econintersect.com
       
  

FREE NEWSLETTER: Econintersect sends a nightly newsletter highlighting news events of the day, and providing a summary of new articles posted on the website. Econintersect will not sell or pass your email address to others per our privacy policy. You can cancel this subscription at any time by selecting the unsubscribing link in the footer of each email.



posted on 16 October 2016

Land Values Drive Home Price Volatility

from CoreLogic

When homeowners think about the value of their properties they usually focus on the physical attributes of their houses and pay less attention to the land parcels on which their houses sit. This makes sense since most people spend more time inside their houses than in their backyards. But in many housing markets, especially expensive markets on the East and West Coasts, the values of residential land parcels exceed the replacement costs of houses.

Furthermore, unlike houses, the values of parcels are not closely tied to the physical attributes of the land, but depend more on the locations of each parcel. That is why real estate agents always remind home buyers and sellers that "location, location, location" is a primary driver of home value.

Of course, it is not easy for home buyers and sellers to estimate the dollar values of the hundreds of locational factors that sum up to total land value. If I have school-age children, how much more would I be willing to pay for a house located in a school district with higher test scores? What if that house is located on a busy street or on the edge of a flood plain? The kids in the house next door have moved out, so do my potential neighbors place less value on school quality? How do their preferences or the preferences of future home buyers affect the current and future value of the house that I am thinking of buying?

Because of this uncertainty, land value is more volatile than structure cost as a component of residential property prices. This can be seen in Figure 1, in which the CoreLogic Case-Shiller home price index for the Boston area is decomposed into land value and housing structure replacement cost components.[1] It is easy to see that Boston land values exhibit far more cyclical and month-to-month volatility than structure costs, a pattern that holds true in most housing markets. Furthermore, declines in Boston area home prices are almost entirely attributable to falling land values - structure costs can increase even while home prices are falling.

Structure costs are determined by construction wages and the prices of building materials for particular types of homes in specific markets. These costs can vary widely depending on methods of construction (e.g., masonry or wood frame), the attributes of a house (e.g., one or two stories), and the supply and demand conditions in the local construction labor and materials markets. But when structure costs are averaged across individual houses within a metro area market, as they are in a cost index, their average, inflation-adjusted values tend to increase relatively steadily, especially when compared to land values.

Because the values of locational factors are so uncertain, residential land values in most markets are highly speculative. Buyers, sellers and residential developers are making guesses - sometimes educated, sometimes not - about the current and future values of locations when they are setting the prices for properties. This means that property prices are more speculative and volatile in markets where land values are a larger proportion of total property value.

Average home price volatility for the last housing market cycle (1997 to 2012) is plotted against the land share of property value at the start of the cycle for 46 metro areas in Figure 2. In general, metro areas with lower land value shares at the beginning of the cycle had less volatile home prices across the entire span of the cycle. At one extreme, Pittsburgh, which had the lowest land value share in 1997, also had the least volatile home prices between 1997 and 2012. If fact, Pittsburgh is one of the very few markets in which home prices did not fall during the housing market crash. At the other extreme, San Francisco, which had the highest land value share in 1997, experienced two double-digit percentage home price declines - one following the "dot.com" stock market crash in 2000 and another during the housing market crash.

Land value indexes can be used to track direct and indirect exposure to land prices for individuals or organizations that own either developed or undeveloped residential land parcels or hold mortgages for residential properties. Since higher land value shares of total property value are associated with increased home price volatility, information about land values can also be used as an early warning indicator for future home price declines.


Source

http://www.corelogic.com/blog/authors/david-stiff/2016/09/land-values-drive-home-price-volatility.aspx

Footnotes

[1] In the decomposition, structure cost trends are measured by replacement cost indexes from the CoreLogic Marshall & Swift Residential Cost Handbook

©2016 CoreLogic, Inc. All rights reserved.

>>>>> Scroll down to view and make comments <<<<<<

Click here for Historical News Post Listing










Make a Comment

Econintersect wants your comments, data and opinion on the articles posted.  As the internet is a "war zone" of trolls, hackers and spammers - Econintersect must balance its defences against ease of commenting.  We have joined with Livefyre to manage our comment streams.

To comment, using Livefyre just click the "Sign In" button at the top-left corner of the comment box below. You can create a commenting account using your favorite social network such as Twitter, Facebook, Google+, LinkedIn or Open ID - or open a Livefyre account using your email address.



You can also comment using Facebook directly using he comment block below.





Econintersect Contributors


search_box

Print this page or create a PDF file of this page
Print Friendly and PDF


The growing use of ad blocking software is creating a shortfall in covering our fixed expenses. Please consider a donation to Econintersect to allow continuing output of quality and balanced financial and economic news and analysis.


Take a look at what is going on inside of Econintersect.com
Main Home
Analysis Blog
Big Mess in Italy
Are You Feeling the Economic Surge?
News Blog
The Best Countries In The World
What We Read Today 03 December 2016 - Public Edition
Big Mac Index In Its 30th Year
What We Read Today 03 December 2016
Scientists Find Giant Underground Ice Reserve On Mars
Sustained 3 To 4% GDP Growth Is A Huge Stretch
New Earthquake Risk Model Confirms Possibility Of Statewide Earthquake In California
Subprime Auto Debt Grows Despite Rising Delinquencies
Silver Sentiment Looks Golden
Infographic Of The Day: Investing In A Cure For Cancer
Early Headlines: Trump Campaigning Still, WaPo Finds Voter Fraud Favored Trump, No Carolina GOP Shotguns For Voter Fraud, New Age Of Blacklisting, All Eyes On Italy, Big Bucks In India And More
What Did The EU Ever Do For Europeans?
The 10 Most Stolen Cars In America
Investing Blog
How To Invest When The Fed Destroys Capitalism
Technical Thoughts: Manage Risk
Opinion Blog
Modern Slavery
Please, Donald Trump, Don't Send Climate Science Back To The Pre-Satellite Era
Precious Metals Blog
Silver Prices Rebounded Today: Where They Are Headed
Live Markets
02Dec2016 Market Close: WTI Crude Climbed Back Up To Previous 51 Handle, US Dollar Index Trading At The100 Level, Oil Rig Count At 10-Month High
Amazon Books & More






.... and keep up with economic news using our dynamic economic newspapers with the largest international coverage on the internet
Asia / Pacific
Europe
Middle East / Africa
Americas
USA Government



Crowdfunding ....






























 navigate econintersect.com

Blogs

Analysis Blog
News Blog
Investing Blog
Opinion Blog
Precious Metals Blog
Markets Blog
Video of the Day
Weather

Newspapers

Asia / Pacific
Europe
Middle East / Africa
Americas
USA Government
     

RSS Feeds / Social Media

Combined Econintersect Feed
Google+
Facebook
Twitter
Digg

Free Newsletter

Marketplace - Books & More

Economic Forecast

Content Contribution

Contact

About

  Top Economics Site

Investing.com Contributor TalkMarkets Contributor Finance Blogs Free PageRank Checker Active Search Results Google+

This Web Page by Steven Hansen ---- Copyright 2010 - 2016 Econintersect LLC - all rights reserved