A new toll road cuts through a vast swath of brown dirt where orange groves once stood. It symbolizes the start of a development boom in the corridor from Irvine, Calif., to southern Orange County.

As the state's economy gains steam and more people flock to the state, developers, builders, and financiers smell big opportunities in Southern California.

Big names like Morgan Stanley & Co., Starwood Lodging Trust Corp., and Carlyle Holding Corp. are all buying a piece of California these days. And land prices in formerly moribund areas, including Orange County, have skyrocketed in the past year.

In Las Flores, a 2,000-home development not far from the toll road near the town of Rancho Santa Margarita, three- and four-bedroom homes that were selling for $350,000 just one year ago are going for $420,000.

But with California's recovery still in its early stages, some see signs that the market is already overheating. And that raises questions about the viability of some developers' visions for the region-pointing to trouble ahead for those financial institutions that lend on the assumption that the rebound will continue at its current pace.

"The only people who you know are fat and happy are people who bought large land positions last year or before," said James Z. Pugash, president of Hearthstone Advisors, which invests in single-family housing for Calpers and many other pension funds.

He warned that when builders and investors start "buying land on deals that make sense (only) if home prices appreciate," that's a sure sign of trouble.

Even when demand is strong and builders are selling houses quickly, it doesn't mean they'll make money at it if they're paying too much for the land, he added.

In San Diego, some investors are paying up to $100 million for land that hasn't even been approved for building, said Dennis M. Moser, vice president of Genstar Land Company Southwest. Getting local approval to build is notoriously difficult in California. Only one San Diego housing development has been approved over the last seven years, he said.

"It's sort of a high-risk/high-reward game being played right now," Mr. Moser said. "That probably means there are going to be some very big winners and conceivably some very big losers."

Economist G.U. Krueger of the California Association of Realtors dismisses talk of real estate bubbles. "We are too early in the cycle for any kind of bubble behavior," Mr. Krueger said.

He said Southern California's land and home prices fell too far in the early 1990s and they are just now recovering. It makes sense that land prices now reflect the expectation that home prices will continue to rise as the state's economy gets stronger, he said.

With low land prices, developers and builders have had the luxury of making money on deals without counting on home price appreciation, Mr. Krueger said, and that may no longer be possible.

"The only wild card as far as I'm concerned," Mr. Krueger said, is if there's "anything on the horizon that could threaten the economic assumptions."

If economic turmoil in the Pacific Rim countries means lower high tech exports, California's economy could slow down. Almost certainly, he added, developers and builders aren't taking that risk into account in their home price projections.

Many investors blame the run-up in land prices on "Wall Street money"-a catch-all phrase that refers to investments by publicly traded builders whose stocks have soared and money managers who seek high rates of return and are willing to move out of real estate investments when they don't get them.

Frederick N. Cooper, vice president of finance at Toll Brothers, the Huntingdon Valley, Pa., luxury-home builder, laughed when told of the griping.

"If you lose a deal, you always say the person who bought it paid too much," Mr. Cooper said.

Some investors "are speculating on increased prices," but Toll Brothers isn't among them, Mr. Cooper said, and has lost several deals recently.

"In general land prices are going up," he agreed, but "we're trying not to pay more."

Jeffrey M. Kaplan is a managing principal of Westbrook Partners, a real estate investment firm in New York that manages $1.5 billion for pension funds. Mr. Kaplan said Westbrook is the largest developer of land nationally for master-planned communities.

It's a big player in California, but these days they've have been priced out of land deals, Mr. Kaplan said.

Is he troubled that investors are counting on future home price increase and bidding up land prices?

"I honestly couldn't tell you it's a bad thing, because we continue to see home prices increase," Mr. Kaplan said. "Having said that, home prices could hit a plateau, and some of those deals wouldn't pencil out."

Mr. Kaplan said investors like him are well aware that real estate is a cyclical business.

"As there are ups, there will be downs," he said. "The challenge is predicting when that will be. We hope we're smart enough structuring deals that we're comfortable through a downturn."

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