House Prices, Land Prices, and

Fundamentals Under the Microscope

Analysis of the Washington, DC Metro Area
Steve Oliner
AEI and UCLA Ziman Center
Presented at
International Conference on Collateral Risk
Hosted by Allianz SE in Berlin, Germany
March 28, 2014

The research presented here is joint work with Edward Pinto at AEI and Morris Davis at the University of
Wisconsin-Madison.

House Prices: What Do We Know?

Housing busts can be very damaging to the economy and

financial system. Best to prevent them if possible.
House prices can stray from fundamentals (construction cost,
rent, income). Eventually correct back.
Risk varies over the cycle. Highest during the boom.
Land is the risky part of the housing bundle.

Residential Land and House Prices

In the recent cycle, land prices moved up and down much more than house prices.

Index, 2002:H2 = 100

300

300

Residential land price index, 23 cities

Half-yearly
250

250

200

200

150

150

Case-Shiller 20-city
house price index
100

100

50

50

0
1996

1997

1998

1999

2000

Source: Nichols, Oliner, and Mulhall (2013).

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

The Research Program

Goal: To assess collateral risk in US housing markets at a finer
level of geography than is currently available
An ambitious, data-intensive project with multiple steps
Step 1: Acquire property-level data for millions of homes
Step 2: Separate house price into land and structure value
Step 3: Calculate land price indices at the zip-code level
Step 4: Estimate fundamental values for land and houses
Step 5: Calculate deviations from fundamentals and assess risk

Todays Presentation
Will present preliminary results from steps 1-3 for the
Washington, DC metro area
Focus on detached, single-family homes in five jurisdictions:
City of Washington, DC
Two counties in Maryland: Montgomery and Prince Georges
Two counties in Virginia: Fairfax and Prince William

Currently refining the analysis and extending it to other cities

Snapshot of the Washington, DC Area

County/city

Population

Median
Household
Income

% of Adults
w/ Bachelors
Degree

% Black or
Hispanic

Fairfax

1,082,000

$109,400

58%

26%

Montgomery

1,005,000

$97,000

57%

36%

Prince William

430,000

$96,200

38%

42%

Prince Georges

863,000

$73,600

30%

81%

Washington, DC

633,000

$64,300

51%

60%

313,900,000

$53,000

29%

30%

United States, total

Note: Population and percent black or Hispanic are as of 2012. Median household income and percent with bachelors
degree are averages over 2008-2012. Source: U.S. Census Bureau.

Compared to US average, Washington area is affluent, with a well

educated and ethnically diverse population.
Fairfax and Montgomery: highest income and education
Prince Georges and DC: largest minority share of population

Key Data Sources

Property-level data
House characteristics, location, and current estimated market
value (AVM). Source: FNC, Inc
Reconstruction cost of house as new. Source: Marshall &
Swift/Boeckh (MSB)

Zip-level data
House price indices. Source: FNC, Inc
Construction cost indices. Source: MSB

Property-Level Snapshot in 2013:Q3

Dataset contains about 570,000 detached, single-family
homes about 85% coverage
Have AVM and reconstruction cost as new for each home
Adjust reconstruction cost for depreciation
Do this with results from a regression of AVM on reconstruction
cost, house age, assessed land value, and lot size
Still fine-tuning this procedure and looking at other options

Land value = house AVM value adjusted reconstruction cost.

Land is a shorthand for amenities of a given location.

Creating Time Series

Roll the property-level AVMs back from 2013:Q3 to 2000:Q1

using zip-level house price indices
Roll the property-level adjusted reconstruction cost back from
2013:Q2 to 2000:Q1 using zip-level cost indices
Back out implied land value for each property in each quarter.

House Price Decline in DC Metro Area, 2006-2012

House prices fell sharply over 2006-12 in Prince George's County and
in outlying areas. Prices fell much less in the affluent, close-in areas.

