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Strategies & Market Trends : The Residential Real Estate Crash Index -- Ignore unavailable to you. Want to Upgrade?

To: Les H who wrote (25885)	12/12/2004 4:47:25 PM
From: Elroy Jetson	Respond to of 306849

"Land prices quadruple over last 5 years" is a typical headline for a real estate up-cycle, whether it's Wollongong, Los Angeles or London. That's an annual appreciation rate of 32%. During the Southern California real estate boom of the 1980s land appreciated at a 38% annual rate. The fun part is that it's easy to predict the magnitude of the eventual decline in land prices. If income increases by 2% while land appreciates by 35%, land prices will eventually lose the extra 33%, resulting in a 25% price decline. [1 / (1.35 - .02)] Of course the real estate boom lasts longer than one year and the resulting price declines are larger. Also, land prices frequently over-shoot on the downside,just as they do on the upside. Raw land prices in Southern California, after being pushed up by the boom of the 1980s, declined by 85% to 95% in the early 1990s. People who own homes notice a smaller appreciation than raw land. They also notice a smaller decline in price as land makes up only a portion of the value of their home. The other components of value are of course the building and, frequently over-looked, the value of what builders call the "off-sites". These include grading, the cost of bringing streets and utilities to the home, permitting and other costs. When I worked on the litigation over the value of The Irvine Company, appraisers were lost in confusion when using the current 35% land appreciation offset by a 15% discount rate used at the time by many manufacturing industries. Upon changing the land appreciation rate to the income growth rate for the area and the discount rate to the market rate for real estate loans, finally everything fell into place and comparable sales of raw land made sense. .