It’s a 2,700-square-foot property in Tarzana that even the real estate agent acknowledges epitomizes “a middle-class tract home.” Sitting on a 12,000-square-foot lot, it has four bedrooms, three bathrooms, an open patio and was built in 1959.

“It’s not a mansion. In fact, it’s the opposite of a mansion,” said Joan Duffy, with Prudential California’s John Aaroe division.

Price tag? $1.3 million


In another sign of how the continuing real estate boom is transforming Los Angeles, middle-class neighborhoods have entered the seven-digit world.

A Business Journal analysis of home sales in L.A. County shows that ZIP codes in North Hollywood, Tarzana, Glendale, Rancho Park and the heart of Hollywood now boast median home prices exceeding $1 million.

The data, provided by Melville, N.Y.-based HomeData Corp., also shows that communities like Arcadia and Culver City are knocking on the door. ZIP codes in those areas and others are likely to pass the million-dollar mark if prices keep rising to the end of the year.

In fact, the notion of a million-dollar home as a psychological barrier has all but disappeared, especially now that the median price of a home in L.A. County has topped a half-million dollars.

“The million-dollar home used to be huge. Now it’s nothing anymore,” said Susan Barber, a residential real estate agent with Simi Valley-based Realty Executive Professionals. “Middle-class professionals are buying million-dollar homes all over L.A.”

Barber is marketing a 1950s 3-bedroom tract home in Tarzana for $959,000, and has sold similar-sized homes nearby for over $1 million.

“If the homes in that neighborhood you want to live in are more than $1 million, that’s the price you have to pay,” said David Bitran, an appraisal manager who just moved into a $1.1 million, 3,700-square-foot home in Tarzana.

In July, the median price for an existing home in L.A. County rose 20.9 percent to $515,000 from $426,000 a year earlier, according to HomeData numbers. In June, the median price was $501,000. Condominium prices rose 15.6 percent, to $385,000 in July from $333,000 a year earlier. They were unchanged from June.

Buyers squeezed


The surge in home values has been fueled by low inventories and a lack of available land, combined with demand driven by low interest rates and creative mortgage financing. As home prices continue to rise, more are crossing the million-dollar threshold, said John Karevoll, an analyst with San Diego-based DataQuick Information Systems.

From 2001 to 2004, the number of L.A. County homes and condos that sold for at least $1 million tripled, to 7,860, according to DataQuick. Those figures, updated once a year, include new and resale homes.

The trend has been accelerating in 2005. Just counting resales, more than 4,500 homes and condos traded hands for $1 million or above in the first six months of the year, according to HomeData figures.

Prices this high are transforming the appearance of some neighborhoods. “If you do a modest renovation of a home valued at $700,000 in certain neighborhoods, you can push the sale value to $1 million, which is a great incentive for people to fix up their homes,” said Alan Long, president of the Southern California region of Sotheby’s International Realty.

Some homeowners are doing more than modest renovations. They are tearing down homes and building much larger ones in their place, a process that’s become known as “mansionization.” Because of their size, the rebuilt homes now almost always top $1 million.

But the practice has sparked a backlash in some communities, whose residents say that the larger homes are out of character for the neighborhoods. Last month, the L.A. City Council enacted an emergency ordinance banning the practice in the Sunland-Tujunga area.

In the longer run, there’s another potential downside to the spread of million-dollar homes: what will happen to relatively new owners when home prices flatten or even decline?

“When this does play out, whenever that may be, it’s this part of the market that’s going to ease back first,” Karevoll said. “The people buying these homes have some money, so these are discretionary purchases, not ones where you just need any roof over your head.”

But if interest rate hikes cause monthly payments to move out of reach or it appears that home prices won’t keep going up, demand for million-dollar tract homes could drop. “When truly mediocre homes are going for $1 million, that’s when you know you’re in a real estate bubble,” said Chris Thornberg, senior economist with the Anderson School of Management at the University of California Los Angeles.

He and his colleagues at UCLA declared the housing market a bubble 18 months ago, and since then, prices have only accelerated. Thornberg maintains that prices are “way out of whack” with underlying fundamentals like rents. “It’s being driven by people who are buying homes because they believe prices will go up 10 percent or more next year,” he said.

Even so, Thornberg says it’s not necessarily a mistake to pay $1 million for a home in a middle-class neighborhood. “If you are planning to live in the home for a long time and are comfortable with the prospect that in 2010 or 2011 the home could still be around $1 million, then it may make sense to buy,” he said.

Paying up


That’s the strategy adopted by Bitran when he purchased his Tarzana home earlier this year. “We plan to live here for 20 years, so we’re prepared for any short-term dip in value,” he said.

At first, he and his wife weren’t planning to become members of the million-dollar club. “We were looking in the $700,000 range. It wasn’t until we started to look at a particular school district on the south side of Ventura Boulevard that our price range changed,” he said. “Homes the size of the one we had or even slightly smaller were going for $750,000 and up and we wanted something that was just a little larger.”

Bitran said the $1 million threshold was not much of a psychological barrier, since he works in the industry and knows how common it is for a home to top $1 million. Still, he said his family would not have been able to afford the price tag had it not been for some “extremely creative financing.” He and his wife took out an interest-only loan.

“The way my business is, I have some really good months and some not-so-good months. This loan allows me to pay interest and pay off some principal when times are good, but when things are slow, I only have to pay the interest,” he said.

Loan packages like the one Bitran took out are allowing middle-class professionals to buy million-dollar homes. They help keep the monthly payments to within 25 percent of monthly income, the generally accepted level of affordability.

But interest-only loans do carry risk. If long-term interest rates rise, then the borrower faces much higher payments in the out years of the loan. “That’s why I plan to pay down as much of the principal as I can during my good months,” Bitran said.