors in the county.

In San Diego, financial advisors who work with some of the region’s wealthiest people are advising their clients to sell their investment properties. After a monumental run-up in home prices, they say, their clients are weary of holding onto investments too long and repeating the past mistakes of the dot-com bubble.

Nationwide, only 21 percent of wealthy people who plan on making additions to their investment portfolios intend to invest in real estate, according to data collected by the Phoenix Affluent Marketing Service, a New York-based market research and consulting firm. That figure is a lot lower in California, where only 16 percent of wealthy investors said they would be buying more real estate, down from 21 percent a year ago.

As wealthy people trend away from real estate investments and toward increased stock portfolios and retirement accounts, the population at large should take note, said Gary Painter, director of research at the University of Southern California’s Lusk Center for Real Estate.

“It is reasonable for the average investor to look at what rich people are doing, because presumably the richer people have more access to better information,” Painter said. “Because of that, they’re going to be able to more quickly move their money when they see trends changing.”

Under that logic, if wealthy investors are choosing not to rely on real estate for a good return, their decision is probably based on sound economic advice. Most wealthy real estate investors have made a good profit on their properties over the last few years, but as price increases slow, sales drop and inventory spikes, many of those speculators are choosing to invest elsewhere in order to avoid any risk of a downturn in home values.

The message some financial advisors in San Diego are giving wealthy investors is clear: Those clients who can afford to sell their investment properties should do so.

“If you have an investment property, this is a wonderful time to get the heck out,” said Richard Ashburn, an investment manager and financial columnist in La Jolla.

Ashburn said that unless a residential property is paying for itself through the rent it is generating, an owner should sell. Any owner paying $1,000 or $2,000 a month to cover the mortgage payments and taxes on their investment property should realize that it’s time to get rid of that investment, he said.

“If you’re in a negative cash flow situation, you’re nuts to hold onto it,” he said.

Ashburn said all three of his clients who previously owned investment properties have sold them in the last six months, and none of the 25 or so wealthy families for whom he manages investments has any intention to buy residential real estate in the next few years.

Michael Dorvillier, another La Jolla-based investment advisor who works with Linsco Private Ledger Financial Services, sings the same tune.

Dorvillier said the wealthy investors he works for have recently been moving to liquidate their real estate assets. He said the situation is analogous to what happened during the dot-com crash.

“A lot of those affluent investors learned their lesson with their Qualcomm stocks and their Enron stocks, and they don’t want to see that happen again,” Dorvillier said.

However, Dorvillier pointed out that some of his clients are choosing to roll over their local real estate investments into property elsewhere in the country. His clients are concerned about the future of house and condo prices in Southern California, Dorvillier said, not the value of strip malls or parking lots in places like Kansas.

David M. Thompson, vice president of affluent practice at Phoenix Marketing International, said the figures his company has collated do not necessarily indicate a slowdown in real estate prices.

Many of the 1,100 wealthy households – households with $250,000 to $1 million in invested assets – that the firm interviewed nationwide already have substantial real estate assets, Thompson said. These investors have bought up lots of property, he said, so they are less likely to buy up more as the real estate market flattens off.

“They’re already pretty maxed out, so – if they’re getting good advice – they are going to be advised to diversify,” Thompson said.

Nevertheless, Thompson said the perception that the real estate market is in a “bubble” has certainly played a part in raising concerns about property assets, particularly among the wealthy – a segment of the population that is notoriously risk-averse when it comes to investing.

Alan Gin, a professor of economics at the University of San Diego’s Burnham-Moores Center for Real Estate, said there’s another reason why most investors should be watching what the very wealthy do with their real estate assets.

Anxious investors are likely to unload their additional homes or condos rather than their first homes. If the owners of investment properties in San Diego decide it’s time to sell, Gin said, that could have a negative effect on home prices across the county.

“There’s a worry that if people start selling [investment properties] then there will be a depressing effect,” Gin said. “It won’t just be the million dollar mansion, but if people own $700,000, $800,000 homes that they’ve bought for investments, and they suddenly put them on the market, that will have a dampening effect.”

In San Diego, 17.2 percent of homes were bought as investment properties last year, according to DataQuick, a San Diego-based real estate information service. That’s considerably less than the national figure. The National Association of Realtors reported earlier this year that four out of 10 home sales in 2005 were second home sales.

Gin doesn’t know whether 17.2 percent is a large enough chunk of the market to cause a general slowdown in home prices. However, he cautioned that certain markets within San Diego are probably at a higher risk than the county as a whole. Downtown San Diego condos are probably more like 30 to 40 percent investor-owned, he said, which makes that market more susceptible to changes in investment trends.

Ashburn said it is not what affect wealthy real estate investors could have on the market, but what their activity could signal about the future of home prices. If wealthy people are shying away from real estate, he said, it’s probably for a good reason.

“They don’t need to go knock themselves out for another $100,000, they’ve got all the money they need. What they want to do is be safe with their money, be wise and safe and cautious. It’s more of a matter of money husbandry than money management,” he said.

Please contact Will Carless directly at will.carless@voiceofsandiego.org with your thoughts, ideas, personal stories or tips.