Wednesday, April 06, 2005

As housing market booms, more buyers pay $1M-plus


In today's booming housing market, buyers are increasingly willing to fork over $1 million or more for their dream house.

Last year, nearly 51,000 buyers — 65% in California — spent $1 million or more for a single-family home, says DataQuick Information Systems. That's a fivefold increase since 1999, when 10,000 homes fetched $1 million-plus.

Derek Walter, 43, is one buyer who views high-end real estate as a good investment. He paid $1.1 million in 2004 for a four-bedroom "second" home with ocean views on Bald Head Island off North Carolina. "There's no other houses between us and the beach," he says.

The big demand for seven-figure homes is adding fuel to the current debate about whether the real estate market is overheating in the USA, or at least in certain ZIP codes.

Robert Shiller, a Yale University economist, says a bubble is forming and will end badly: "People have transferred their affections from the stock market to real estate."

But David Lereah, chief economist at the National Association of Realtors (NAR), counters that low interest rates, positive demographics and a strong economy will buoy real estate through the end of the decade. Driving megapricey buys:

Price appreciation. A home valued at $725,000 at the end of 1999 is now worth $1 million, based on the 6.7% median annual appreciation of homes since then. Hot markets have enjoyed double-digit annual price gains.

Low interest rates. Cheap loans make homes more affordable. A buyer borrowing $1 million now at 6% would spend $60,000 in interest in year one — the same as it cost to finance $600,000 in 1990 when mortgage rates were 10%.

Tight supply. "There are still more buyers than sellers," says John Karevoll, a DataQuick analyst. There's now a 4.2-month supply of homes for sale, NAR says. A six-month supply is deemed a fair balance between buyers and sellers.

Favorable tax treatments. After two years, a couple can sell a house and pay no taxes on up to $500,000 in gains. That's making it easier to move up to larger houses.

The $1 million-plus market shows no sign of cooling. In Rancho Santa Fe, Calif., 59 homes priced above $1 million are currently under contract, and 171 more are for sale, says Roberta Murphy of Windermere Exclusive Properties. In Tucson, 33 home sales in 2005 broke the $1 million barrier, and another 31 are under contract, says Kandy Walsh at Long Realty. That's on track to beat the 93 $1 million-plus homes sold last year. "At our weekly sales meetings, there are always brokers who say, 'I need something between $1 million and $1.3 million,' " she says.

Contributing: John Wihbey

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