A new study explains why so many small homes have such a massive price tag in desirable coastal areas: It's not the coast of building; it's the value of the land.

  • In the expensive U.S. coastal metros, home prices have detached from construction costs and can be almost four times as high as the cost of rebuilding existing structures. However, absent restrictions on housing supply, competition among developers tends to maintain average metropolitan home prices tethered to the cost of construction.
  • This study estimates the average home value to replacement cost ratio for the largest U.S. metro areas, as well as several related measures, and maps them by zip code area within each metro.
  • The high cost of housing in expensive coastal metros is not driven by construction costs. It is driven by the high cost of land which, in turn, reflects a scarcity of zoned units, not a scarcity of land per se.
  • The scarcity of zoned units afflicts the expensive coastal metros in their entirety but, even within more affordable metro areas, sought-after districts suffer from such scarcity.
  • The disconnect between home values and construction costs in the expensive coastal metros does not imply that real estate development is necessarily lucrative. Because developers must acquire valuable land, construction costs can still be pivotal with respect to the viability of projects and, as a result, they can still influence the housing supply. The timing of developers’ land acquisition vis-a-vis the housing cycle can be crucial.

Anyone who has seen a million dollar bungalow can attest that, in America’s expensive coastal cities, the disparity between a home’s appearance and its price tag can be shocking. Real estate property values consist of two parts: the value of land and the value of improvements to it, like structures. In the expensive coastal cities, the land component corresponds first and foremost to a premium paid for staking a claim in the location, and it can be huge, generally comprising most of a home’s value.

This study illustrates the disparity between the appearance and price tag of homes, identifying the places in which home buyers pay mostly for the dirt. For each of the largest U.S. metros – and for each zip code area therein –  it estimates average home values and replacement costs: the cost of building existing homes anew at current quality standards and construction costs. The estimates help infer the breakdown of home value between the value of improvements – primarily the structure – and the value of the land. Sources and methodology are detailed in the appendix, and the complete set of estimates is available for download.