Land Leverage: Decomposing Home Price Dynamics

This paper argues for the importance of separating the bundled good of housing into land and
improvements, because locational amenities – which often constitute a significant portion of
property value – are typically capitalized into the value of land but not the value of the physical
structure on a parcel of land. This means that changes in overall property value will depend critically
on how much of its value is represented by land value, a proportion we call land leverage. The
importance of this deconstruction is demonstrated by highlighting how land leverage helps to explain
variation in house price appreciation in Wichita, Kansas. The use of Wichita to demonstrate a land
leverage effect is noteworthy, because its house price dynamics bias the analysis against finding a land
leverage effect – the effect of land leverage is likely to more pronounced in larger urban areas.
Noting that land leverage should be relevant for many real estate issues and policies, we highlight
four specific areas where consideration of land leverage could significantly improve our
understanding of real estate markets.