Land leverage: Decomposing home price dynamics

Abstract

This article demonstrates the importance of separating the bundled good of housing into land and improvements, arguing that changes in a property's overall value will depend critically on how much of its total value is contained in the land, 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. 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. Land is the only thing in the world that amounts to anything ... for 'tis the only thing in this world that lasts, and don't you be forgetting it! 'Tis the only thing worth working for, worth fighting for - worth dying for. Gerald O'Hara in Gone with the Wind1 © 2007 American Real Estate and Urban Economics Association.