Land Leverage: Decomposing Home Price Dynamics

Raphael Bostic, Stanley D. Longhofer and Christian Redfearn

No 8565, Working Paper from USC Lusk Center for Real Estate

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; neighborhood amenities; Property Value; Land Leverage (search for similar items in EconPapers)
Date: 2006
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Persistent link: https://EconPapers.repec.org/RePEc:luk:wpaper:8565

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