Home sales are decreasing due to rising interest rates, but prices are still increasing due to rising land values. Increasing home prices are reflecting the rising value of the land on which they are situated, rather than building values. That was determined by a recent study conducted by the Federal Reserve. In the 46 biggest metro housing markets, land’s share of property prices increased from 32 percent in 1984 to 51 percent in 2004, according to Michael Palumbo, chief economist in the Fed’s Flow of Funds section.
Land value increases were most dramatic during the 1998-2004 housing boom when land’s share of property values gained rapidly. “With residential land having appreciated so significantly over the last 20 years, the future course of land prices is expected to play an even more important role in driving home prices in the next two decades in terms of average appreciation rates and volatility,” the study report stated.
The increasing share of property values are being determined by rising land values. “This could mean faster home price appreciation, on average, and possibly a larger swing in home prices,” the report noted. Most experts now point to a much slower pace of home value increases in future years. However, the cumulative gains in land values in past years means that house prices might rise more quickly on average than they did before the boom, according to the study report. At least, this might be the case on some areas.
Markets where homes are particularly high priced have seen the biggest increases in land’s share of prices, but the recent housing boom has been marked by rapid appreciation of residential land just about everywhere, the study revealed.