For years, the rule of thumb ratio for land-versus-home construction costs has been one to four or one to three, but a new data base published by the Wisconsin School of Business shows just how widely that ratio varies across the country and how drastically it changed in many markets during the housing boom and consequent bust.
The free data, developed by the Lincoln Institute of Land Policy and the Graaskamp Center for Real Estate at the Wisconsin School of Business, can be accessed at http://www.lincolninst.edu/subcenters/land-values/.
"If housing were simply a manufactured good, and location or land had no value, then the price of housing would be determined by construction costs, and housing prices would increase at roughly the same rate as the price of other goods in the U.S. economy," said Morris A. Davis, an assistant professor of Real Estate and Urban Land Economics at the Wisconsin School of Business and fellow at the Lincoln Institute.
But, clearly from the three sets of data developed by Davis, it is not. In addition to the metro area land prices data, the Center also published sets of data on rent-price-ratio and on aggregate U.S. land prices. Both provide extremely granular statistics dating back decades, one set even goes back as far as 1930.
But the one of most interest to those who are more statistically challenged is the metro area land prices data, http://www.lincolninst.edu/subcenters/land-values/metro-area-land-prices.asp. This provides quarterly historical information on the ratio between land and construction costs for 46 metro markets from 1984 until the first quarter of 2009.
Here are a few tidbit take-aways. The first, overriding, one is a reaffirmation of the adage that real estate is all about location. The second is that you really can’t develop a nationwide industry standard rule of thumb for land-versus-construction cost ratios.
Land Value, Nearly Nothing
There are markets where land is worth almost nothing now. In Atlanta, for instance, a market where land costs were a relatively stable 25% of total home price for decades, the highest ratio of land to build cost was 32.1% in the third quarter of 2001. By the first quarter of 2009, land costs were $8,927, 5% of a $178,543 total price.
In Cleveland, Ohio, land prices climbed to 39.2% of a home’s value in 2003 -- $74,461 of the price of a $189,715 home. By 2009, the land value was 5%, $8,148 of a $162,967 home.
Most everybody knows that Detroit land prices have been in free fall, but the numbers show just how far and how fast. In the third quarter of 2003 the percentage of land cost in a home was 34.2%, $60,804 of a $177,620 home. In 2009 it was 5%, $5,576 of an $111,510 home.
Land prices in Phoenix, a market where lot costs historically accounted for more than half the cost of a home, had climbed to more than 65% of a home’s cost by 2005. At the beginning of 2009, land accounted for 13.8%, $29,003 of a $210,805 house.
In San Diego, where, like most California areas, land prices have always been significantly more than half a home’s costs, the price of land had climbed to 81.8%, $598,407 of a $731,486 total cost in the third quarter of 2005. By 2009 land accounted for 61.8%, $266,671 of a $431,766 total cost.
But take note of the total house price change in San Diego during that period. Land plus construction costs dropped by more than 40%.
In Pittsburgh, where home prices have been historically low compared with the rest of the nation, land prices were a low percentage of houses during the time when the rest of the nation was blooming and were hardly affected afterwards.
In 2003, the price of land in Pittsburgh climbed to a recent high percentage of 23.3%, $31,037 of a $133,466 home. In 2009, land accounted for 13.3%, $21,478 of a $160,922 home.
In Houston, there’s no evidence of either a boom or a bust. Home prices have continued to rise modestly despite the downturn. The highest percentage of land-versus-home price was in 2003 when the land cost 30.9%, $48,223 of a $155,835 house. In 2009, it accounted for 24.4%, $50,599 of a $207,766 home.
Teresa Burney is a senior editor with Builder and Big Builder magazines.
Learn more about markets featured in this article: Atlanta, GA.