Land Is The Basis

by Jim the Realtor | Oct 28, 2013 | Dirt Sales, Market Conditions | 8 comments

From businessweek.com:

For anyone wanting to know if the U.S. housing market is turning into a new, speculative bubble, a good and overlooked way to tell is the price of land. A real estate professor at the University of Wisconsin has done just that—and concluded that there is no evidence of a bubble on a national level. Not yet, anyway.

“Housing might be undervalued today,” says Morris Davis, a professor in the Department of Real Estate and Urban Land Economics at the Wisconsin School of Business in Madison.Wisc.

Twice a year, Davis looks at prices that houses are selling for and then strips out the cost of the structures, leaving the value of the land they are built on as “residual.” Land prices fluctuate much more than overall sales prices because the cost of structures doesn’t change much from year to year.

“Land is telling you what’s going on with demand,” Davis says.

Phoenix is one metro area whose prices have rebounded sharply, and bidding wars are back in the headlines.

Phoenix doesn’t look so scary by Davis’s metric. Land’s share of house value was 65 percent in 2006 and then plummeted to 5 percent in 2011. It has climbed steeply since, but it was still just 26 percent in the first quarter of 2013, according to Davis’s calculations. He won’t have his figures for the third quarter of 2013 until next February or so.

A complete set of data for 46 metro areas and all 50 states is posted on the website of the Lincoln Institute of Land Policy, which helps cover the cost of updating the data.

John Burns Real Estate Consulting of Irvine, Calif., sees rapid increases in land prices in many markets. It tracks empty lots in subdivisions that are ready for building. Its Finished Lot Value Index, an average for 27 markets, fell 46 percent from its peak to its 2009 low but has rising briskly since and needs only a 22 percent further increase to match its all-time high.

Bakersfield, Calif., and Phoenix lots are up roughly 200 percent from their troughs, the firm says. At the other extreme, prepared lots in Chicago are up only 7 percent from their bottom.

Will Frank, a senior finance manager at John Burns Real Estate Consulting, said today that by John Burns’ measure, Phoenix is starting to look a little pricey, along with Dallas and Orlando. The land in those metro areas isn’t a bubble, but prices should start to “plateau” in the next year or so, Frank says. “We still have Las Vegas going up a while,’ he says.

Land is the right thing to pay attention to when sniffing for speculation. “There’s only one difference between a car and a house, and that’s the land,” says Wisconsin’s Davis. “We all know how cars work. Eventually they depreciate and they’re worthless. Housing is the same way. It depreciates, and eventually it’s worthless and it needs to be torn down. Only hope is that the land appreciates in value. It’s really the only piece of a house that can appreciates.”

If you’re counting on home prices to rise, then—consciously or not—you’re betting on land.

http://www.businessweek.com/articles/2013-10-28/little-sign-of-housing-bubble-in-land-prices