The Strange Power of Land: Truly A 4-Letter Word

Earlier this week I read an article about Ross Perot, Jr., the largest land owner in the Dallas-Fort Worth region who has amassed a fortune rivaling his father, the former presidential candidate, Ross Perot Sr. (Senior is still alive?) Ross Perot Sr. was well known for his homespun sayings. My favorite was “It’s time to pick up the shovel and clean out the barn.” Man, I love that one. Well, Junior has a few new ones that are pretty good and they relate to the power of land.

“What I like about land is I can drive out and check on it,” Perot, 57, with a net worth of $2.1 billion on the Bloomberg Billionaires Index, said last month in an interview in his Dallas office. “It doesn’t go anywhere. It’s hard to steal land.”

Aside from “credit”, the price of land is the single most important factor today concerning the distortion of the housing market. Last year I wrote a couple of columns about land during my year long Bloomberg View column adventure. One of my favorites, which was proudly one of the most read on the Bloomberg Terminals worldwide was Housing Bust Wasn’t About the House where I illustrated the idea that home price appreciation is really a function of the land underneath the house. When a property appreciates, assuming no significant change in the home itself, the land is doing the appreciating, not the house.

Appraisers know this by heart.

Here is the chart I developed to illustrate my point.

land prices chart

The same logic applies to the new development boom the world is currently experiencing. In this low interest rate environment, global investors have been canvasing the globe, seeking out higher returns.

When insatiable investment demand meets limited supply, land gets a lot more expensive. And it did.

Since we just went through the biggest housing boom of the modern era, much of the low hanging fruit (land) had been picked over and what remains was prohibitively expensive and more complicated to work with. During this 5-year boom, housing development skewed towards the high end in virtually every housing market in the U.S., if not the world – despite tepid wage growth and tight credit conditions. Land owners, at least in the 18 U.S. housing markets I cover, tend to be longer term investors, not speculators looking for a quick flip. I realize this is a broad generalization but it has been my experience. As a result, they don’t have to sell. There is no urgency. Someone recently joked to me “as the patriarch of the family lay on his deathbed surrounded by his family, his last words were ‘don’t sell our land, no matter what.'”

Since real estate developers are in the business of developing and need to acquire land to build unless they’ve been stockpiling it, they have to pay to play. They have been “forced” to pay record prices in many cases and have to reverse-engineer that land price into record high sales prices for single family homes and condos in order to make a return on their investment and risk. Over the past few years, the heavy volume of new product that has been in the pipeline has been coming on to the market. Combine that with a stronger U.S. dollar, weakening economies around the word, the potential for higher interest rates and the visceral images of construction creating bloated inventories, we are at an inflection point.

In fact with the stronger U.S. dollar we’re starting to see a perspective in real estate coverage on foreign buyers such as Stronger Dollar Emboldens More Americans to Seek European Dream Home and For Foreign Buyers, Family Homes Over Trophy Towers

These domestic housing headwinds (I feel like a Washington D.C. policy wonk whenever I use that term) are forcing the development community to focus on the lower end of “luxury” where demand remains very strong. It’s a tough situation for developers who want to tap this market since land is the part of the equation and sellers of land are generally unyielding.

Mark Twain – “Buy land, they’re not making it anymore.”

Without the demand for more moderate priced housing being fulfilled, housing prices outside the high end market are rising and in some cases, rapidly. Hence a national housing affordability crisis is in full swing.

Land of the dolls (Friday the 13th edition)

But then again, why go outside and enjoy your land when you have a home like this?


Source: Terrible real estate agent photographs

Land of exciting things to do

From the Gothamist web site: Colbert Releases Glorious Tilt Shift Video Showcasing NYC The video that didn’t make the final cut of his show intro. It’s amazing.

Land ‘O Lakes

Housing butter sculpture gone wild.

But I digress…

Land of Rentals

Not unlike the mismatch between the type of new development homes that are being built and the lower priced homes in high demand, we are seeing a similar pattern in the rental market. Today we published our Manhattan, Brooklyn & Queens rental report for Douglas Elliman but the top line theme could potentially apply to any housing market in the U.S.:

– Rents continue to rise, with much of the growth skewed to the low and middle end
– New construction of rental housing is skewed towards the high end

Here are a view salient points for each region within the report:


– Rising prices, more strength at the lower end of the market
– Tight credit and rising sales price kept more renters in rental market
– Strong economy continued to drive prices higher
– Median rental price increased year-over-year for the 21st consecutive month
– Non-doorman rentals continued to see larger gains than doorman rentals
– Luxury market rents showed smallest price gains
– Vacancy rate edged higher despite falling use of concessions by landlords


– Median rental price reached the second highest level on record
– 1-bedroom median and average rents set new records
– Overall prices continued to rise from year ago period
– Faster marketing times and fewer landlord concessions
– Luxury market prices continued to slip
– Growing resistance by tenants for renewals with increase in new rentals
– Median Brooklyn rent was $410 less than median Manhattan rent


– Price indicators were mixed as median declined and average rose
– New development market share rose 6.9% comprising 32.7% of new rentals
– Luxury rentals showed most price gains
– 2-bedrooms and studios showed largest price gains
– Median Queens rent was $413 less than Brooklyn and $823 less than Manhattan

And I’ve created a slew of charts using the report’s data with some of my favorites below. More charts here: Manhattan Brooklyn Queens

Click any chart to expand.

2015-10MBQ-MBspread 600

2015-10MBQ-Mprices 600

2015-10MBQ-BmedianYOY 600

2015-10MBQ-QBspread 600

2015-10MBQ-QmedianNewDevShare 600

Land of Appraiser Shortages

In one of my favorite sources of appraisal industry information, Valuation Review (subscription), they ask an appraisal industry veteran from a large firm: why is there an appraiser shortage?

Greg Stephens, chief appraiser, SVP compliance with Metro-West Appraisal Company, LLC provided these key reasons , among others:

– The diminution of appraisal fees within the residential mortgage lending industry creating a disincentive to either remain in the industry or gain initial entrance.

– The Federal Housing Administration (FHA) revision to their appraisal panel requirements accepting only certified appraisers on their rosters.
– Restrictive federal and state regulations with the evidence being indisputable that an unintended consequence of the Home Valuation Code of Conduct (HVCC) was the proliferation of AMCs, followed by an immediate diminution of fees paid to appraisers.

My takeaway – the disruption of the appraisal industry is based on appraisal management companies paying appraisers half the market rate. Period.

They keep the other half in the name of bank compliance with Dodd-Frank by essentially denying that cut rate appraisal fees have an impact on quality and reliability. Much of the appraisal talent has largely left the industry or moved into other areas outside of mortgage lending. Since 2009 the result has been crappy quality. This shift has become a self fulfilling prophecy for those seeking to automate valuation. And who offers automated valuation? Those very same AMCs that control 80% of the appraisal market for lender work and who coincidentally have analytics tools and lobbying power.

Ok I’ve buttered you up enough. Be sure to check out the reads I enjoyed this week (below) – there is a lot of stuff on the rental market and the housing affordability crisis.

If you need something rock solid in your life like a cold stick of margarine (particularly on Friday afternoons), sign up for my Housing Note here. And please share this with a friend or colleague. They’ll feel good, you’ll feel better and I’ll be estatic.

See you next week.

Jonathan Miller, CRP, CRE
Miller Samuel Inc.
Real Estate Appraisers & Consultants

Reads I Enjoyed

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