High-End Homebuyers
Face a Tougher Choice

Question: My husband and I pay $10,000 in taxes each month. Our accountant insists buying a house is our only chance to get a tax break. I have been surveying the market for two years now, and my husband just recently decided that he is ready to make a move. Prices in this area have been increasing by more than 20% a year. One house that was offered at $1.5 million last year is now on the market for $2.5 million. For us to buy a house, we will need to settle for something that isn't as nice as we had hoped. Should we buy now or wait a few months to see what happens?

-- Becky, Beverly Hills, Calif.

Becky: Buy now when the prices are high -- or wait until they could be even higher? This is the question that most homebuyers across the country are facing. Most economists think real-estate prices aren't likely to fall anytime soon, at least at the low to moderate end of the market. But the high end is a different story, as I will explain.

Today's strong real-estate market seems to be fed by at least three forces: historically low interest rates (that are almost half of what they were 20 years ago), low- to no-down payment loans for new buyers of homes priced less than $300,000 and a shortage of inventory in most parts of the country. So until interest rates move upward, it becomes harder to get a new mortgage or the supply of homes increases (which is unlikely given the number of housing starts), the strength of the low-end to moderate market will probably continue.

In high-priced homes, however, it is a different story, particularly on the West Coast, where the market is driven almost exclusively by a shortage of inventory in choice areas like Beverly Hills. A shortage of available land in top locations means few new homes are being built. At the same time, investors have purchased many of the hot properties in the high-end areas in hopes of reselling down the road for a big profit.

You may not remember this, but when California came out of its last real-estate recession (which ended around 1998), the first part of the market to bounce back was the high end, as prices almost doubled within a few years. Again, speculators had a big role.

Then came the dot-com bust in Silicon Valley, with many highly paid executives suddenly out of work and trying to sell their homes. Prices took a tumble as speculators quickly unloaded to avoid having to sell at a larger loss later on. The effects spread through the high-end market across the state, cutting sales and prices.

But more recently the trend has again reversed and there has been a comeback in high-end home prices. What goes down, apparently, can come back up -- and may go down yet again. It seems clear that the high-end real-estate market is more volatile than the low to moderate end. In fact, high-end home prices have looked like a roller-coaster ride.

If only we had a crystal ball, it would be easy to make a decision. But unfortunately, no one knows the future. You could wait, hoping for another reversal in high-end home prices. But since you say you want a home primarily for the tax advantages it can provide, you might want to bite the bullet and jump in. As long as you hold the property for the long term, it might not make all that much difference when you buy.

-- Mr. Irwin has more than 25 years' experience as a Los Angeles-area real-estate broker. He is the author of more than two dozen books about real estate and is recognized as one of the most knowledgeable writers in the real-estate field. Mr. Irwin's most recent book is "Tips and Traps When Renovating Your Home," (McGraw-Hill, 2000).

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