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Too many palatial homes, too few princely buyers

As spec mansions lie unsold across Southern California, stressed sellers may deflate the housing market's high end by lowering their prices.

October 04, 2009|Peter Y. Hong

Two years ago, Larry Igarashi bet he could build a sprawling house in Orange County's foothills that would sell for at least $10 million. These days, you can easily guess how that turned out.

On Saturday he put the eight-bedroom house in the gated Coto de Caza community on the auction block and got a high bid of $6.6 million -- less than he was willing to accept.

Igarashi had gone all-out when he built the "Santa Barbara ranch" house: The master bedroom suite alone is 3,200 square feet, a bit smaller than the 10-car, climate-controlled garage, which measures 4,000 square feet. The driveway is long enough for a firetruck to turn around, and there's a wine storage enclave with room for 1,400 bottles.

The 16,500-square-foot hilltop house -- in the community that was the setting for "The Real Housewives of Orange County" television show -- is just one of dozens of unsold mega-mansions across Southern California conceived during the real estate bubble, when builders waged an ill-timed arms race to ever-increasing extravagance.

Comparably deluxe houses now lie vacant in droves along the coasts and hillsides of Southern California, from Manhattan Beach to Irvine. Their owners could afford to keep them on the market for months, sometimes years, hoping to find buyers who would pay their asking prices.

That holding pattern has kept the most expensive segment of the home market from posting the kinds of sharp price drops seen just about everywhere else. But it's now clear that there are too many palatial properties and too few princely buyers.

As more sellers like Igarashi decide to cut their losses and move on -- or are compelled to do so by their lenders -- the most expensive homes could slip from their perch at the top rung of the market.

"Sellers there now have to unload, and in order to do so, they must reduce their prices," said Chapman University economist Esmael Adibi.

Spec mansions are now amassed in some areas like rising floodwater behind a dam. A search of homes for sale built since 2007 and priced above $3 million shows 39 such properties in Newport Beach and Newport Coast, 27 in Laguna Beach, 19 in Manhattan Beach, 18 in Irvine and 11 on the Palos Verdes Peninsula.

There are also hundreds of other multimillion-dollar homes for sale in Southern California that were not recently built, but sellers who live in homes they bought before the housing bubble are less likely to be under the same pressure to sell as speculators stuck with vacant properties and construction loans coming due.

As speculators and recent purchasers who must get out of mortgages that exceed their home values slash prices to find buyers, other sellers will have to lower their prices to compete.

In much the same way that foreclosures pulled down market prices for lower-priced homes, stressed sellers could deflate the high end by unloading luxury homes at bargain prices.

But even at cut-rate prices, few multimillion-dollar homes are selling. With so many to choose from, even those with enough money are taking their time.

"There's no sense of urgency among buyers," Igarashi said. He had hoped that the prospect of snaring a good deal through Saturday's auction would motivate those who have been delaying a purchase to get off the fence. But it turned out to be a double disappointment.

Igarashi had two houses at auction. The other was a six-bedroom Tuscan-style house he had once listed for $5.75 million. He finished the 10,500-square-foot house in 2007; it sat unsold as the even grander second house was built. It drew a top bid of $3.1 million, below Igarashi's undisclosed minimum. After the auction, Igarashi began negotiating with the high bidder on each property, and was still talking with them at the end of the day.

Near his houses, another six-bedroom home is being auctioned later this month with a starting bid of $3.9 million. It had failed to sell when listed at $9 million.

Auctions can backfire. In December, five new homes in Manhattan Beach were auctioned with opening bids of more than $1 million -- none were sold.

Buyers will eventually emerge as prices fall, Adibi said. Still, it's hard to know how much real demand there is for super-sized homes, even among the very wealthy.

Spec home builders were motivated to ramp up square footage to justify higher prices on their projects. But buyers today who are more likely be looking for a long-term home than a place to flip may not want the trouble of maintaining such large houses.

A bigger question also remains: What if the giant spec homes just never sell?

Stefanos Polyzoides, a Pasadena architect who is an advocate of more dense, compact residences, said sometimes economies change in ways that make the original uses of buildings obsolete. The grand mansions of Newport, R.I., for example, have been converted to condominium buildings or inns, he notes.

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