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.

  • Maggie moore

    The question should be Location ,Location, Location that is the true importance of value

    • disqus_bvIVLOSS7J

      Both land and the structure(house), have their own value.Since we don’t manufacture land, we should give more weight on land value.Location and set-up
      Are also factors to consider.You can build a luxury mansion on a 1/2 acre lot or a cottage on 5- acre lot, with location as controlled variable.

  • Clients buying property because 1)demanding location, 2) house. Land doesn’t have value if not in prime location. We, American has too much land!

  • Simone Dadsetan

    That all depends. I live and work in Newport Beach. There are many areas here were people buy because of land value. The home is primarily a “tear down”. The Newport Peninsula is a prime example. However, there are parts of Orange County that no matter how old the home, you can’t ever rebuild a home of your choice. Irvine is an example of that. So in Newport Beach you buy first due to location (land) and in Irvine you buy based on the home. It actually may be why those who seek to purchase in Irvine, look for newer homes.

  • Holly

    I agree with both Simone and Maggie. Most of all it depends on where you want to live. Where I work in the San Gabriel Valley, many of the homes are purchased just for location. If they can afford it they tear them down and rebuild. Unfortunately land is scarce, not plentiful. So the many buyers that want a new home need to buy a great distance from their job or settle for an older home.

  • Eric Drew

    Please define “land”

    Components of the value of the land under the improvements that we call ‘Home’ include:

    a) Cost of Land
    b) Cost of Entitlements, permits and approvals
    c) Cost of installation of infrastructure [ie sewer, water, storm drains, gas, elec cable, phone, streets, curbs, gutter, sidewalk etc]
    d) Cost of government impact fees for sewer, water, school, drainage, traffic, park and affordable housing

    The components of cost b) through d) have not changed much in 6 years.

    Therefore, for the past 5 years this calculus equates to a negative value of a) cost of land

    Bank owned and stressed land development projects have mostly sold at negative a) land values. Very few new ‘pipeline’ projects going through approval process suggest that a) land value is likely to become rational rather than negative in 2014.

  • Matt Orzech

    The value is in the land. It cost roughly the same dollar per square foot to build. Therefore, the value is and always has been in the land. The land equals the location. The land provides the location that affords views. The land provides the location that is close to great schools, the ocean, work centers, or garbage dumps. Therefore, the value is, was, and always be in the land. Buildable land is limited in supply. The homes theoretically could all be duplicated and built on the same size piece of land anywhere (subject to zoning, etc, more evidence that value is in the land).

    • RE_Insider

      Matt, your comments are to the point… buildable! The number of restrictions in certain areas or cities could negatively impact the value of the land. For example; Malibu restricts the location of septic tanks in relationship to the structures and the water wells, making many lots (undeveloped land) impossible or impractical to be developed. Other counties have severe restrictions for development of lots in proximity to fire zones… is buying a lot or a tear down with intention of building a single family residence a feasible project to anyone or reserved to the pros? What you think? What steps would you recommend before buying an empty lot or a tear down? Are loans available for building a home? What are the terms?

      • Matt Orzech

        It is feasible, Brian added the other factors in a subsequent comment. My recommendation to anyone considering a “tear-down”, re-model, or custom build on their own lot is to consult with an experienced professional. The typical real estate agent, in most cases, will not have enough knowledge in all the aspects of this type of transaction. Find someone with experience and that has current references.

  • In our experience, teardowns and/or “land-valued” opportunities exist when the market determines that the structure sitting on the land has no premium or value over the value of the land. The market has determined that the properties “potential” is more valuable than as it sits there now…….don’t want to be a “know-it-all” but with a business name like teardowns.com and a tagline of “When the Value is in the Land”..we should be able to add something to the conversation 🙂 Thanks,

    • RE_Insider

      Brian, Thanks for you insight and for the information on the website. Teardowns are quite common in the beach cities of California. In Southern California with the price of land going for up to $1000 per square foot in cities like Manhattan Beach builders are always looking for good teardowns.

  • Jake Rose

    The four most dangerous words in the investment world are “this time is different.” It is dangerous to project the future based on the recent past and proclaim that we have entered a new paradigm. Regardless of each bubble, the world was forever changed in each situation, regardless of price. Market pundits often get caught up in an emotional bias towards recent events and cite that “this time is different” just as the market reverts back to its long-term trend. Four years ago, the concept of a “new normal” was introduced, a time period where economies would struggle to grow home equity returns that had fallen below historical norms. “New normal” advocates believed that housing prices would fail to perform as well as their historical averages. Four years after the prognostication, the stock market is back at record highs and the market is up over 85%. Housing prices will likely follow a similar projector. Investors too often believe that as the economy changes, long standing investment principles will no longer hold true. But they do. They always do.