The Price and Quantity of Residential Land in the United States

Abstract

We combine publicly available data from Freddie Mac, the Decennial Census of Housing, and the Bureau of Economic Analysis to construct the first constant-quality aggregate price index for the stock of residential land in the United States. We uncover five main results: (a) since 1970, residential land prices have grown faster but (b) have also been twice as volatile as existing home prices; (c) averaged from 1970 to 2003, the nominal stock of residential land under 1-4 unit structures accounts for 38% of the market value of the housing stock and is equal to 50% of nominal annual GDP; (d) the real stock of residential land under 1-4 unit structures has increased an average of 0.6% per year since 1970; and (e) residential investment leads the price of residential land by three quarters. We also estimate that in 2003:Q3 the nominal value of the entire stock of residential land is the same as annual GDP. Finally, we show for the US data that the logarithms of the nominal price index for residential land, disposable income, and interest rates are cointegrated.

Consumption, (dis)aggregate wealth, and asset returns

“…On the other hand, because the value of land is excluded and land accounts for most of the volatility in housing returns, housing wealth may be imprecisely measured in the U.K. Nevertheless, Davis and Heathcote (2007) conceptualize a house as a bundle comprising a non-reproducible plot of land and a reproducible tangible structure. The authors decompose the aggregate value of the housing stock into structures and land components, and show that the growth rate of the price of housing is a weighted average of the growth rate of the price of structures and the price of land.…”

User costs and bubbles in land markets

“…In this case, i *t would be approximated by the trend change in the CPI plus a fixed real appreciation rate. The data on land prices for the United States constructed by Davis and Heathcote (2007) shows a real price change of about 0.2% per quarter between 1975 and about 1997 and a real price change of 0.7% per quarter between 1975 and 2005. The correction of land prices in the recent past will have brought the average back down if data were available up to 2008 or 2009.…”

Housing, home production, and the equity- and value-premium puzzles

“…We compute real aggregate numeraire consumption as its nominal value divided by the appropriately calculated price index, p c m;t ; 7 note that we use quarterly changes in p c m;t to convert all nominal financial returns into real returns. We compute the real aggregate stock of home capital as the Davis and Heathcote (2007) estimate of the nominal market value of all housing units, divided by the Davis and Heathcote price index for the stock of housing. 8 This estimate of the real stock of housing includes both physical structures and land in residential use.…”