The steady surge in luxury home prices shows no sign of abating as bull-market millionaires pour fortunes into status-symbol homes. But some real estate agents and mortgage lenders are beginning to have a feeling of deja vu.
Laura J. D'Antonio, who manages Norwest Mortgage's high-end business in California, is no doomsayer. But she sees telltale signs of a market that could overheat: multiple offers, homes selling above list price, buyers paying people to stand in line as they wait for a new phase of a subdivision to open sales. "I feel like saying, 'Didn't we learn something the last time?'"
The last time prices skyrocketed in California was in the 1980s. From 1987 to the market's peak in 1991, median prices increased 50%, before plunging 20% over the next five years. In some Southern California counties, prices stopped falling only last year.
The resulting rash of delinquencies and foreclosures hobbled many California lenders, paving the way for the state's large thrifts-once national powerhouses-to be acquired by buyers such as Seattle's Washington Mutual Inc.
Loans for high-end homes tend to be held in lenders' portfolios, because they exceed the secondary market agencies' loan limit. And wealthier borrowers are considered likely to take advantage to declining rates by refinancing, which means the lender can lose interest income.
Today the booming high-end housing market is a bi-coastal phenomenon, from the hills of Silicon Valley to the beachfronts of Southampton, N.Y.
It is fueled by such millionaires as a 30-something venture capitalist who purchased a house last month "in the seven-figure range" in Wellesley, Mass., and doubled his mortgage in the process. The buyer, who asked that his name not be used, says he is unfazed by the financial leap. His two mortgage payments-he owns a second home on Cape Cod-still make up only 15% of his salary.
Another typical case is that of a 32-year-old systems engineer who works for Cisco Systems, the San Jose, Calif. technology giant. This man, who also wanted to remain unnamed, bought a 1,500-square-foot house for $750,000 in the small town of Los Gatos. His $500,000 down payment came from cashing stock options.
"There is so much stock money around here, who cares about paying $1.2 million or $1.4 million for a house?" he says.
The easy attitude toward money strikes a familiar chord in certain markets, as does the pace of price gains.
Home prices are rising so fast that appraisers trying to determine the value of a home routinely add up to 1% for each month since comparable properties were sold, says Charles N. Nilsen, executive vice president of First Financial Inc., a specialist in high-end loans in Wellesley.
"That is something we haven't seen since 1986 or '87," Mr. Nilsen said. Bidding wars are commonplace, and homes often sell for more than they are listed, real estate agents say.
In California's Santa Clara county-the nerve center of the state's software industry-prices rose 30% between May 1997 and May 1998.
This is good news as long as the stock market and the economy keep going up. But privately, many real estate agents and lenders worry that prices are getting ahead of values, and fret about how their young, newly rich clients will fare in a downturn.
"There is a quiet concern in the market about a lot of new money that is buying large homes," Mr. Nilsen says.
The worry, as Mr. Nilsen describes it, is that "this person is 29 years old, his income has popped tenfold in three years. What happens if things do correct themselves? Will these people be able to manage a much lower level of income?"
It used to be that buyers for Wellesley's big homes came from the ranks of law partners and senior corporate executives-people who had spent a couple of decades managing and saving incomes, he said. Still, lenders are not fretting enough to turn down these lucrative loans, Mr. Nilsen added.
Certainly, the worries are blunted by several factors. Many real estate agents and lenders said the newly rich buyers are less leveraged than they were in the 1980s. They routinely make cash down payments of 20% to a third of the home's value. For bankers, that means that even if home prices fall, a defaulting homeowner would probably take all the loss if the home were sold.
And high-end homebuyers are not flipping homes like they were in the 1980s, real estate agents add. If prices fall, it will not matter because the buyer is in the home for the long run, they say.
High-end homes account for a growing portion of home resales, according to the National Association of Realtors. In 1995 just over 10% of home resold were priced at $250,000 and above. Last year such homes made up 13% of home resales-a 30% increase over three years.
Homes priced at $500,000 and above-the highest category tracked by the Realtors-made up 2.5% of sales last year compared to 1.8% in 1995-an increase of almost 40% over the three-year period.
Samia S. Morgan, a real estate broker in San Carlos, Calif., described a particularly fierce bidding war for a house in San Carlos that she showed this spring. The three-bedroom house came on the market March 2 for $589,000 and was sold March 10 for $701,000 in cash.
"There were eight offers," Ms. Morgan recounted. "The sellers countered. Each and every bidder countered. It was a very bad case because I don't think the house was worth that kind of money.
"The listing agent told me her jaw dropped when she saw how high the price (went)," Ms. Morgan added.
Despite her doubts, Ms. Morgan is not predicting a meltdown. Like many others, she expresses confidence that even if the fever cools, prices will not plummet.
"Our weather is wonderful, we don't have to shovel snow, the economy is good, our schools are good," she said.
"Hopefully, we don't get hurt too badly when the market adjusts, because we are landlocked and we don't have new land to develop," she said. "Supply will always be tight, and demand will always be high."