By quintile*

20872, 21771

Montgomery County, MD

Smallest
Second

20871

Third

20882, 21797
20876
20838, 20839, 20841, 20842

20879

20886
20877,
20880

20837

20832

20855

20878

20853

20850

20851

20895,
20896

20170

20817, 20818

20171
20151

22124

20120
20143, 20155

22027,
22180

20124

20110

22015

22039

20111

22101, 22207

20812,
20816

20015

22152

22150

20781

20737

20706

20784
20017 20710, 20712,
20722
20018
20785

20708

20020

20715
20706

20720

20721

20716

20774

20747

20032
20745

20769

20743

20748

20746

22303, 22310

22315

22153

20706

20782

22041,
22044
22302,
22311,
22312

22151

20012

20001,
20016 20008 20009,
20010,
20007
20011

20740, 20770

20783,
20903,
20912

20002, 20003,
20019

22042

Prince George's
County, MD

20901
20910

22046,
22213

22003

22032

20121

20136

20815

20705, 20904

20902

22043

22031
22030

20109

22102

22182
22181

22033

20169, 20137

20814

20194

20190, 20191

20707,
20866

20906

20852

22066

20707,
20866

20868, 20905

20705, 20904

20854

Fairfax County, VA

Largest

20879

20879
20874

Fourth

20777, 20833,
20860, 20861,
20862

20772

22306, 22307

20744

20623, 20735

22308
22060, 22309

Prince William
County, VA

20119, 20181

22192
20112

22079

20601, 20607

20608, 20613

22193
22191
22205
22026
22134, 22172

*Range of house price decline by quintile (rounded to the nearest 1%) is less than 15%, 15% to 22%, 22% to 34%, 34% to 41%, and 41% to 51%.
Bottom quintile includes zips 20007, 20008, 20016, and 20815, where index rose.
Source: Authors' calculations using data from FNC, Inc.

Average AVM in DC Metro Area, 2013:Q3

House prices are relatively low in Prince George's County and outlying areas - precisely where the steep price
drops occurred, consistent with the established pattern that house prices tend to be more volatile in low-price areas.

By quintile*

20872, 21771

Montgomery County, MD

Lowest

20871

Second

20882, 21797

Third

20876

20886

20877,
20880

20837

20832

20855

20878

20853

20850

20851

20868, 20905
20906

20170

Fairfax County, VA

20194

20151
22033

20169, 20137

20120
20143, 20155

22124

20136

22042

22003

22032
20124

20110

22027,
22180

22030

20109

22015

20111

20814

20815

20901
20783,
20903,
20912

20910

20740, 20770
20706

20015
2073720706
20782
20812,
20001,
20781
20816
20784
20009,
22101, 22207
20016 20008
20017
20710, 20712,
20010,
20722
20018
20011
20007
20785
22043
20002, 20003,
22046,
20019
20743
22213

22031

20121

Prince George's
County, MD
20708

20769
20715

20706

20720

22102

22182

22181

20707,
20866

20705, 20904

20902

20012

20190, 20191
20171

20895,
20896

20817, 20818

20707,
20866

20705, 20904

20852
20854
22066

Highest

20879

20879
20874

Fourth

20777, 20833,
20860, 20861,
20862

20879

20838, 20839, 20841, 20842

22151
22152

20745

20748

20774

20746

22303, 22310

22315

20716

20747

20032

22302,
22311,
22312

22150

22153

22039

20020

22041,
22044

20721

20772

22306, 22307

20744

20623, 20735

22308
22060, 22309

20119, 20181

Prince William
County, VA

22192
20112

22079

20601, 20607

20608, 20613

22193

22191
22205

22026
22134, 22172

*Range of average AVM values by quintile (rounded to nearest $1000) is $128,000 to $294,000, $294,000 to $416,000, $416,000 to $542,000, $542,000 to $621,000 and $621,000 to $1,593,000.
Source: Authors' calculations using data from FNC, Inc.

Average Lot Value in DC Metro Area, 2013:Q3

Lot values mirror the pattern for house prices - low in Prince George's and outlying areas,
and higher in Fairfax County and the affluent parts of Montgomery County and DC.

