Demand building for million-dollar homes

By Adam Shell
USA Today

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 percent 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, 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 percent median annual appreciation of homes since then.

• Low interest rates. Cheap loans make homes more affordable. A buyer borrowing $1 million now at 6 percent 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 percent.

• Tight supply. "There are still more buyers than sellers," says John Karevoll, a DataQuick analyst.

• Favorable tax treatments. After two years, a couple can sell a house and pay no taxes on up to $500,000 in gains.