? A way to hedge against falling home prices |
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August 01, 2005
"Buy land," Mark Twain famously said. "They don't make it anymore." Lawrence S. Pratt, a senior fellow at the American Institute for Economic Research says many commentators on the real estate bubble are missing that essential fact. A larger and larger percentage of increased home prices is coming from the land underneath them. In 1952, Pratt notes, land accounted for about 15% of a property's total value. Today it's more like 40% and that's up from 30% in 1996. The explanation is that there is a finite amount of land available, particularly within commuting distance. In addition, zoning codes and environmental regulations restrict the availability of land, increasing the price of what's buildable. Pratt's research doesn't justify a doubling of homes prices in many parts of the country over the past five years. But it does give long term investors something else to feel good about.
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We don't live in a booming market (Raleigh, NC) but we are certainly a thriving market. Housing prices are consistant area wide at about 3% each year where as raw land averages 5% appreciation each year. Urban sprawl has consumed much of our outlying areas and the limited land we have left is bringing large profits to those who plan accordingly. Your article rings very true!
Posted by: Jason at August 2, 2005 06:39 PM
Nothing new here. Structures depreciate. Land appreciates. One can make the case that in green fields development, the real cost of housing should be constant, in an unconstrained urban environment it should rise at the real after tax cost of debt, and a constrained urban environment like the coasts, it should rise at the rate of local growth, population, income, and productivity. This is greater than the cost of debt and leverage increases it greatly to make it the best investment in these areas. And the more congested traffic becomes, the more land appreciates due to proximity.
Posted by: Lord at August 3, 2005 01:31 PM