Continued: High-end homes feel pinch, too

When Tony and Theresa Jace decided to trade up to a larger house to be closer to their daughter's school, they knew it was a good time to be a buyer -- they just didn't know how good.

After looking at about 70 houses -- about a quarter of them foreclosures or "short sales" that sell for less than what is owed on the mortgage -- they bid on a house across the street from Lake Minnetonka in Wayzata that the seller had mortgaged for $1.7 million and which had an assessed value of $1.36 million. They paid $725,000.

With the stock market erratic and the inventory of upper-bracket houses bulging, the foreclosure crisis is creeping into the rarefied world of high-end homes.

While such distress sales represent only a small fraction of all upper-bracket home sales, the number of high-end houses that are on the market and in some stage of foreclosure has nearly doubled during the past year.

It's a sign, some say, that even the wealthy are beginning to struggle in today's topsy-turvy economy.

During October, houses priced from $500,000 to $1 million represented 7 percent of all lender-mediated listings on the market, while houses priced at more than $1 million represented 1.9 percent, according to the Minneapolis Area Association of Realtors.

Across all price ranges, lender-mediated listings represented 28 percent of the entire inventory of homes for sale in the metro area, with the vast majority of those listings priced at less than $250,000.

The disparity between the bottom and top of the market suggests that wealthier homeowners "appear to be weathering the economic and financial difficulties better than those in lower price ranges," said John Murphy, a Re/Max Results sales agent in the western suburbs.

Still, Jeffrey Hornig, broker-owner of Sotheby's International Realty in Minneapolis and a longtime observer of the luxury-home market, expects the number of high-buck houses in default to increase as the number of high-end houses on the market increases.

A glut of seven-figure homes

In Edina right now, for example, four houses are on the market priced at more than $2 million. All four are spec houses that are likely to go into foreclosure. That includes a new house with more than 10,000 square feet that Hornig has listed for $2.4 million. The house, which is 75 percent complete, was originally listed at more than $4 million.

Hornig also recently represented the lender in the sale of a 9,000-square-foot house in Edina for $2.925 million to former Minnesota Twin Paul Molitor. The hilltop house, which has landscaping valued at more than the cost of many starter houses, was originally listed for almost $5 million.

This month the Minneapolis Area Association of Realtors says there's a 27.1-month supply of million-dollar-plus houses on the market -- an 18 percent increase over the same time last year and the biggest glut of any price range. For houses priced at less than $350,000, there's a 7.2- to 9.7-month supply of listings.

Aaron Dickinson, the Edina Realty sales agent who prepared the report for the Realtors group, said the dramatic increase in the number of upper-bracket distress sales is tied to an overwhelming glut of unsold starter houses. This month nearly 90 percent of active listings flagged as lender-mediated are priced at less than $250,000.

What's the connection?

What's the connection between the top and bottom of the market?

If starter houses aren't selling, the owners of those houses are going to be less likely to trade up to a larger and more expensive house.

"It all comes down to the first-time home buyer," Dickinson said.

That doesn't mean that upper-bracket houses have stopped selling, however; it's just a sign that more people are selling, not buying. In fact, the number of upper-bracket houses and condominiums for sale has fallen only slightly in the past 12 months.

During that time, sales of single-family homes priced at more than $1 million fell 17.8 percent; sales of those priced from $500,001 to $1,000,000 fell 25.3 percent. In the same period there were 28 $1 million-plus condominium sales -- the same number that sold in the previous 12 months.

No shortage of buyers with cash in hand

Hornig said there still are plenty of prospective buyers in the wings, waiting for the right price. He's received three cash offers ranging from $1.7 million to $2 million on a 10,000-square-foot house he has listed in Edina, but because those offers would need to go through the often time-consuming lender approval process, none was accepted.

The supply of trophy property buyers pales in comparison with the market just two years ago, in part because rates on jumbo mortgages -- those more than $417,000 -- are now significantly higher than for other mortgages.

It's a trend that means big opportunities for buyers who have the cash to spend and don't have to worry about selling another house. Dickinson, for example, decided that with mortgage rates still at near-historic lows it was time for his family to trade up to a larger house.

He made offers on four houses that were in some stage of foreclosure, but he got outbid on all of them. Then he made an offer on a 3,200-square-foot, four-bedroom house in Champlin that sold for more than $700,000 in March. He paid about $380,000.

A bargain? Perhaps, he said, noting that the value of a house is only what the market will bear and that it might be too soon to tell if prices have hit bottom. "I may regret it three months from now, but not five years from now," he said. "I think it was a resounding value."

Jim Buchta • 612-673-7376