Land Swings Home Prices
Land Swings Home Prices
The cost of land is an increasingly important factor in the prices of homes. Not just in a few markets with well-known shortages of open space like San Francisco. Even in Minneapolis, land accounted for almost 46% of the value of homes in 2004, up from just 12.5% in 1984.
That’s according to a fascinating new study published by the Federal Reserve. It’s by Morris Davis of the University of Wisconsin (top) and Michael Palumbo, a Fed economist, and it was published last month.
This study has important implications for the future of home prices. In a nutshell, it means home prices are likely to be more volatile in the future. They’ll rise more abruptly and fall more abruptly as well in reaction to changes in demand.
Here’s why: Since land looms so large now as a factor in home prices, fluctuations in the price of land matter more now than ever. And what affects the price of land? Well, since the supply of land is pretty much fixed, the only thing that can affect the price of land is changes in demand for it. That goes back to things like job growth, demographics, and speculation. If demand drops, the price has to drop, too.
Do land prices ever really fall? Sure they do. According to the authors’ estimates, the average price of land in Houston fell 50%, adjusted for inflation, from 1985 to 1989. It took until 1999 for land prices to get back to their early-’85 level, the authors say.
The numbers below are pasted from the Fed paper. For example, the first number for Buffalo, 0.050, means that in 1984, the price of land accounted for 5% of the value of homes in Buffalo. By 1998 it was up to 20.2%, and by 2004 it was up to 28.7%