The Salt Lake City area is ranked near the middle in a 50-city study of the value of a home and the cost to build it.
In the study, titled “Paying for Dirt: Where Have Home Values Detached from Construction Costs,” Salt Lake City ranks 23rd and in 2016 had a “construction cost ratio” of 1.45. The ratio, it said, is a rough gauge of the extent to which home values are driven by the value of land. It is determined by average home value to average construction cost. A ratio between 1 and 1.5 indicates that cities are producing enough new housing to keep home values loosely tethered to construction costs, it said.
The Salt Lake ratio was based on an average home value $320,240 and an average home replacement cost of $220,910, and the average land value per home of $153,970.
When the ratio is high, it indicates a disparity between homes’ price tag and appearance because home values mostly correspond to land, the report said. Topping the disparity list was San Jose, Sunnyvale and Santa Clara in California, with a ratio of 3.74. Next was San Francisco, Oakland and Hayward with 2.98. An area including Buffalo, New York, had the lowest average home value to average construction cost ratio among the 50 metro areas studied, at 0.74.
The study report was compiled by Issi Romem, chief economist of BuildZoom, a San Francisco-based company that connects homeowners with building contractors.
“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,” the report said. “However, absent restrictions on housing supply, competition among developers tends to maintain average metropolitan home prices tethered to the cost of construction.”
In expansive 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,” it said, describing the disparity as “places in which home buyers pay mostly for the dirt.”