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The housing bust is really a land bust

Posted by: Peter Coy on November 27, 2007

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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Reader Comments


November 28, 2007 06:19 AM

Everyday more Economist’s like Robert J. Shiller are expressing concern that the threat of a recession is coming, but there are plenty of other clues that we are facing unprecedented risks. Consider publicly traded Real Estate Investment Trusts ( REIT). Over the last few years most REIT’s performed extremely well. But the fundamentals are deteriorating and the trading values that took years to build could potentially be wiped out in as many months by the those nasty stock market vultures and fast buck artists commonly known as short sellers. Take Equity One (ticker: EQY) as an example of the perfect storm. Equity One is traded on the New York Stock Exchange. While Equity One’s exposure is nationwide it is based in Florida and so is a huge chunk of its portfolio. The double whammy facing Equity One is that unlike a diversified REIT it primarily invests in “retail” real estate. Equity One disclosed in the latest supplement to it’s quarterly report that its overall vacancy rate is already over 6%, but the shocker is the fact that the rate almost doubles (to a little over 12% vacancy) when the tenants shop is less 10,000 sq ft. The real danger for Equity One is that this group of tenants represents over 70% of Equity One’s shopping center revenue. When you consider that less than 30% of Equity One’s current shopping center tenants are Anchor’s (defined as having over 10,000 sq ft.) you really get goose bumps because at least the bigger retailers have the capital reserves to weather the storm. …And you thought only Realtors and builders had it bad

Jeff Jensen

November 28, 2007 12:02 PM

Please save the silly comments about "fast buck artists known as short sellers". If the REITs you mention are worth their share prices, then shorts will get burned because the prices won't drop. If the shares are truly overvalued, which is probable given the absurd escalation in real estate values over the past 10 years, then short sellers are only reflecting what the market perceives the share values to be.
Shorts only make money if the price goes down.

jeff k

November 28, 2007 12:42 PM

um, radioceleb may be right, but that is one suspicious posting
it is written like an article and the "nasty vulture" description of short sellers sounds like a prof. short PR hack trying to cover tracks
readers beware


November 28, 2007 03:07 PM

Those of us that are News Junkies know that the news is HYPED so much it's rediculous.

1. OK...prices went up an INSANE amount, so they are coming back down some. BIG DEAL. You knew it was coming. SHUT UP! LOL

2. Donald Trump said that this bubble is nothing compared to the Savings & Loan DEBACLE of the late 1990's. So chill out.


November 28, 2007 03:17 PM

America's Recipe for Disaster (Step By Step)

#1) Ship all the manufacturing jobs oversees to Mexico and China. So Corporate America can rich with fatter profits.

#2) Keep workers in our own country employed by building big houses.

#3) All the manufacturing jobs are gone so the working class in America slips into Poverty.

#4) The middle class disappears.

#5) The Rich get Richer (reference #1)

#6) Run a Trade Deficit, live off borrowed money, which we lend out to people to buy homes they can't afford, which keeps the construction workers employed (reference #2).

#7) When we run out of money to lend out, and foreign countrys decide it is too risky to lend us any more money, the economy collapses.

#8) The Chinese don't care if our economy collapes because they no longer need our consumers for their products because they have built up their own middle class.

#9) China rules the world.


November 29, 2007 12:45 PM

What's really sad is that all that land in Florida is going to be worth $0/acre by 2050 latest. That's because all that land will be underwater as the sea level rises. Boca Raton is only 25 feet above sea level, and when the arctic ice melts, there's going to be way more than a 25 foot rise in sea levels.

So buying land in Florida is a bad idea. Land is only worth something if it can be passed on to your grandchildren. Once you can no longer do that, once land is no longer a persistent good, it becomes worthless.


December 1, 2007 05:40 PM

Where are all those people who said we are going to have a soft landing? I WANT TO GIVE THEM A KICK IN THE YOU KNOW WHAT


December 2, 2007 07:43 PM

" wiped out in as many months by the those nasty stock market vultures and fast buck artists commonly known as short sellers."

Remember, if short sellers push down the value of a stock, they'll push is back up again when they buy to cover. The net effect is ZILCH.

And who are short sellers buying to cover from? The FAST BUCK ARTISTS COMMONLY KNOWN AS SPECULATORS who finally realize that they *are* the greater fool they were waiting to come along.

Chris Ketchel

December 4, 2007 05:49 PM

It bothers me as well, that listings and values are often quoted in terms of price / house sqft. Kudos to Cyberhomes for posting land area in sqft with their property records. Their are other factors as well. Value, other than emotional, is what income it can produce. Farming, parking, storage units, rental housing, office spaces, etc. is all about "how much can be generated." Land by itself is useless and thus not valuable unless there is infrastructure to go with it. Thus its the Developer that adds value to a property. As my Uncle observed , the tide has turned to Urban, and this is true for investing as well.


December 6, 2007 03:27 PM

Note to Dan: Sea levels won't rise to wipe out Florida.

I don't want to see the ice caps melt, but if they did, water level can't rise. Ice is water that has EXPANDED in volume, so when it melts, it takes up less space. Don't believe me, put some ice in a glass of your favorite warm drink and put the level at the brim and see what happens.


December 8, 2007 07:00 PM

Note to Paul: Much of the ice sheets across Antartica are on LAND, not floating. As that melts sea levels WILL rise.

Also your glass analogy is not real world, look at this page where it describes what happens when floating freshwater ice melts in saltwater (sea water).

Try using saltwater instead of your favorite warm drink.

Thank you for your interest. This blog is no longer active.



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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