Like many Southern Californians, Granada Hills condominium owner Beverly Gilroy and her husband had trouble finding an affordable house after years of double-digit price hikes.

So the Gilroys came up with a better idea. Why not buy a vacation home in a really nice place, like trendy and picturesque Sedona, Ariz.?

“We love the area and want to retire there one day,” said the 30-year-old studio set sculptor. “We also wanted to invest our money and it seems like real estate is the only sure investment.”

In just one year, their home in the high-desert, red-rock country has appreciated $60,000, to $440,000.

That’s what worries Federal Reserve Board Chairman Alan Greenspan. Driven by historically-low interest rates, vacation homes are now considered the hot new investment.

More than a third of residential transactions last year were second homes, according to the National Association of Realtors. The nation’s burgeoning ranks of millionaires and baby boomers on the brink of retirement are buying them for rental income, as a speculative investment or just for recreation.

That has prices in these far-off places appreciating at double-digit annual rates.

Among the popular spots aside from Sedona: Jackson Hole, Wyo., Myrtle Beach, S.C., Los Cabos in Baja, Mexico, and perennial favorites such as Hawaii.

These destinations have become so popular that Greenspan, along with a growing chorus of economists, are concerned that housing bubbles might indeed exist, not only in major metropolitan areas like Los Angeles but smaller, vacation-oriented markets.

“People are borrowing with 100-percent financing, so no down payment. They’re betting that the value of the homes will just keep going up. When prices peak, they’re going to bail,” predicted Michael Bazdarich, a senior economist at UCLA Anderson Forecast.

Booming boomers


Much of the interest in second homes is coming from boomers who figure that the residences can serve multiple purposes. The NAR calculates that the typical vacation home buyer is 55 years old and earned $71,000 in 2003. Nearly a quarter bought them strictly as investments, while 13 percent wanted them only for recreation.

“A lot of my clients have a little more money, maybe they inherited something, and they’re putting it into second homes,” said Michele Moore, estates director for H & M; Estates, a division of Executive Associates Real Estate Corp., which specializes in finding vacation homes for Angelenos. “If they decide not to retire there, they want to be able to sell it and get a good value.”

Moore’s last few clients have spent as little as $350,000 for vacation homes in Myrtle Beach, which has plenty of golf courses, but can get crowded during the summer. That holds prices down, allowing Southern Californians used to beach-front homes going for several millions dollars to pick them up for far less.

Those with more money select isolated ranch properties or homes in small towns near ski resorts in Wyoming and Montana.

“The places that are all the rage are the private clubs, like Yellowstone Club,” said Hal & #233; Behzadi, a money manager for high net-worth individuals for Citigroup Private Bank in Beverly Hills.

Yellowstone Club’s full-page ads in the Wall Street Journal tout privacy, a golf course, and a residents-only ski mountain. That’s just right for Behzadi’s entertainment industry clients looking to duck the paparazzi. Aspiring owner-members must be approved by the club and pay a $250,000 initiation fee and $16,000 annual membership fee. Ski-out-the-door homes cost $1.1 million to $3.5 million and 160-acre ranches start at $8 million.

That kind of home attracts only a small percentage of buyers. First-time buyers are staying closer to home, in places like Las Vegas, Mammoth, and even around the corner in Malibu. “They are more familiar with Southern California and trust that values will really go up. It’s something they can keep an eye on, even if they rent it out.”

In Sedona, the real estate market is so strong that buyers are snapping up sub-division parcels with nothing more than a utility connection, said Tom Garrow, an agent for Coldwell Banker First Affiliate, who estimates that 14 of the 35 homes he sold last year were vacation homes.

“About 33 percent of the buyers are from California,” he said. “Right now it’s more expensive to buy land and build, but people are doing it anyway. Some are not planning to move here for five or six years, they just sit on it while it appreciates.”

Another hot destination is the southern tip of the Baja Peninsula. Recently the Mexican government relaxed ownership rules along the coast line, allowing foreigners to own real estate through holding title in a trust held by a Mexican bank.

The must-have homes in Cabo are in new beach-front developments that are managed, can be rented out and have golf courses. Three-bedroom condos are going for $1.4 million, and the larger free-standing homes, with more bedrooms and a pool, range from $2 million to $5 million.

Economists who have studied real estate cycles say the vacation home boom has many of the hallmarks of a bubble, with buyers using inflated equity in their primary residences to buy second homes they can’t really afford through the use of alternative financing, such as zero down payment loans.

Other buyers, of course, have cash to burn and can withstand an expected rise in the cost of their variable-rate mortgages if the Federal Reserve Board continues to hike interest rates, as expected.

Those most in danger have bought second homes largely as investments, expecting to flip homes quickly or rely on inflated rental income.

“Investment housing is a pretty lousy investment, because you’re not getting the tax breaks that an owner-occupier gets, which is like tax-free rent,”

Bazdarich said. “Then if you rent it out, you’re a landlord, they pay you rent and you pay tax on it. If you sell it, there are capital gains taxes (on the entire sale),” he said.

He’s less worried about buyers who want vacation homes for long-term enjoyment and have used traditional financing to get them. They should be able to wait out a market bust. That’s a category the Gilroys place themselves in, noting that they put down a large down payment and took out a 30-year, fixed-rate mortgage. “The market is kind of unpredictable, so we wanted to play it safe,” Gilroy said.