By Matthew Power. When Meritage Homes, a national builder, purchased one of the last large pieces of land approved for building in Roseville, Calif.--not far from Sacramento--it had plenty of competition. Four other builders offered the seller (Richmond Communities) its full asking price of $26 million. But Meritage wanted the property in a bad way. For its hefty cash outlay of a million above the asking price, the builder gets zoning-approved land, but the raw lots need complete infrastructure work--hardly what you would call a slam-dunk deal.

But the company is betting on recent sales trends. This region has some of the fastest increasing home prices in the nation. In the past two years, the median sales price of homes in greater Sacramento has soared 32 percent, to a scorching $325,000.

Meritage is counting on those numbers to make this deal profitable, with 350 properly zoned lots on the site. The price tag, however, raises some concerns. For one, it makes the prospect of badly needed affordable housing in the area highly implausible. For another, says Greg Paquin, a consultant with the Gregory Group in nearby Folsom, buyers in the region are nearing a "price wall" based on their income.

"With interest rates lowered again, things look good," says Paquin. "But certainly if we lose jobs for the next three years, we're in trouble."

Given the region's recent sales history--13,000 new homes sold by the end of this year's third-quarter--almost any price paid for land seems recoverable. If demand does slow, big landholders will ride out an expensive slump--but they may be the only players left when the dust clears.