To appreciate the new math of this Southern California real estate market, consider the $10-million home.
Tom and Michelle Rhodes did. Not that that's what they'd wanted. What they'd wanted was to trade up from the five-bedroom tract house they had bought eight years ago in one of Newport Beach's most family-oriented sectors.
When the home for which they'd paid $800,000 sold this year for a thrilling $2.36 million, the Rhodeses -- a 43-year-old contractor and pharmacist-turned-homemaker, respectively, and three school-aged children -- figured they'd soon be moving into the Taj Mahal bracket. Five million dollars, they proudly told their real estate agent, who promptly showed them a parade of lot-line-to-lot-line McMansions, most with no yard, some in neighborhoods that weren't even gated.
"I don't know what I was expecting," Tom Rhodes said, still mildly flummoxed. "Better views for sure. And bigger closets." It soon became clear that the dream house they'd pictured -- half-acre lot, great ocean views, wine cellar, home theater, elbowroom commensurate with the price tag -- was going to run them eight figures. And in fact, now that they have it, they say it was a bargain at $10.9 million.
"It's amazing," Tom Rhodes now marvels, "what that kind of money won't buy anymore."
Once upon a time, $10 million was the tippy-top of the housing market, even here, in one of the nation's most rarefied markets for real estate. Ten million bucks was, in the 1970s, about 10 times the then-record price of the Playboy Mansion. It was, in the 1980s, what Aaron Spelling paid for the 6-acre former Bing Crosby estate.
Even in the mid-1990s, even among rich folks, $10 million was freakishly big money; only a handful of homes each year sold in that range. Not Madonna, not Cher, not Arnold Schwarzenegger lived in $10-million houses, at least in those days.
Now, however, even with the market momentarily cooling, real estate agents say $10 million is your basic starter mansion. "In the high bracket," said Beverly Hills real estate broker Cecelia Waeschle, "$10 million is now almost the norm."
Waeschle should know. For almost 20 years cross-referencing public records and private sources on the industry grapevine, she has carefully tracked home sales in the Hollywood Hills-to-Malibu swath of Los Angeles County that encompasses the West Coast's highest concentration of $10-million-plus homes.
Among real estate professionals in Los Angeles, Waeschle's personal list has become a crucial point of reference, in part because discretion -- long a watchword in high-end real estate transactions -- has become a near-fetish in the current market. According to agents, appraisers and county officials, confidentiality agreements have spiked in popularity in the last three years, as has the use of mechanisms that keep home sales prices and the tax information from which they might be deduced out of the public record.
On or off the books, however, 2004 is shaping up to be a record year for $10-million-plus home sales. With the year scarcely half over, Waeschle says she has already counted 30 just on the Westside, the area's highest number ever. A similar list, maintained in southern Orange County by Bill Cote, a veteran Newport Beach agent, shows five such home sales, just two shy of the county's record, set last year.
Meanwhile, La Jolla-based DataQuick Information Systems, which relies exclusively on public records, has recorded 27 openly documented home sales of more than $10 million statewide this year. Because so many high-end sales prices are now shielded from the public, DataQuick's numbers are substantially lower than counts kept by agents, but even so, the firm, which compiles housing data, reports that this year has already matched the last statewide high mark, set four years ago.
DataQuick analyst John Karevoll says the high end of the housing market tends not to be driven by the same variables that affect most home buyers, such as mortgage rates. Sales over $10 million tend to be all-cash or complex asset swaps and rarely hinge on the availability of a conventional mortgage.
"Obviously," he said, "people who can buy a $10-million house have different issues in their lives, such as, 'Hmmm, where do I park this money I inherited or sold my company for or something -- stock market? Naaah. Bonds? Buy a jet? How about property?' "
Fueling the market
Thus, Karevoll said, the demand for high-end homes has risen in part because the doldrums on Wall Street have made real estate a comparatively more attractive investment. Indirectly, however, at least some of the $10 million-plus market has been fueled by current low interest rates.
Cheap mortgages, he said, have heightened demand for $1-million and $2-million houses, and as those owners have traded up, demand has shot up at the top of the market. In that sense, Karevoll said, "everybody's floating on the same rising tide."