20872, 21771

Montgomery County, MD

By quintile*
Lowest

20871

Second

20882, 21797
20876

20879

20838, 20839, 20841, 20842

20886

20879

20879

20877,
20880

20874
20837

20878

20851

20854

20895,
20896

22182

20171
20151
20169, 20137

22033
20120

22181
22124

20136

22003

22032
20124

20110

22042

22030

20109

22015
22039

20111

22101, 22207

22151
22152

20002, 20003,
20019

Prince William
County, VA

22192
20112

22079

20715
20720

20721

20743

20716

20774

20748

20746

20772

22306, 22307

22060, 22309
20119, 20181

20706

20747

20032
20745

20769

22303, 22310

22315

22153

20020

22302,
22311,
22312

22150

20706

20015 20012

22041, 22044

20708

20740, 20770

2073720706
20782
20781
20001,
20784
20008 20009, 20017
20710, 20712,
20016
20010,
20018 20722
20007
20011
20785

20812,
20816

22043
22046,
22213

22027,
22180
22031

20121
20143, 20155

22102

Prince George's
County, MD

20705, 20904

20902

20901
20783,
20910
20903,
20912
20815

20817, 20818

20707,
20866

20705, 20904

20814

20170 20194

20707,
20866

20906

20852

20190,
20191

Highest

20868,
20905

20853

22066

Fourth

20832

20855

20850

Fairfax County, VA

Third

20777, 20833,
20860, 20861,
20862

20744

20623, 20735

22308

20601, 20607

20608, 20613

22193
22191
22205
22026
22134, 22172

*Range of average lot value by quintile (rounded to the nearest $1000) is $37,000 to $136,000, $136,000 to $199,000, $199,000 to $263,000,
$263,000 to $347,000, and $347,000 to $962,000.
Source: Authors' calculations using data from FNC, Inc. and Marshall & Swift/Boeckh.

Average Lot Size in DC Metro Area, 2013:Q3

As expected, lots tend to be small in close-in areas and larger further out.

By quintile*

20872, 21771

Montgomery County, MD

Lowest

Second

20871
20882, 21797
20876
20838, 20839, 20841, 20842

20886

20832

20855

20878

20853

20850

20851

20895,
20896
20814

20817, 20818

Fairfax County, VA

20190, 20191
20171
20151

22182
22181

22124

22027,
22180

22033

20169, 20137

22030

20109

20136

22015

22039

20111

20015

22152

20781

20737 20706

20017 20710, 20712,

20722
20018
20002, 20003,
20019

20708

20715
20706

20720

20784
20721

20785

20743

20020

20774

20747

20032
20745

20769

20748

20746

22303, 22310

22315

22153

20706

20782

22041, 22044

22150

20740, 20770

20783,
20903,
20912

20012

20001,
20016 20008 20009,
20010,
20007
20011

22302,
22311,
22312

22151

20124

20110

22042

Prince George's
County, MD

20901
20910

22046,
22213

22003

22032

20121

22101, 22207

20812,
20816

20705, 20904

20902

22043

22031

20120
20143, 20155

20815

20194
22102

20707,
20866

20906

20852

22066

20707,
20866

20868, 20905

20705, 20904

20854

20170

Highest

20879

20877,
20880

20874

Fourth

20777, 20833,
20860, 20861,
20862

20879

20879

20837

Third

20772

22306, 22307

20744

20623, 20735

22308
22060, 22309

20119, 20181

Prince William
County, VA

22192
20112

22079

20601, 20607

20608, 20613

22193
22191
22205
22026
22134, 22172

*Range of average lot size by quintile (rounded to the nearest 1000 square feet) is 4,000-9,000, 9,000-13,000,
13,000-17,000, 17,000-30,000, and 30,000-167,000.
Source: Authors' calculations using data from FNC, Inc.

20716

Average Standardized Land Price per Square Foot in DC Metro Area, 2013:Q3
After controlling for differences in lot size, the price of land is highly correlated with
house prices. That is, house prices reflect the amenity value of a given location.

