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Dirt rich

It's not construction costs that have driven the bay area's soaring home prices. Turns out, it's the ground the homes sit on that's really valuable.

By JAMES THORNER
Published July 8, 2006

	[Times photo: Brian Cassella]
	In South Tampa, land prices are so high that lots are often worth much more than the homes that occupy them. Ted Eckerson, above, says that's why he tore down the Ballast Point community home he'd lived in since the 1960s and replaced it with a new 3,000-square-foot house.

The Tampa Bay area's home price boom has been mostly a land price boom.

Land accounts for nearly half of an average home's value in Tampa-St. Petersburg-Clearwater, up from about a third of a home's value in 1998 and a quarter of a home's value in 1984.

Waterfront lots have appreciated the most, but the trend played out across most of the region, even in monster suburban subdivisions built on former cow pastures.

At a time when builders can replicate homes by the thousands, it's increasingly land that sets a home's value, said University of Wisconsin economist Morris Davis, who drew up the findings in a recent report released with Federal Reserve economist Michael Palumbo.

"When house prices grow faster than construction costs, it's arithmetically impossible to be anything but land prices," Davis said.

Even for those homeowners benefitting from rising land prices, the news isn't all good. The trend will likely lead to greater volatility in the housing market, according to the study. If land is the main basis of a home's worth - and not such costs as labor, lumber and concrete - home prices could rise and fall more sharply in concert with land's boom or bust cycles.

Ted Eckerson has witnessed the phenomenon first hand. Eckerson moved into South Tampa's Ballast Point community in the 1960s, when his South Quincy Street ranch home sat on a dirt road.

Homes in his part of Ballast Point are mostly weathered, single-story affairs with carports, many worth less than $100,000. But the real value rests with the land. The neighborhood stretches a few blocks from the bay, across Gandy Boulevard from ritzy Bayshore Beautiful.

Ballooning land prices have boosted the worth of Eckerson's lot to nearly a quarter-million dollars. So he tore down his old house and gave the lot the house it deserved, a new 3,000-square-foot stucco pile with pillars.

"I'm scared to ask what's it's worth," Eckerson said as workers put the final touches on the house. "The high prices have leaked over from Bayshore Boulevard the past few years."

It's the same story in such Pinellas County neighborhoods as Yacht Club Estates, Kenwood, Redington Beach and Snell Isle: Land is so valuable that some homes have become almost disposable.

"Land prices are magnified greatly when you're on the water. If you can smell water, view it, spit in it, that property has taken off," said Warren Weathers, Hillsborough County's assistant property appraiser.

Economists were surprised to learn bay area land had appreciated so much, Davis said. Local land prices still haven't reached Miami's, where 71 percent of an average home's value is the lot, but since 1998 Tampa has bested Miami in the rate of growth.

"Tampa made no sense to me at first. It doesn't have Miami's name. I hadn't really known Tampa was as expensive as it was," Davis said.

To measure land's key role in shaping housing costs, the study's authors essentially took the average price of more than 1,000 homes in the area and subtracted the cost of construction.

What was left they dubbed "land," a category that encapsulates not just raw dirt but location and amenities. Expensive homes were overrepresented, so a Clearwater Beach home influenced the average more than a suburban lot in Pasco County.

The researchers didn't analyze why the price of land increased. But they note that land, the supply of which is more or less fixed, fluctuates in price almost solely based on demand. Factors affecting demand are immigration, housing speculation and low interest rates.

That's why land makes up more than 88 percent of an average home's value in densely packed San Francisco. With few exceptions (parts of Texas walloped by a collapse of the oil industry in the '80s and '90s), the land boom was replicated across the country.

Some developers caution about relying too much on the study's findings on the outskirts of the Tampa Bay area.

While the price of raw land has tripled over the past six years in Pasco, land is nowhere near half the value of a home in Wesley Chapel and Land O'Lakes, said Kevin Robles of McCar Homes. A random check of a few dozen suburban Pasco houses shows the lot's share of a home's price at about 20 percent.

"What is it they say about lies, damn lies and statistics?" Robles said. "Has land gone up? Sure it has. But as the housing market slows, demand for land has begun to abate."

For Davis, the news from the suburbs doesn't necessarily contradict his report. Since living in Pasco requires longer commutes to reach jobs and amenities in Tampa, land should be relatively cheap there. In other words, the market rewards residents near the center and punishes residents on the periphery.

"Not everyone can live downtown," Davis said. "So land prices adjust to keep people out."

The authors conclude that home prices will grow more volatile in the future as land, as opposed to construction costs, represents a larger share of a home's worth.

And the movement won't always be up. If land values decline in certain regions, home prices will follow them into the trough.

"Look, we don't know what's going to happen in future, but if the future looks like the past, housing prices will grow faster and grow more volatile," Davis said.

[Last modified July 8, 2006, 00:47:41]