"It's like a trickle-up effect," agreed Beverly Hills broker Jeff Hyland, a native of Little Holmby and coauthor of a book on Beverly Hills estates. "The $10-million buyer is probably moving up from a house he just sold for five to someone who sold theirs for three who just sold to a starter buyer. And those magnificent mansions that used to sell for $10 million are now 20 and 30 apiece." By most measures, that's a lot of dough for a roof and four walls, but appraisers and agents say the biggest part of an eight-figure home price -- or any home price, for that matter -- is the land value.
"What bumps it up is acreage," said longtime Bel-Air broker Bruce Nelson, who this year helped a client get $12.3 million for two vacant lots on Sunset Boulevard near the Beverly Hills Hotel. (It's the big, fenced site that once held the estate of the late Sheik Mohammed al-Fassi, the Saudi royal who, in the 1980s, rocked the neighborhood by painting his nude statues flesh-tone and his mansion lime green.)
"When the price of the dirt goes up, the value of the property goes up."
Agents and appraisers say a flat lot on a decent street in the so-called Platinum Triangle -- Beverly Hills, Holmby Hills, Bel-Air -- now averages $5 million an acre. A lot on the Pacific Ocean in Newport Beach has been selling for upward of $125,000 per linear foot of beachfront. In parts of Malibu, that same "front-foot," as it is termed, has been bid up to $200,000 or higher.
Malibu locals blame a run-up in sales there during the last several years among show business people and second-home buyers who became nervous about international travel after Sept. 11, plus an eye-popping shopping spree by Oracle Corp. founder Larry Ellison. Over the last two years, the Silicon Valley billionaire has bought seven properties on Carbon Beach to the tune of nearly $100 million.
"Carbon Beach was already going up, but because of what he did, it's now the single most expensive beachfront in Malibu," laughed Alan Mark, a longtime local agent. "When he came in, the comps went crazy. He probably jumped the price of a front-foot a good 25%."
The rush to rebuild
Appraisers say prices in top locations also are being driven by the teardown craze that has been inflating real estate values, on and off, since the 1978 passage of the property-tax-slashing Proposition 13. Vickie L. Gill, a Los Angeles appraiser who specializes in the $10-million-plus market, says many eight-figure homes are mini-mansions that were built in the 1980s on the remains of, say, Beverly Hills ranch houses, were resold in the 1990s, and are now selling again -- to buyers who'll raze them for still bigger houses.
Even so, agents say, the supply of grandeur is failing to keep pace with demand among the very wealthy.
"If it was $5 million three years ago, it's $10 million today," says Cote, who for 34 years has sold real estate in coastal Orange County.
Thirteen years ago, Cote briefly made local history by snagging a then-record price of $14.8 million for an 18,000 square-foot manse with 300 linear feet on the water on Newport Beach's Harbor Island. This year, a property half that size with a third of the beachfront sold on far-less-exclusive Lido Isle for about the same price.
"It's economics," he said. "There are only 1,100 waterfront properties in Newport Beach -- that's the entire city, and that's not a lot. Laguna Beach probably has a third of that."
Beverly Hills' Hyland says he has discovered a new rule of thumb in this market.
"Someone looking at a $10-million home usually won't want to see anything more than 15, but someone wealthy enough to look at $20 million will also look at 40," he said.
So what will $10 million buy, house-wise?
"Not what it used to, that's for sure," said Malibu agent Mark. "It'll still get you parts of the Westside and the Valley, but you won't be the biggest kid in town. You won't even be the biggest kid in the neighborhood, really. It'll buy you a nice house, but it'll only put you on the edge of the beginning of the big, big boys."
As a demonstration, Mark offered a tour of an estate he is marketing with his son and partner, Tony Mark, in Paradise Cove. It's 3 acres, bluff top and beach, with a bougainvillea-strewn hacienda, a tennis court and two guesthouses. The views are extraordinary. The house has a soulful, Old California feel to it. Barbra Streisand's compound is visible, just a couple of bluffs up the coast.
But upon close inspection, the tennis court is crumbling. The kitchens (all three) are dated with nary a Sub-Zero among them. The bathrooms have cheap showers and cracked tile. The golf-cart path down to the beach is not landscaped. Stains of indeterminate origin dot the various carpets and when Alan Mark opened the thick wooden gate to one of the guesthouses, it fell off.
This is, in fact, a top-of-the-market fixer-upper. And $10 million won't buy it. The owner wants $15 million but will settle for $12 million for just the main residence and one guesthouse.