By quintile*
Lowest

20872, 21771

Montgomery County, MD

Second

20871

Third

20882, 21797
20876
20838, 20839, 20841, 20842

20886

20877,
20880

20837

20832

20855

20878

20853

20850

20851

20906

20852
20895,
20896

22066

Fairfax County, VA

20817, 20818

20190, 20191
20171
20151

22182
22181

22124

22027,
22180

22033

20169, 20137
20120
20143, 20155

20136

20124

20110

22042

22015

20815

22039

20111

20812,
20816

20015

22152

20017

20781

20737 20706

20784
20710, 20712,
20722
20785

20018

20002, 20003,
20019

20708

20020

20715
20706

20720

20721

20716

20774

20747

20032
20745

20769

20743

20748

20746

22303, 22310

22315

22153

20706

20782

22041,
22044

22150

20740, 20770

20783,
20903,
20912

20012

20001,
20016 20008 20009,
20010,
20011
20007

22302,
22311,
22312

22151

Prince George's
County, MD

20901
20910

22046,
22213

22003

22032

20121

22101, 22207

20707,
20866

20705, 20904

20902

22043

22031
22030

20109

20814

20194
22102

20707,
20866

20868, 20905

20705, 20904

20854

20170

Highest

20879

20879
20874

Fourth

20777, 20833,
20860, 20861,
20862

20879

20772

22306, 22307

20744

20623, 20735

22308
22060, 22309

20119, 20181

Prince William
County, VA

22192
20112

22079

20601, 20607

20608, 20613

22193
22191
22205
22026
22134, 22172

*Range of average land price per square foot for a quarter-acre lot by quintile (rounded to the nearest dollar) is $4 to $14, $14 to $19,
$19 to $26, $26 to $35, and $35 to $98.
Source: Authors' calculations using data from FNC, Inc. and Marshall & Swift/Boeckh.

Average Land Share of Property Value in DC Metro Area, 2013:Q3

The land share tends to vary more across neighboring zips than do house prices, partly reflecting differences in lot size.

By quintile*

20872, 21771

Montgomery County, MD

Lowest

Second

20871
20882, 21797
20876
20838, 20839, 20841, 20842

Third

20886

20877,
20880

20837

20832

20855

20878

20853

20850

20851

20868, 20905

22066
20170

20171
20151

22182
22181

22124

22027,
22180

22033

20169, 20137

22030

22039

20111

22152

20706
20737 20706

20782

20781
2001720710, 20712,
20722
20018

22041,
22044

20745

22153

20769
20715
20706

20720

20784
20785

20748

20721

20716

20774

20746

22303, 22310

22315

20708

20747

20032

22150

Prince George's
County, MD

20743

20020

22302, 22311, 22312

22015

20740, 20770

20002, 20003,
20019

22151

20124

20110

20136

20015

22046,
22213

22042

20783,
20903,
20912

20012

20001,
20016 20008 20009,
20010,
20011
20007

22101, 22207

22003

22032

20121
20109

20815

20901
20910

22043

22031

20120
20143, 20155

20814

20812, 20816

22102

20705, 20904

20902

20194

20190, 20191

20707, 20866
20705, 20904

20895,
20896
20817, 20818

20707,
20866

20906

20852
20854

Fairfax County, VA

Highest

20879

20879
20874

Fourth

20777, 20833,
20860, 20861,
20862

20879

20772

22306, 22307

20744

20623, 20735

22308
22060, 22309

20119, 20181

Prince William
County, VA

22192
20112

22079

20601, 20607

20608, 20613

22193
22191
22205
22026
22134, 22172

*Range of average land share of property value by quintile (rounded to the nearest 1%) is 26% to 43%, 43% to 49%,
49% to 53%, 53% to 58%, and 58% to 76%.
Source: Authors' calculations using data from FNC, Inc. and Marshall & Swift/Boeckh.

