Real Estate: Spiraling Land

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While economists debate whether the U.S. is about to take off on another inflationary spiral, inflation is already rampant in one key area of economic life: land. In many cases, the price of land has risen as much as 1,000% in the last decade. A growing population, the migration from cities to suburbia, increased prosperity and widespread speculation have all pushed up land prices and made old Henry Ford's dictum come true in a way that he never anticipated: "The soil is the source of wealth—not the banks." The worth of all the land in the U.S. is half a trillion dollars—nearly twice the assets of all commercial banks.

Price Kills. Whether East or West, whether for an apartment building or for a highway, land rises in cost almost every month. The only exceptions are a few pockets, such as Denver and Pittsburgh, where present and future housing needs are saturated. An acre of ground in California, a half-hour away from Disneyland, that sold for $2,200 less than three years ago now brings as much as $13,500. Within a year, lot costs in southwest Houston have jumped $1,200 to $5,500. And on Long Island, the price of land has gone from 10% of a house's cost to 25% in five years. "Land is getting scarce," says Winchell Royce of the Long Island Home Builders Institute, "and whoever owns it advances his price."

Booming land prices seriously affect the big housing developers, who must construct more expensive homes to recover the cost of the plot and thus risk losing their mass market. Dallas' Centex Construction Co., the fourth biggest U.S. home builder, had to go 20 miles outside Chicago to find land cheap enough for its middle-income Elk Grove Village. The asking price for virgin land 30 miles from San Diego—with no houses around, no sewage or water service—is $3,500 an acre. Sometimes the price can kill a project. After land along a Houston freeway doubled in price, developers would have had to put up homes in the $30,000 class to make a profit. The tract lies vacant because no one wants to pay that much to live by the side of a highway.

The Trigger. Prices naturally rise fastest in the most rapidly growing and most crowded areas: California, Florida, Arizona and metropolitan New York. In the East, prices get a boost from many suburban communities that resort to "snob zoning" to keep out the creeping city. Reasoning that an influx of families in matchbox homes would overload their schools with children, these communities have zoned all lots for one, two and three acres. "They're attempting birth control by zoning," says Royce.

Some experts fear that sooner or later there will have to be a reckoning. What would happen if land prices ever begin to slide? For one thing, many speculators who borrowed money to buy property on the gamble that land inflation would continue might be forced to sell off to pay their debts. For another, banks and savings and loan associations that are lending money on the inflated values might not be able to retrieve the full amount of their mortgages, would find themselves in serious trouble. All this could trigger a price collapse that would burst the land-boom bubble, but few expect this to happen soon—if at all. Despite the high prices, strong and rising demand still supports the cost of land.