Land Prices Increasingly Drive Housing Markets, Fed Study Says

Jay’s Opine: Really not all that surprising. Do you think the value of your home increases as the structure ages and deteriorates? Generally speaking, older homes are in more need of repair, have higher maintenance costs, and aren’t as energy efficient as newer homes. Yet home values tend to increase over time…. Hmmm. Is it the actual structure that increases in value, or is it the LAND the structure is sitting on that increases in value? It’s all (well mostly) about the land…

Land Prices Increasingly Drive Housing Markets, Fed Study Says
By Campion Walsh
From The Wall Street Journal Online (June 22. Article Link)

WASHINGTON — Housing prices in big U.S. cities have increasingly reflected underlying land value rather than building value since the mid-1980s, and that trend is likely to continue, according to a Federal Reserve study released Tuesday.

In the 46 biggest metro housing markets, land’s share of property prices increased on average to 51% in 2004 from 32% in 1984, according to the study authored by Michael Palumbo, chief economist in the Fed’s flow of funds section, and Morris Davis, a former Fed economist now at the University of Wisconsin.

The increase was especially sharp during the 1998-2004 housing boom, when land’s share of property values gained 11 percentage points, the study said.

“With residential land having appreciated so significantly over the past 20 years around the country, the future course of land prices is expected to play an even more important role in governing home prices — in terms of average appreciation rates and volatility — in the next two decades,” according to the study.

The report concludes that land’s increased share of property values “could mean faster home-price appreciation, on average, and possibly larger swings in home prices.”

Even if land appreciation returns to the slower pace seen before the 1998-2004 boom, cumulative gains in land value mean that house prices might rise more quickly on average than they did before the boom, it said.

Regionally, relatively expensive housing markets have seen somewhat bigger increases in land’s share of prices in the 1998-2004 period, but the current housing boom has been marked by rapid appreciation of residential land “just about everywhere,” according to the report.

The Fed study also found that at some point since 1984 most large U.S. cities have gone through one pronounced price cycle in which residential land lost value for several years, usually after several years of rapid appreciation.

“In real terms, land prices have generally taken several years to go from peak to trough, and the subsequent recovery from these price declines has generally occurred at a more gradual pace,” the study said.

And Jay adds: Land values in and around the Phoenix area have exploded in the last couple of years. We recently listed and sold several 5 acre parcels inan area northwest of Phoenix called Whispering Ranch. As recently as two years ago, these parcels were selling for $8,000. Today’s prices? $60,000 - $100,000. Don’t you wish you’d bought a dozen two years ago? Another real life Phoenix land story…. an Air Force Sargent calls and says, “I’m looking for a couple of acres in Queen Creek. I lived near there about 10 years ago and am moving back. Can you help me?” I thought this guy might not understand the BOOM Queen Creek has gone through in the last couple of years. I asked him roughly how much he wanted to spend. He said $4 - $5,000 tops. Then I had to break the news to him that two acres in Queen Creek would probably cost him over $200, 000…

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