Land Prices over Time

For zips grouped into quintiles by quarter-acre land price in 2013:Q3. Land prices
jumped everywhere, but fell much more in zips where land was relatively cheap.
Index, 2006=100

110

110

100

100

90

90

Highest quintile
80

80

70

70

Fourth
60

60

Third
50

50

Second

40

40

Lowest
30

30

20

20
2000

2001

2002

2003

2004

2005

2006

2007

2008

Note: Observations for 2013 represent average of Q1, Q2, and Q3

Source: Authors' calculations using data from FNC, Inc. and Marshall & Swift/Boeckh

2009

2010

2011

2012

2013

Land and House Prices: 2000-2006

Land prices rose at least twice as much as house prices everywhere. Zips with
highest land prices had smallest increases, though they were still sizable.
Percent change
400
Land Price

House price

Construction cost

350

300

250

200

150

100

50

0
Lowest

Second

Third

Fourth

Zips grouped in quintiles by quarter-acre land price in 2013:Q3

Source: Author's calculations based on data from FNC, Inc. and Marshall &Swift/Boeckh

Highest

Land and House Prices: 2006-2012

Land prices fell more than house prices everywhere, especially in zips with low
land prices. Declines in low-price zips were staggering.
Zips grouped into quintiles by quarter-acre land price in 2013:Q3
Lowest

Second

Third

Fourth

Highest

20
10
0
-10
-20
-30
-40
-50
Land Price
-60
-70
-80

Percent change
Source: Author's calculations based on data from FNC, Inc. and Marshall &Swift/Boeckh

House price

Construction cost

Land Shares over Time

For zips grouped into quintiles by quarter-acre land price in 2013:Q3. Land share was
relatively stable for high-price zips. Bigger swing down after peak for lower-price zips.
75%

Percent

70%

65%

60%

Highest quintile
55%

Fourth
50%

Third
Second

45%

40%

Lowest
35%

30%
2000

2001

2002

2003

2004

2005

2006

2007

Note: Observations for 2013 represent average of Q1, Q2, and Q3.
Source: Authors' calculations using data from FNC, Inc. and Marshall & Swift/Boeckh.

2008

2009

2010

2011

2012

2013

2000-12 Cycle: Montgomery County

For Montgomery County, house prices fell more from 2006 to 2012 in zips where
the land share rose a lot during 2000-06. A strong relationship.

House price change, 2006 to 2012, percent

10

0
16

18

20

22

24

26

28

30

32

34

36

-10

-20

-30

-40

R2 = .56
-50

Maximum rise in land share from 2000 to any year through 2006, percentage points

Source: Authors' calculations using data from FNC, Inc. and Marshall & Swift/Boeckh.

2000-12 Cycle: Entire DC Area

For full DC area, relationship is much looser. Could reflect need to refine land
shares and/or to control for different fundamental trends in land prices across
the different counties and DC proper. To be tackled in future work.
20

House price change, 2006 to 2012, percent

10

All other counties and DC proper

0
15

20

25

30

35

40

-10

Montgomery County
-20

R2 = .04
-30

-40

-50

-60

Maximum rise in land share from 2000 to any year through 2006, percentage points

Source: Authors' calculations using data from FNC, Inc. and Marshall & Swift/Boeckh.

45

Metro Areas in Full Study

East Coast
Boston
Washington DC
Miami

Far West
Seattle
Los Angeles
Phoenix

Interior
Chicago
Detroit
Memphis
Oklahoma City

MSAs represent range of markets across the U.S.

Counties selected to capture range of experience within the
MSA. 26 counties in all.
Total population of selected counties: about 40 million

Summary
Housing submarkets are important in Washington DC area.
House price swing was largest in outlying and lower-priced
areas; it was much smaller in affluent, close-in areas.
Land prices were more volatile than house prices.
Large rise in land share had some association with extent of
subsequent house price correction.
Clearest signal about over-valuation could come from
outlying and lower-priced areas.
Future work: Refine estimation of land value. Bring
fundamentals and loan quality into the analysis.