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Land Swings Home Prices

Posted by: Peter Coy on June 26, 2006

Davis.jpgThe 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. (You can find it here. I saw it mentioned first in the REAL Trends newsletter.)

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%.

Land's Share of Home Value by Region of the U.S., 1984, 1998, and 2004

Buffalo 0.050 0.202 0.287
Chicago 0.205 0.398 0.521
Cincinnati 0.081 0.337 0.393
Cleveland 0.050 0.360 0.408
Columbus 0.193 0.389 0.424
Detroit 0.050 0.248 0.325
Indianapolis 0.053 0.249 0.273
Kansas City 0.159 0.220 0.307
Milwaukee 0.125 0.331 0.466
Minneapolis/St. Paul 0.121 0.251 0.458
Pittsburgh 0.050 0.126 0.260
Rochester 0.205 0.219 0.281
St. Louis 0.050 0.121 0.300
Atlanta 0.255 0.288 0.358
Birmingham 0.119 0.308 0.357
Charlotte 0.559 0.577 0.565
Memphis 0.136 0.295 0.305
Tampa 0.264 0.329 0.489
Dallas 0.586 0.425 0.462
Denver 0.271 0.383 0.472
Fort Worth 0.448 0.296 0.341
Houston 0.274 0.189 0.312
New Orleans 0.286 0.357 0.466
Oklahoma City 0.279 0.129 0.233
Phoenix 0.606 0.479 0.558
Salt Lake City 0.080 0.373 0.353
San Antonio 0.284 0.141 0.258
Baltimore 0.403 0.484 0.645
Boston 0.501 0.600 0.757
Hartford 0.285 0.397 0.541
Miami 0.587 0.578 0.713
New York City 0.322 0.444 0.674
Norfolk 0.419 0.418 0.593
Philadelphia 0.207 0.343 0.547
Providence 0.193 0.390 0.654
Washington DC 0.467 0.493 0.674
Anaheim 0.760 0.704 0.819
Los Angeles 0.608 0.649 0.787
Oakland 0.607 0.646 0.781
Portland 0.234 0.531 0.579
Sacramento 0.376 0.394 0.638
San Bernardino 0.511 0.390 0.633
San Diego 0.658 0.651 0.811
San Francisco 0.749 0.811 0.885
San Jose 0.682 0.756 0.824
Seattle 0.318 0.548 0.626

Reader Comments

Larry Lathrop

June 27, 2006 2:18 AM

Land prices are being driven by the idiotic urban growth boundaries that are becoming ubiquitous. Hey people, wake the fuck up! You can't advocate unbridled population growth and then try to limit development! Either line up on the side of controlled population growth and development, OR uncontrolled population and development. You can't have it both ways without creating a residential real estate nightmare.


June 27, 2006 12:17 PM

Land prices should make up a vast majority of housing costs. Land is a scarce resource; houses are a depreciating asset once built that require increasing amounts of maintenance.

In short, there is little reason to believe that houses as a stand-alone product are appreciating goods. Teardowns are a perfect example; they reveal the buyer has ZERO value for the house and 100% of the value for the property.

I recall in the mid to late 1980s when good farmland was almost worthless in the midwest. Florida swamp land that has close to zero commerical or residential value and was $300 an area five years ago is now going for $3000-4000 an acre. Why? Land is being treated as a commodity by the markets, much like gold and oil.

There will be increasing price and transaction votality in the housing market as long as people continue to treat homes as an investment commodity instead of a place to live (i.e. home).


June 27, 2006 1:42 PM

Appreciation is the product of the local growth rate and the percentage of value in the land, so as land becomes a larger part, the appreciation rate also rises. This leads to the greater volatility.

Domestically population is well under control; it is largely immigration, especially uncontrolled immigration that is increasing it. I don't think many people consider the result a nightmare though. They consider it their god-given right as homeowners.


June 27, 2006 4:18 PM

In 20 years, U.S. Population may grow as half of Chinese 13billion. think about it, how many people we should hold for America? Now we have near 0.3billion, and cost of living is higher than what we can get for a job... sooner of later you many need to give up you front and back yards for money...


June 27, 2006 11:22 PM

Larry sounds angry.

Interesting point on land values, but a little superficial. It's not just the amount of land, but the available use of the land that is determinative. Land use issues are critical to the value proposition. I keep plugging the site where I have my property for sale ( and I'd like someone to buy my property. However, the zoning issues on the available properties largely control the values. That's evident from reviewing the listings on that site. Although some properties seem "undervalued" by comparison, the available uses dictate value. Frankly, for the good of us all (including Larry) certain uses are not allowed even though the individual valuations would benefit. Get a good land use planner.


June 28, 2006 6:50 AM

Will midtown & downown miami long term investors get burn? will they find renters to rent a large 2 bedroom for 3000$ and over?

In real estate locating a new developing area and investing in it used to be profitable? Will it be brought down alltogether by a downwards price spiral?

donna marie mcneil

December 18, 2007 3:12 AM

i am looking for my farst home my husben is disable vet hes has a va home thang that the vea pepole gave him ti help him to get a home but whin we try to use it most property owners say s no thank you you do not qulafie for a home whith that va home ciftet for 36.000 to me that is not fare to us vetrens that help you prtake us over the yrs of war .thats wat i thank if you understad wat ihave sad if not call me at 405-604-8007 i wil tel you more mr mcneil,or email at

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BusinessWeek editors Chris Palmeri, Prashant Gopal and Peter Coy chronicle the highs and lows of the housing and mortgage markets on their Hot Property blog. In print and online, the Hot Property team first wrote about the potential downside of lenders pushing riskier, "option ARM" mortgages and the rise in mortgage fraud back in 2005—well ahead of many other media outlets. In 2008, Hot Property bloggers finished #1 in a ranking of the world's top 100 "most powerful property people" by the British real estate website Global edge. Hot Property was named among the 25 most influential real estate blogs of 2007 by Inman News.

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