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Land Leverage: Decomposing Home Price Dynamics

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  • Raphael W. Bostic
  • Stanley D. Longhofer
  • Christian Redfearn

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.

Suggested Citation

  • Raphael W. Bostic & Stanley D. Longhofer & Christian Redfearn, 2006. "Land Leverage: Decomposing Home Price Dynamics," Working Paper 8565, USC Lusk Center for Real Estate.
  • Handle: RePEc:luk:wpaper:8565
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    File URL: http://lusk.usc.edu/sites/default/files/working_papers/wp_2006-1013.pdf
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    References listed on IDEAS

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    Cited by:

    1. Cabray L. Haines & Richard J. Rosen, 2007. "Bubble, bubble, toil, and trouble," Economic Perspectives, Federal Reserve Bank of Chicago, vol. 31(Q I), pages 16-35.

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