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Strategies & Market Trends : The Residential Real Estate Crash Index
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To: Wyätt Gwyön who wrote (21956)7/5/2004 8:46:32 PM
From: Elroy JetsonRead Replies (1) of 306849
 
Regulations affect land prices in a way which is contrary to what many expect. The secret to understanding this is "Residual Land Value".

1.) You start with the sales price the finished product will sell for - say 920 homes. This number is set by what the public is willing and able to pay - it has nothing to do with costs:

2.) You subtract the cost of building and selling those homes including all regulatory burdens;

3.) The remaining figure is the Residual Land Value - how much the land is worth. Pay more and the Developer incurs a loss. Pay less and the developer gains an unusually large profit at the expense of the previous land owner.

What does this mean? Let's assume I impose a $30k per acre tax, or regulatory burden, on land to be developed just because I'm mean-spirited and I can. The land owner will typically receive $30k less per acre than before the tax. The home price is set by the buyer's ability to pay. The price the buyer pays for the completed home is unaffected by the $30k tax on land.

To understand home prices, you need to understand the factors which affect sales price like: incomes; available credit; number of buyers; and their motivation.

As you suggest, people who focus instead on inputs to "land cost" are forever lost in an Alice in Wonderland world where nothing ever makes sense.
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