I lived in SW Michigan up until a month and a half ago. There you could find lots for $15-20k for somewhere between 1/3 and a 1/2 an acre. Normal subdivision size I guess. Then I moved to Madison, Wisconsin. Outside of the city, in the cornfields the same lots cost between $50 and $75k.

I'm trying to find some sort of logical explanation for this. The price difference cannot be explained by supply and demand. There are LOTS of farms all around with for sale signs, and the are lots of new subdivisions which are just getting started. It's obviously not a supply issue. According to people who live here, the housing market is dead, and it's a buyer's market. Demand cannot explain the prices either.

Is there some kind of logical explanation, or is it pretty much the same explanation as the price of crude oil?

 

Location, Location, LOCATION

 

theoretically it should be supply and demand, and the price should be commensurate with the income the property can yield.

of course, in reality it is just not that way. Prices are quick to get raised, and pride keeps them there. Prices go down when demand goes down, but it can take a very, very long time. Hence, you get oversupply.

 

Yeah, it can get crazy.

My brother was going to lend his friend 10% of the price of a lot near his place outside Dublin, Ireland. It's a farm that's being turned into a subdivision.

The asking price for the lot (1/4 acre) was $650,000. My brother's friend decided against it, and started looking at other houses.

Out of curiousity, my brother checked the lot prices a year later, just after first construction started. The price for the same lot was now $1,560,000.

When you consider that those lots would have gone for maybe $15 - $20,000 about 10 years ago, it's just insane.

 

There is a simple explanation for this. Crop property is always more expensive than real estate property. You will be earning income from the use of the land, rather than have a house sitting on it.

 

Just over 3 years ago my parents bought a house in a subdivision that used to be a cornfield. At the time the lot cost $15,000. They paid $150,000 for a 2000 sq ft house. Today, the lots are selling for roughly $20,000 and their house it worth approximately $200,000.

Basically, the lots that I'm comparing were both cornfields at one point.

 

not true.

Theoretically it sounds good, but if you priced land in Manhattan versus the closest crop land to NYC you'd see a HUGE difference. You know which would be more.

Here in Ventura county crop land is much cheaper then residential land, but has shot up too because of stupid rich people buying them all up for their 'ranches.'

 

1/2 acre is a regular size lot for a subdivision? that's huge here for new subdivisions, you're lucky to get a 1/8 acre lot.

 

Price of residential lots depends on a variety of factors: existence of mucinicpal services (water, sewer, police, fire protection, etc.), absorption rates of growth in the community, availability of commercial services, access to transportational infrastructure, future growth as set forth in the general plan for the community, permit fees inclusive of development impact fees, to name a few.

 

Yea, and just about all of those factors would be built into the rent, and thus income, the property can generate.

yet prices in many areas are still 2-3x that number.

IMO, if a property is priced over 130x the monthly income it generates, it is overpriced. When a property becomes more desireable, income goes up with it.

You've got condos in Miami selling for $1M plus that can only generate $2500/mo in rent...and you've got to pay maintenance which will eat up almost all of that income anyway. After taxes/insurance, you've lost money...and that DOESN'T EVEN COUNT THE PRINCIPAL AND INTEREST!

Then again, most places in mid-America only sell at 90-100x rent. Real estate is worse than the stock market when it comes to irrational exuberance, IMO.