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May 28 AREUEA: DC Metro House Prices and Land Prices under the Microscope

May 29, 2014

AREUEA: DC Metro House Prices and Land Prices under the Microscope

By: Edward Pinto, Resident Fellow and Co-director of International Center on Housing Risk, American Enterprise Institute

edward pinto

As many of you know, AEI has had an ongoing research project related to collateral valuation and risk assessment.  The attached paper entitled “House Prices and Land Prices under the Microscope: A Property-Level Analysis for the Washington, DC Area” will be presented at the annual convention of The American Real Estate and Urban Economics Association to be held here in Washington, DC on Friday, May 30 at 10AM.


1. AREUEA Davis Oliner Pinto House Land Prices DC May 2014 final

2. AREUEA Davis Oliner Pinto House Land Prices DC May 2014 final PowerPoint

This paper represents the culmination of 18 months’ work by Morris Davis (University of Wisconsin), Stephen Oliner (AEI) and myself.  Also attached is a slide presentation that summarizes our work.

As demonstrated in the attached materials, we have quantified collateral risk at a finer level of geography than is currently available.

·  The focus is on land value, as land is the risky part of house price.

·  The study estimated land value at the property level, something no previous study has done on such a large scale.

·  We used the estimates to characterize the recent boom/bust cycle in land prices and house prices in the Washington area at the zip-code level.

·  The research is ongoing with continued refinement of the methodology and expansion to many more metropolitan areas.

Key takeaways:

·  The swing in house prices and land prices varied widely across locations. The 2000-2013 cycle was mildest in the affluent, close-in parts of the metro area. It was considerably greater in the more distant suburbs and in areas with a large Black or Hispanic population ― places where land is relatively cheap.

·  Land prices were more volatile than house prices everywhere, but especially so in the areas with initially inexpensive land. In the quintile of zips with the lowest land prices in 2000, land prices jumped more than 500 percent through 2006. The increase in each successive quintile was less extreme, though it remained quite large even in the highest quintile. During the bust, land prices in the lowest price quintile plunged 75 percent, far exceeding the 20 percent drop in the highest quintile.

·  Rising land prices accounted for the vast majority of the increase in house prices during the boom and more than accounted for the drop in house prices during the bust. These results demonstrate the central role for land in house-price swings.

·  Changes in the land share of property value were a useful predictor of subsequent change in house prices: the areas with the largest increases in the land share tended to suffer the sharpest drop in house prices during the bust. This implies that a substantial rise in land shares, even when not accompanied by a relatively large increase in house prices, provided a valuable signal about the risk of a severe house-price drop.

·  All in all, these results highlight the value of focusing on land for assessing house-price risk and suggest that market participants and policymakers should be particularly attentive to situations that involve a rapid appreciation of land prices from initially low levels.

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