Get a poured concrete foundation.

And once you have a poured concrete foundation you can put an EDPM

While poured concrete can stil have problems, it has the fewest joint and seams.
It is required by many jurisdictions if building within a 100 year flood plain (where it is even allowed tobuild there).
Concrete with good waterproofing applied can withstand surface water very well.

Ya know the question seems silly but I figure if pool can can be constructed to keep water in, then it should keep water out. Seems like a constant battle keeping basements dry.
O.K. one of you inovators, bring this to market. I won't even sue you for any of your profit, even though I did give you the idea LOL!
Gladiolus

Seemed rather risky to me to try and change the land to suit your needs. I specialize in erosion control and I can tell you that you will not win this battle.

Not to change the subject but since you mentioned a "little house" have you seen the Little Houses that are being built in Washington State? These might be something you'd be interested in and can give you some ideas.

Here is a link that might be useful: Little Houses

"Ya know the question seems silly but I figure if pool can can be constructed to keep water in, then it should keep water out."

You are misinformed. Pools leak almost constantly.

Even steel hulled ships leak.
Shut off the bilge pumps and wait. They eventually will sink.
A vinyl lined pool kas about hte lowest rate, but a typical concrete pool is always leaking through the concrete and plster lining.

Msafirstein,
Thank you for the link for "Little Houses"
I'm just starting to research plans and builders for the house. I love the look of the houses on the site but I need to go back to the CCR's to see what the height restrictions are; don't know if two story is allowed. That's why some basement space might be worth investigating.
Guess I'll be asking around in the other Garden Web forums.
Thanks again, Gladiolus

Gladiolus; You might consider a wrap-around porch and/or pergola. We have a wrap-around covered 7' porch planned for 3 sides of our home and then a patio with pergola off the kitchen. Although we live in the midwest and the porch and patio will not get much use in the Winter, it is suprising how much room then add to a house.

You might also consider adding a sleeping porch (see Craftsman Architecture), these are great fun in the mosquito off season!

I definitely sound like a stupid yankee (in the geographical sense, not the baseball sense), but isn't an arroyo just a creek? How is this any different than building near a creek anywhere else? Is the lot sloped? How close is the creek to the the future house location?

We built our house on top of (yes, that is correct) an underground creek. We have a dry basement.