There are two primary components that make up the price of a house. One is the value associated to the land. The second is the costs of the structure.
The Home Price Replacement Cost Fundamental™ will provide you with information on what it costs in 2008 to rebuild four different quality levels of houses based on cost per square foot, exclusive of land costs. By identifying the cost per square foot without the cost of the land, you are able to do comparisons to existing properties and break down the values of the land vs structure.
The prices of new supply coming to market in the next 6 months to 2 years provides telling information about what to expect for future home values. In 2008 building materials and labor costs have fallen 15-20% from their 2006 levels. Land costs in some areas are down 30-80% from 2005 levels. In high cost areas, land comprises as much as 70% of the total cost of a house.
In many areas, builders today can build and sell houses to consumers at prices 20-40% off of 2005 levels and do so making an acceptable profit. Land costs are the component of home prices with the greatest sensitivity to market conditions and will rise and fall the most. Observing what happens to prices of land for home building will give you an idea on the direction of future home prices.
If new supply is coming to market at prices less than current prices of comparable houses, there is downward pressure on prices. Consumers will opt for new house over a comparable used house. When new houses are less expensive, used houses will have to lower their prices to be competitive. Yes, there are exceptions.
If new supply is coming to market at prices higher than current prices for comparable used houses, then the condition exists for prices of used houses to rise. When new housing is more expensive than comparable used houses, consumers may opt for used houses if they appear to be a better value.