How Land Prices Affect Home Values In The U.S.?

Our previous article [link to the article] showed that almost half of Americans lives in the top-20 metro areas and has to spend 10+ years to save for a down payment. Let's dive deeper to figure out what makes American homes so expensive.

First, let's break down the median 1,500 sf home price into the building and land prices and use the $ per sf of the building as a measure. For example:

. If a typical 1,500 sf home in the metro area
. Sits on a 0.15 ac lot
. And the empty 0.15 ac lot in the area costs $150k
. That means, the land component in the home price is $150,000/1,500sf = $100/sf (where sf is the size of the building, not the land).
. If this typical 1,500 sf home costs $300k, it means the total home price is $300k/1,500sf = $200/sf.
. So, the "building price" will be $200-$100 = $100/sf.

Such approach displays the share of the land prices in home values and helps to understand how location affects the price.

It looks like the buildings themselves cost approximately the same $150/sf in all metros, depending on local regulations and labor costs. In the next articles, we will discuss different construction technologies and their costs per sf.

While, the most interesting insight is: in the top-20 metros, the land price typically takes 40-85% of the overall home price per sf, which is significant.

Obviously - the more people want to live in the area - the higher the land prices. The main parameters are:

. Jobs with high incomes.
. Interesting jobs.
. Quality of education (mostly - high schools and colleges).
. Costs of living.
. Logistics (close to the airports, highways, train stations, big cities).
. Safety (cr*me rates).
. Tidyness of the area (yes, that's a big issue in American towns).
. Variety of recreation activities (theaters, concert halls, stadiums, cafes, museums).
. Environment (climate, air quality, natural disasters, hiking trails)
. Interesting community.

All parameters have different priorities for different people, but according to the U.S. Census Bureau, Americans most often relocate for reasons related to jobs and schools. However, as we discussed in the previous article, top-income cities most likely have the least affordable housing, even when considering local salaries. Land prices account for over 80% of the overall per-square-foot home value in the top-3 metros, making them extremely expensive, especially for young families with children. This is why, for example, families are increasingly leaving Manhattan, as evidenced by reports from various analytics firms like CBRE, which track workforce migration and the increasing number of moves to more affordable areas.

Big American cities often have an interesting feature: a 15-min walk from a fancy street can move you to a very unpleasant area with 2-3 times lower home values. Here are some examples:

Gentrification has a bad rap in the media, because it's "pushing the poor to the outskirts", but actually the community benefits a lot:
. More beautiful fresh buildings, parks, schools, and walkable areas.
. Developers have to put a certain amount of Section-A (free rent) or affordable housing.
. Lower crime rates in the area due to the dissolution of the previously ghetto-ized areas.

While, it worth mention that the home values in the gentrified areas are still quite unaffordable for the general public with median incomes.

Big developers often build huge master-planned communities for 1,000+ families. When they start planning the project, they buy big land lots with very low prices per sf of the future homes: all the way down to $10-20/sf of house. As they develop the site, the media and prospective buyers figure out that there's going to be a new community soon, and the land prices in the area begin to grow. In many areas this growth is x10, to $100-200/sf of the house.

If the developer would've bought the land at the current prices, then, with an average $120/sf costs of building a tract home, the margin will be only 3-30%, which is tiny to +1,000% made on the land.

Anyways, these new communities provide way more affordable homes than the closest big cities, which attracts buyers. But the multi-year non-stop shortage of new construction and labor made buyers so hungry, so they buy quite a low-quality living for $300-400k+. This lowers down the motivation of big developers to be creative and build something more than typical cookie-cutter homes with community pools, fitness, and lounge areas.

1. The main factor in the home prices in the top-20 American metro areas is the land price.

2. Land takes 80-85% of the home value in the top-3 areas, making it unaffordable.

3. Gentrification of cheaper areas in big cities is a way to make more affordable housing. But the land supply there is very limited and the homes are quite expensive at the end of the day.

4. Master-planned development of more rural land creates a wider market with lower prices. But the chronic housing shortage motivates developers to cut the corners and deliver lower-quality communities.

We beleive that the fundamental approach to make significantly more affordable high-quality housing is not to make more highrises in NYC, but to create new vibrant areas.

Automation of home-building factories can carve out some money to create really nice parks, schools, theaters, famers markets, and regular event management. It will enable a high-quality community living even in a 30-45 min radius from a big city. Such areas will attract people who don't need to commute to the office 5 days/week - digital/online professionals and entrepreneurs. Plus, the price optimization will enable to make these homes affordable to the local people with regular jobs.