"It's land value," Mark conceded. "But feel it." He paused. The sun glinted on the blue, blue ocean. Gulls squawked. The breeze was warm and smelled of eucalyptus and salt.
Ten million dollars (and change) did buy the Rhodeses a taupe, tile-roofed manor, high on a guard-gated hilltop overlooking Newport Beach.
Built just two years ago for the owner of a commercial plumbing business who lived in it for only 18 months before he sold it, the house came furnished down to the last lampshade by Fari International, a high-end building and design firm with a cult-like following in Orange County.
Big, plush sofas and chairs fill the family room; the walls are covered with rich wood paneling and marble insets. When 13-year-old Taylor politely greeted a guest at the tall, beveled-glass doorway, she seemed tiny next to the massive floral arrangement anchoring the entry hall.
Michelle Rhodes, who grew up in Riverside and met her husband in high school, said the place had taken some getting used to after what she described as their old "Martha-Stewart-meets-the-Brady-Bunch" neighborhood. There, kids on bikes raced among the cul-de-sacs and neighbors waved hello to each other as they clipped the hedges. Visitors drove in and out, uninhibited by pass codes and gates. The Rhodes kids' toys spilled out of bedrooms that were impossibly tiny.
In the new house, she said, their children could play hide and seek in their own wing and ride up and down in the built-in elevator. The home theater raised sleepovers at chez Rhodes to a whole new plateau. And if it still was thisclose to the estate next door, it nonetheless had the feel of a mansion.
"Mom! Mom!" 8-year-old Ashley's small, disembodied voice crackled at one point over the intercom from the kitchen. "Can I have one of those small apple things?"
Outside, all was quiet, save for the security patrol truck, which cruised every few minutes past the newly minted palaces. Some lots are still vacant and occasionally, the children said, they have seen coyotes.
"I have yet to see another person," 16-year-old Matt laughed. "I think we're the only ones who live up here."
When their real estate agent first told them about this development they caught their breath -- they'd known right away which area he was describing.
"We'd come up here years ago when we were just dreaming and it was first being built," Michelle said. "The lots were like, $1.2 million and we thought, 'One-point-two-million dollars? And then to pay to build a house on top of that?' "
Now their house, for all its grandeur, is not even close to being the neighborhood's most expensive, and even as they closed escrow, a neighbor was asking $15 million for a property up the hillside.
"There's always a bigger fish," Michelle laughed. "The guy building next to us bought not one but two lots."
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Great moments in really expensive Southern California home-buying history
1906: Rodeo Land & Water Co. announces the sale of lots "between the city and the sea" for $900 and up. Its first development, Beverly Hills, promises "a better class of homes."
1920: Silent film stars Mary Pickford and Douglas Fairbanks pay $35,000 for a Beverly Hills hunting lodge, which they transform into a manor. "Pickfair" helps turn the city into an enclave for movie stars.
1955: Lucy Smith Battson, widow of oil heir Ned Doheny, wearies of living in Greystone, the mansion that was the scene of Doheny's mysterious death. With her second husband, she builds the Knoll, a 55-room Georgian mansion in Beverly Hills.
1971: Real estate surpasses $1 million for the first time in Los Angeles with the sale of what is to become the Playboy Mansion in Holmby Hills.
1978: Proposition 13 passes, slashing property taxes and increasing land values. Home buyers respond by frantically razing small homes and replacing them with big ones. Italian film producer Dino De Laurentiis buys the Knoll for $2 million. The sale sets a home price record in L.A.
1988: Laker owner Jerry Buss sells Pickfair for a little less than $7 million to businessman Meshulam Riklis and his actress wife, Pia Zadora, who raze most of the house for a new mansion modeled after Versailles and the Sistine Chapel.
1995: Barbra Streisand breaks the $10-million mark in Malibu, paying about $12.5 million for two homes on three acres near Point Dume.
2003: Tech mogul Larry Ellison goes on a Malibu shopping spree, spending nearly $100 million on more than half a dozen properties on Carbon Beach. Agents now view the area as the West Coast's priciest waterfront real estate.
2004: A Malibu fixer-upper compound goes on the market for $15 million. Pickfair goes back on the market at $27 million, or about 770 times what Pickford paid for it. In Newport Coast, the price of a house on the wrong side of PCH surpasses $10 million.
Contact Shawn Hubler at Calendar.firstname.lastname@example.org.