Quotes of the Day

Randy Bianchi is a firm believer that in America, "a person should be allowed to buy a second, third or fourth home if he or she wants." That goes for real estate investors and speculators, even those who "flip" homes—that is, people who buy a house or condominium for the sole purpose of quickly selling it off for a profit, usually before construction is completed and often without even taking title to it. But Bianchi, a real estate broker and co-owner of Paradise Properties in West Palm Beach, Fla., who says he may soon flip a luxury condo himself, admits that his convictions about the practice are being tested in today's housing-price boom when homes in his area of Florida are jumping 35% a year. "Flipping," says Bianchi, "is turning into a negative phenomenon. In reality, it's pushing the market up too fast."

Some of the nation's leading homebuilders call that an understatement. To them, real estate investors, especially flippers, are to the housing boom what day traders were to the disastrous dot.com craze: a scourge distorting the market. In fact, Steve Hilton, co-CEO of Meritage Homes Corporation in Plano, Texas, said in an interview last month with the Arizona Republic in Phoenix—one of the nation's hottest real estate markets—that many investors today are "parasites" who artificially "raise the price of housing" but "don't bring any value." Craig Robins, head of Dacra Developers in Miami, concurs: the investors, he says, are bringing a hyper-short-term mentality to real estate ownership that creates too much turnover and "diminishes both the financial and community integrity of any development."

Investors argue they're being unfairly scapegoated. Developers, they say, are simply frightened that outsiders like them are getting a piece of the action for once. They add that homebuilders, far from being the socially conscious lot they've cast themselves as in this dispute, are just as culpable with respect to skyrocketing housing prices. The developers, says Sean Claggett, a Las Vegas attorney who represents investors, are often the first these days to hyperactively raise home prices to levels that attract investors in the first place. "The investors are not the ones who dictate the market, so to just point the finger at them is inappropriate," says Claggett. "No one's happy when too many investors flood a market, but the builders have to take a large share of the responsibility for that."

Still, a growing number of developers nationwide are increasingly working "anti-investor clauses" and other "flip-buster" weapons into their sales contracts. Many now demand that buyers pledge in writing that they'll actually occupy the home they buy (or at least disclose whether the unit will be a primary or secondary residence or merely an investment). Others, like Robins, limit the number of units a person can purchase in any one development; and some, like StarPointe Properties of Arizona, are requiring investors to close on (and take title to) the property they're buying. Hilton and Meritage, as well as a host of other large developers like Pulte Homes, are playing even harder ball: they now demand that a homebuyer forfeit the profit if selling a home before the minimum period of one year (except for hardship reasons). Hilton says Meritage already has several cases pending in court against investors who violated those contract terms. "We weren't doing this a few years ago because the investors were few and far between," says Hilton. "But now it's an out-of-control activity that we simply can't condone."

"Investment homes," as they're often called, used to represent a fraction of U.S. housing sales, but according to the National Association of Realtors they made up almost a quarter of home purchases last year. It's one reason why U.S. home prices have lept 50% since the 1990s (condo prices have risen 57%) and why fewer than an estimated fifth of Californians can afford a median-priced home in their state. Developers complain that when investors snatch up units pre-construction and then sell them off before the sodded grass is even put down, it essentially means the developer ends up competing with the flippers for sales within his own development. At the same time, families and other buyers who don't have the time or wherewithal to play this game usually end up paying a higher price than they would had the home not been flipped. "It takes money off the table for the parties who are genuinely interested in building and living in the homes," says Robins.

What's also at stake, say the developers, is the status of the "home" as something more than a commodity as instantly tradable as pork-belly futures. When the prime purpose of a house or condo becomes hedging instead of living, they argue, it eventually loses the cachet of residential and community stability that keeps property values strong in the long term. "If there is no sincere interest or care about the actual use of the property," says Robins, "it won't be worth that much over time. It jeopardizes the market." In an exchange this month on the Inman News website, a leading real estate news service, a prospective Las Vegas condo buyer told columnist Robert J. Bruss he didn't like the "smell" of the developer selling units pre-construction to speculators. Bruss didn't mince his response: "There should be a law against real estate speculators who hope to tie up a property before construction without ever taking title or adding any market value."

Investors counter that the flip-busting measures are a violation of free-market practices and a worrisome, if not illegal, form of real estate discrimination. The enforceability of anti-investor clauses is still in question, but Hilton says Meritage's attorneys have assured him that his company's pending cases against investors "will stand up," and no investor has yet filed a suit against the anti-investor measures. In the meantime, it appears the investors may have trouble erasing an image, fair or not, as the bad guys of this housing boom.

• Tim Padgett
• Increasingly, housing developers are trying to curb the practice of quickly buying and selling homes