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High-end housing is booming

The slowing economy suggests it shouldn't be happening, but Americans are buying $1 million-plus homes at the fastest clip ever.

The ultra-high end of the housing market represents a fraction of the 6 million new and existing homes expected to sell this year. But the explosive growth at the top contrasts with the general housing market, which will fall short of the record volume of 1999.

Across the USA, and especially in California, young, two-income couples and well-heeled older buyers with enormous home equity built over decades are finding seven-figure home prices within reach. But the kind of home that $1 million will fetch isn't what it used to be.

Laments San Francisco real estate agent Henry Jeger: "A million dollars just isn't a lot of money around here anymore."

When Southern California developer John Markley started working 28 years ago, he had to drive through Beverly Hills, home to the stars, to see a $1 million house. Now, his company cranks them out at the rate of more than 100 a year.

Here's what's happening:

* Nationally, a record 15,595 homes are projected to sell for $1 million or more, up 51% from 1999. That's according to an exclusive analysis of the high-end housing market for USA TODAY by DataQuick Information Systems, a real estate reporting firm based in La Jolla, Calif.

* Seven- and eight-figure prices remain largely a California phenomenon. The state will account for about 70% of $1 million-plus home sales this year.

* The market is hot elsewhere, too. The 30% of high-end home sales that occur outside California this year reflects a 10-percentage- point increase from 1995. Manhattan's notoriously high real estate market accounts for much of the activity. Swank areas in or near Chicago and Washington are hot. Even high-end neighborhoods in Cincinnati have shared in the boom.

* Million-dollar homes aren't necessarily luxury homes anymore. As recently as 1995, the typical $1 million-plus house in California included 4,500 square feet, or nearly the floor space of an NBA court. This year, that average will dip below 3,000 square feet, or roughly the area between the free throw lines.

* New construction represents a growing share of the $1 million- plus market, but more than eight in 10 of the high-end houses that move this year will be resales.

Prices going up and up

The nosedive in tech stocks last March caused a shudder at the home of Douglas and Jennifer Ditmer in San Ramon, Calif. The Ditmers, who have two sons and are deeply rooted in the community east of San Francisco Bay, had already committed a $30,000 deposit on a larger $1 million-plus home in a development close by. Although a big chunk of their wealth evaporated with the market plunge, the Ditmers are pressing ahead with the new home that is now under construction.

"You're never going to be completely comfortable when you're spending this kind of money unless you have $10 million in the bank," Douglas Ditmer says. Yet Ditmer, who works in real estate, says he's confident that his housing investment is safe.

"Prices of these expensive homes (in the East Bay) just keep going up and up," he says.

Times are sweet for Toll Brothers, the publicly traded homebuilder based in Huntingdon Valley, Pa. The company builds high-end homes in 20 states. Toll Brothers expects to announce next week its eighth consecutive year of record earnings. Its share price has been bubbling at or near all-time highs.

A year ago, in Westchester County, N.Y, the company crossed a pricing threshold, developing an entire subdivision where every home style is priced above $1 million. Since then, Toll Brothers has followed with two more developments where the price of entry begins in seven figures -- Norris Canyon Estates, where the Ditmers are building, and another in Basking Ridge, N.J. Expect more, says Toll Brothers CFO Joel Rassman.

Rassman says the firm is riding favorable demographic trends that promise to continue providing large numbers of potential buyers with an urge to splurge on an expensive house. He cites growth in both the number of high-income households and in the number of aging Baby Boomers, the heart of the company's target market.

A tract of mansions?

Volume builders such as Toll Brothers are bringing to the high- end market the sales and building techniques traditionally associated with the mass housing market. Buying a house in seven figures no longer necessarily means starting with an architect toting a sketchpad.

It's now common for buyers to select from a limited number of floor plans based on what appeals in model homes. Increasingly, components of the house are mass-produced and delivered to the building site.

Toll Brothers calls its homes "semi-custom," placing them somewhere between the unique design of a mansion and the mass production of a tract home.

Kira McCarron, Toll Brothers' marketing vice president, says the company provides "a significant amount of customization" by allowing variations on basic floor plans and offering a broad selection for such things as cabinets and counters. These days, she says, high-end homebuyers typically are working couples stretched for time.

"These people obviously could buy what's considered truly custom," McCarron says. "But people don't have the time, and the cost savings we offer are enormous."

The company's volume approach, for instance, cuts the cost of architects' fees as well as the costs of such things as lots, building materials, fixtures and appliances, she says.

