The Beach Bum’s View of Real Estate Values March 14, 2016

As one who lives by the beach in California, I’m prone to think of housing values as being almost exclusively the land underneath the house, and the improvements as almost irrelevant.  Several times a year a widow dies, and her old fashioned beach house is torn down to be replaced by a two story blocky house that takes up most of the lot.  I tend to instinctively apply this principle in other places.  For example, suppose I read of a high rise tower with 100 units, each selling for $500,000.  I will tend to assume that if this tower were destroyed and a single McMansion were put on this site, its value would be $50 million!  That is, the land value is a constant, and is divided among the units.  Now we’re not going to get high rise towers here, and I’m not sorry; I don’t worry that much about the Coastal Commission’s impact on housing affordability, because Large Bodies of Water raise such havoc with land values that nothing in the zone they administer will ever be that affordable anyway.  The moment you cross the inland border of their zone, I say, build away!

But maybe I’m not right in my assumption.  I’m not sure what a vacant lot in Perry, Iowa, is, compared to one with a house on it.  But I’m not sure that the values are as close as they might be in a beach community.  And, the actual process of building may make an area more or less desirable.  And, I may not have taken into account the ‘If you build it, they will come’ factor.  It is often said about new highways that they only relieve traffic temporarily, until people discover new opportunities to do new car trips that they never had the opportunity to do before!  Can this be applied to housing?  In cases where the new units become pied-a-terres [pieds-a-terre?] or second or third homes, yes.  And all too many of the new units in London, New York City, etc., are precisely that.  And you could say that in the case of first residences, too, if you assume that the alternative is that young couples stay in their parents’ McMansion for life and the three or four generation household, Italian style, becomes the standard.  [And I do suspect that there are places where just exactly this is now happening!]  I’ll confess that I don’t favor a mortgage interest deduction for other than a principal residence where one is either registered to vote or registered as a non-citizen.  But a lot of these units now are bought for cash, so this policy would not affect cash buyers.  But when the buyers are making it their principal residence, and they would have had their own residence [not with family or others] somewhere else in this area had this unit not been built, filtering, or trickle-down, is in fact taking place.  Before World War II most of the new housing units being built were not being built for low or moderate income people; but, because of filtering, low or moderate income people could find older houses.  Therefore I conclude that if there were enough new units being built at ‘market rate,’ assuming they were principal residences, that the new units were not ‘affordable’ would not be a problem, because older or existing units would be made available.  But not enough is being built.

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