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The housing bust is really a land bust


Unless you live in the countryside, where land is cheap, there’s a good chance that the price of the land your house is built on is more valuable than the house itself. That’s why you don’t need to insure your home for what you paid for it: Even if it burns to the ground, you’ll still have the title to the valuable acreage.

People tend to take comfort in owning land. It feels tangible and enduring. They shouldn’t. Land is a hugely speculative investment and has been for centuries.

Today, in announcing the latest big drop in quarterly home prices, Yale economist Robert Shiller pointed out that the housing boom and bust have really been a land boom and bust. Citing data from Engineering News Record, Shiller said that housing construction costs have barely budged in recent years. Builders’ profit margins on construction didn’t go that much higher, either. Which means that when people paid more for homes, they were really paying more for the land that the homes were built on. And now they’re paying less.

We don’t have a good read on the price of land. As Shiller observed today, even the federal government calculates land prices by starting with the price of houses and subtracting out the price of construction. But you can tell that land prices must have been incredibly volatile lately in order to produce such big swings in the prices of houses (since the construction component has been stable and has somewhat smoothed out the overall price movement).

Oh, about those quarterly home price changes: The S&P/Case-Shiller U.S. Home Price Index fell 1.7% in the third quarter from a quarter earlier, and fell 4.5% from a year earlier. Both drops were the biggest in the 21-year history of the index.

Somebody asked Shiller if the index, adjusted for inflation, could fall as much as 50% from peak to trough. He said he’s not predicting it, but wouldn’t rule it out either.


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