John Markley, president of Pacific Bay Homes, says customers at his One Ford Road development in Newport Beach, Calif., are buying location -- it's about a mile from the Pacific Ocean -- as much as they're buying a house. They also get community amenities such as a putting green, fitness center, two swimming pools and even a holiday pet parade.

Joel and Stephanie Graves have lived in southern California long enough to get used to high real estate prices, but even they were a bit shocked to break into the seven-figure category with a recent purchase in One Ford Road. "If I'd have thought two years ago I'd be buying a million-dollar house, I'd have fallen over," says Joel Graves, a health care executive.

Graves, 40, says he's comfortable with the big investment in a house because the couple is likely to stay there for many years. If home values dip, so be it, he says.

"We're near the water," he says. "It'll only be a matter of time before they start going back up."

Most houses in what eventually will be a 370-home development are selling while framing is under way, allowing buyers the ability to choose their upgrades. If no buyer comes forward, the builder picks the upgrades and finishes the house. Those move quickly, too, Markley says.

About a third of the nation's $1 million-plus sales this year will be in the nine-county San Francisco Bay area. Many of those are in San Francisco itself, a fully built thumb of land with water on three sides and ordinances limiting the option to build skyward.

When the city's physical and legal limitations bump into the pent- up demand for housing, the collision can be staggering. The protocol for selling these days is to hold a few open houses, then set a day when the seller will accept offers from pre-qualified buyers. Serious bidders omit contingency clauses from their offers.

Steve and Amy Krause last week sold their Victorian cottage in a pricey San Francisco neighborhood for nearly $1.4 million, a gain of almost $400,000 from what they paid for the house just last January.

The Krauses initially bought the place to shed their $3,000-a- month rent payment for a tiny San Francisco apartment and to begin building home equity. They had anticipated a longer stay in the Bay Area but decided over the course of this year to relocate to the East Coast. "We're very happy," Steve Krause, 29, said of the couple's first home ownership experience.

Krause, a business developer for an Internet firm, said he was confident from the start that the couple's seven-figure investment would hold its value, even though the price that they paid last winter was well above the home's $795,000 listing price.

"In our area of San Francisco, there's a very constricted supply" of homes, he says.

So does the new buyer get a view of the water for $1.4 million? Janis Stone, the Krauses' agent in both deals, laughs. "Oh, no. That would be a lot more."

Hot markets help

John Karevoll, a real estate analyst for DataQuick, says homes such as the Krauses' Victorian account for much of the explosive growth in $1 million-plus sales this year. He calls them "million- dollar wannabes" -- houses in hot markets that get bid up from high six figures right through the $1 million threshold.

Jeger, the San Francisco real estate agent, was involved in another such sale recently, in which nine bidders drove one home from an $875,000 asking price to a $1.6 million selling price.

But it's not only the Bay Area's famously pricey housing market where seven-figure homebuyers are seeing expectations deflated. Atlanta agent Nancy Thornton recently had to explain to buyers from New Jersey that their $1.5 million would leave them at least $1 million short of the kind of house they wanted in the city's fashionable Buckhead neighborhood.

"Five years ago, we could have gotten them a place right across West Paces Ferry Road from the governor's mansion," says Thornton, referring to one of the city's most fashionable addresses. "Now, $1.5 million isn't going to touch it." Thornton says a strong local economy and unbearable traffic congestion for suburban commuters has driven up home prices in good, close-in neighborhoods of Atlanta.

The surge at the top defies the conventional wisdom that the high end of the housing market is nearly oblivious to mortgage rates and employment levels while being hypersensitive to stock market performance. According to an estimate by Wilshire Associates, $2.4 trillion of shareholder wealth has vanished since the stock market peaked months ago.

"You'd expect more of an effect," says Mark Calabria, an economist at the National Association of Realtors.

The boom is not over

One possibility, says Calabria, is that many investors, coming off the boom years of the 1990s, are not yet viewing their market losses this year as permanent.

Other possibilities:

* High-end homebuyers took their market profits before the crash. Stone, the San Francisco agent, says she continues to have a huge supply of potential buyers for the homes that she sells in some of San Francisco's priciest neighborhoods. Says Stone: "These are people who have already liquidated their stock options. They've made their millions."

* Homebuyers are shifting assets. David Weaver, an analyst at Legg Mason Wood Walker, surmises that high-end homes are being viewed increasingly as safe harbors for money that in more bullish times might have been invested in stocks.

Time will tell just how good a bet that investment strategy is.

"There'll be a change in the economy some time, and things will slow down," says Stone, a 25-year veteran of San Francisco home sales. "There always is."