Betting against a Housing Bust: With Mortgage Rates at Record Lows and Home Prices Soaring, Trendy 'McMansions' Look like Safer Investments Than Stocks. Are They? No One Has More Riding on the Answer Than Robert Toll

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Byline: Daniel Mcginn

Robert Toll and four colleagues are sitting around his office, trading jokes and gentle barbs. The atmosphere resembles a poker game--only instead of cards, the men huddle over a map of southern California. One of Toll's aides points toward a 52-acre parcel of land he's just visited, and now it's up to Toll, America's largest developer of high-end homes, to decide whether he should try to buy it for $7 million and cover it with $600,000 mini-mansions. "It's a piece of desert," Toll scoffs.

"It's a piece of gold," counters the deputy.

"You've got to be kidding me--you're expecting to sell homes there for this kind of money?" says Toll, 61, who started out selling new houses for $17,990 in 1967. He cross-examines his team: What are competitors selling nearby? Is the mountain view really worth a premium? Finally he decides to pursue the deal. "Next..." he says.

Over the next three hours Toll nixes a land purchase in Arizona, greenlights one in Michigan and mulls a half-dozen others. "I'm in," he shouts, agreeing to a contract for $3 million worth of farmland. Then he kisses the proposal. "Killer deal."

Toll isn't the only one with a lot of chips riding on today's hot housing market. Across the country, home prices seem to have escaped the confines of gravity. In the past two years rising home values have added $1.3 trillion to Americans' net worth, and that's helped buoy the stagnant economy and offset plummeting stock portfolios. Last week came more good news: mortgage rates hit 30-year lows, which makes even more Americans willing to spend ever-bigger sums on homes that look better suited for MTV's "Cribs" than a typical suburb.

But as prices keep going up, some observers wonder how long it can last. Two years after the dot-com meltdown, is real estate the new bubble? Most economists (including Alan Greenspan) argue that the price increases rest on a sturdy foundation: low interest rates, strong demographics and a tight supply of homes. Large, publicly traded home builders like Toll Brothers, Pulte, Lennar and Ryland control a bigger piece of the new-home market than they did in the last recession, and they're better capitalized and better managed than smaller builders, reducing the risks of over-building. Housing bulls also point to the rising public outcry over urban sprawl, which limits the land available for new development and drives up values of existing lots. While some local markets may be overheated, "nationally, housing markets are the healthiest they've been in years," says economist David Lereah of the National Association of Realtors.

Still, other experts say housing has nowhere to go but down. More stock declines, rising layoffs or higher mortgage rates could bring this party to an end, they say. And some of them are trying to profit by betting on stocks like Toll Brothers to fall. Says hedge-fund manager Doug Kass of Seabreeze Partners: "Builders have adopted a mantra--'If we build it, buyers will come'--but I think it's going to burn them."

The last time a real-estate boom turned to bust, Robert Toll was able to expand his empire. A second-generation home builder, Toll earned two Ivy League degrees and briefly practiced law before turning to bricks and mortar. By the late 1970s he'd established himself as a successful regional builder outside Philadelphia, but his big break came in the mid-1980s. Land prices were accelerating, and when Toll's executives crunched the numbers, they could justify buying new lots only if they bet on home prices to keep rising. That's too risky for Toll's taste, so he stopped buying land and hoarded cash. When the Northeast real-estate market collapsed a few years later, Toll was flush and ready to scoop up huge swaths of land. Today his $2.23 billion company controls 40,000 residential lots and is building homes in 22 states (average sale price: $518,000). His personal stockholdings are worth more than $350 million. …