Land Leverage: Decomposing Home Price Dynamics

34 Pages Posted: 26 Jan 2006

See all articles by Raphael W. Bostic

Raphael W. Bostic

Federal Reserve Bank of Atlanta

Stanley D. Longhofer

Wichita State University - W. Frank Barton School of Business

Christian L. Redfearn

University of Southern California - Sol Price School of Public Policy

Multiple version iconThere are 2 versions of this paper

Date Written: June 2006

Abstract

This paper argues for the importance of separating the bundled good of housing into land and improvements, because locational amenities - which often constitute a significant portion of property value - are typically capitalized into the value of land but not the value of the physical structure on a parcel of land. This means that changes in overall property value will depend critically on how much of its value is represented by land value, a proportion we call land leverage. The importance of this deconstruction is demonstrated by highlighting how land leverage helps to explain variation in house price appreciation in Wichita, Kansas. The use of Wichita to demonstrate a land leverage effect is noteworthy, because its house price dynamics bias the analysis against finding a land leverage effect - the effect of land leverage is likely to more pronounced in larger urban areas. Noting that land leverage should be relevant for many real estate issues and policies, we highlight four specific areas where consideration of land leverage could significantly improve our understanding of real estate markets.

Keywords: Housing prices, land, home price index

JEL Classification: R00, R21, R31, R11

Suggested Citation

Bostic, Raphael W. and Longhofer, Stanley D. and Redfearn, Christian L., Land Leverage: Decomposing Home Price Dynamics (June 2006). Available at SSRN: https://ssrn.com/abstract=878111 or http://dx.doi.org/10.2139/ssrn.878111

Raphael W. Bostic

Federal Reserve Bank of Atlanta

1000 Peachtree Street N.E.
Atlanta, GA 30309-4470
United States

Stanley D. Longhofer (Contact Author)

Wichita State University - W. Frank Barton School of Business ( email )

1845 N. Fairmount
Wichita, KS 67260
United States
316-978-7120 (Phone)
316-978-3263 (Fax)

HOME PAGE: http://webs.wichita.edu/longhofer

Christian L. Redfearn

University of Southern California - Sol Price School of Public Policy ( email )

Los Angeles, CA 90089-0626
United States

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