What’s More Valuable: the Land or the House?

Are California buyers investing in real estate because they are expecting an increase in the value of the land or the house? What are you telling your clients?

The collapse of the latest real estate bubble was followed by the collapse of the market. Did you know housing bubbles are not a 20th century phenomenon?

Are any of you old enough to remember land fever? Most housing bubbles in our recent history were relatively local in nature and they were caused by the promotion of supposedly valuable lots of land.

Land fevers occurred in Florida in the 1920s where shady operators sold “swamp land” as an investment. Earlier land booms included New York State in the 1790s, Kansas in the 1850s, and California during the gold rush. In these situations investor induced speculation is generally blamed for the real estate bubbles.

The housing bubble in which we are currently recovering was much more widespread in nature due to financial promotions including sub-prime mortgages, no-down payment mortgages, and securitized mortgages.

It was also fueled by the belief that because land is finite, all home prices must rise. However, a study conducted by Morris Davis of the University of Wisconsin and Jonathan Heathcote of the Federal Reserve Bank of Minneapolis indicated that the share of nonfarm home value accounted for by land declined from a high of 36.4 percent in 2000 to 23.7 percent in 2012. Overall this is a relatively small increase from 15.3 percent in 1930.

Which begs the question: Are your clients buying property because of the perceived value of the land or the house? We’d like to hear from you.