As you may have heard from your local realtor, people pay for location. Nationwide, land values are rising faster than home values, according to an analysis of more than 16 million appraisals across almost 40,000 U.S. neighborhoods released as a Federal Housing Finance Agency working paper by William Larson and Jessica Shui (FHFA), Morris Davis (Rutgers) and Stephen Oliner (American Enterprise Institute).
“Generally, land tends to appreciate faster than structures because when housing demand changes, you can build more structures but you can’t build more land,” Larson said.
It’s not just the distribution of land wealth that’s unequal, it’s the growth in that wealth. The areas with the most valuable lots also saw their land values grow fastest, even after adjusting for current value. And those differences are responsible for many of the trends in inequality which have defined our era.
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Existing landowners in cities such as San Francisco, Seattle, Washington D.C., and New York benefited most from an economic expansion that favored those coastal powerhouses.
“If economic growth were more evenly distributed across cities, land appreciation would likely have been more even and housing would generally be more affordable,” Larson said.
The analysis provides an unprecedented view into one of the nation’s largest stores of wealth: the dirt upon which homes are built. It was a tremendous technical undertaking to strip away the value of structures and measure only the cost of land at the neighborhood level. The economists’ full analytical program took more than a week to run.
It also hints at where a housing bubble could appear: “Previous research shows that very large increases in land prices helped predict subsequent house price busts during the financial crisis,” Larson said.
The team relied on appraisals of single-family homes submitted between 2012 and 2018 to Fannie Mae and Freddie Mac, the giant, government-sponsored enterprises which securitized and guaranteed almost half of all mortgages in 2017. The researchers could only calculate accurate land values if the home on top of the land was a decade old or less, and therefore hadn’t depreciated significantly.
Given those restrictions, they had sufficient data to calculate values for areas containing about 85 percent of the U.S. population and a similar proportion of single-family homes. Because land prices for lots in close proximity are similar, this method yields accurate information even areas with older housing stock — provided there is some new construction or renovation in the area.
By their calculations, the most expensive single-family residential lots were in wealthy, high-density coastal enclaves such as Park Slope or Manhattan Beach, Calif. In many of them, several homes may be wedged into a single acre. The cheapest lots were found in wide-open areas of the rural south.
A few neighborhoods (Census tracts) where land for single-family homes is extraordinarily expensive, such as Manhattan, and where it would be quite affordable, such as many sparsely populated rural areas, won’t appear in the study because there weren’t many relevant transactions.
It’s opening wealth gaps
A successful investment in residential land doesn’t contribute to the economy in the way an investment in a farm, factory or corporation might. As Columbia University economist Joseph Stiglitz explains, a jump in land prices “disproportionately affects the wealthy.”
“There can be an increase in the value of land, without any increase in the productive potential of the economy,” Stiglitz writes. Income generated by land accrues primarily to the person lucky enough to own it, whether he or she builds their own house there, or uses it as a rental property.
As a result, rising land values tend to reinforce existing class divides. In the neighborhoods for which annual data were available, land values grew fastest from 2012 to 2017 in the fifth with the highest-income or most-educated residents. (Groupings are adjusted so that each contains a similar number of households, rather than a similar number of Census tracts, as tract populations vary.)
Those differences were mild compared to the land-value divide that opened up between wealthy and non-wealthy, and between urban and rural landowners.
In a typical neighborhood among the 20 percent where land values were lowest in 2012, average lots appreciated about 23 percent over that time period. In the neighborhoods where land values were highest in 2012, the values rose about 55 percent. The gap between the least-dense, rural neighborhoods (24 percent) and the most-dense, urban ones (62 percent) was even wider.
People often focus on what causes rising land prices. But few ask the crucial follow-up: what do rising land prices cause? Right now, the answer is inequality.
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