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A lot! The following plots (real) household real estate value between 2000 and 2009.

Data from Federal Reserve Flow of Funds Accounts and BLS

Data from Federal Reserve Flow of Funds Accounts and BLS

Since the peak, the U.S. has “lost” about $8 trillion in real estate wealth – or about 33% of the value it held at its peak in 2006. However, if you break out the value of real estate into the value embedded in structures and the value embedded in land you will find that virtually all of the lost value has come in the value of land. Land values have fallen by 75% off their 2006 peak of over $10 trillion down below $3 trillion today. The aggregate value of structures has fallen far less dramatically and accounts for less than 20% of the total decline in real estate value. This should make sense coming into and out of a bubble. The supply of land is probably far more price inelastic than structures and therefore the rate of increase in land prices coming into a bubble likely exceeds the rate of increase of structures prices (ceteris paribus) and on the way down you should expect to see the rate of price decrease of land exceed the rate of price decrease of structures (ceteris paribus).
There’s more to the story of course. By the way, you might profitably read Henry George on his single tax theory and its applications).

One Response to “How Much Real Estate Wealth Was Destroyed During this Downturn?”

  1. Sanket says:

    This seems to be reality staring at people’s faces. Since 2001, I have always heard that real estate and land were “always” good investments, and that housing prices “always” rise. I have even heard retail bankers claim that real estate was always a good investment. I have even heard socialist activists trying to convince the “poor” in america to buy land in third world countries because land is “real” wealth. I think the collapse of the housing bubble contradicts this assertion. Was this mentality caused by the housing bubble, or is real estate over the long run, actually a good investment?

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