Working Paper: CEPR ID: DP5333
Authors: Morris Davis; Jonathan Heathcote
Abstract: A house is a bundle comprising a physical structure and the plot of land upon which the house is built. Thus changes in house prices reflect changes in the cost of structures and value of land. In this paper we apply this insight to construct the first constant-quality price and quantity indexes for the aggregate stock of residential land in the United States. We document that the value of residential land exceeds annual GDP, and that the dynamics for the prices of residential land and residential structures are quite different. For example, the real price index for residential land almost tripled between 1975 and 2005, while the real price of structures increased by only 24 percent. Fluctuations in house prices at business cycle frequencies, including the recent boom, are primarily driven by changes in the price of land.
Keywords: housing; land prices
JEL Codes: R14; R21; R31
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| fluctuations in the price of land (Q15) | fluctuations in house prices (E32) |
| demand for housing (R21) | price of land (Q15) |
| construction costs (L74) | price of structures (D49) |
| demographics (J11) | house prices (R31) |
| interest rates (E43) | house prices (R31) |
| tax treatment of housing (H24) | house prices (R31) |
| growth rate of housing prices (R31) | growth rates of structures and land (R14) |
| initial prices in regions (P22) | appreciation and volatility of house prices (R31) |