@Leah M.
If there is a supply and demand change, e.g., in newton, the land appreciates, not the house structure.
The reason is that if there are ample cheap land available, developers can build new houses.
For example, you own a house (A) sitting on 5000 sf land (B) in Newton, as well as an open lot (C) right next to your house, same size.
Lot B and C should be worth about the same.
If House A (sitting on Lot B) is worth $800/sf, and house A is 2000 sf, the total value is 1.6 M.
However, this 1.6 M is mostly land value, not house value.
Assume new construction cost of $100/sf (as some claim in this forum), the new 2000 sf house (Let call it D) will cost about $200K to build. If you build a 2000 sf house on Lot C, you can sell that new house for >1.6M, because the old house A sitting on Lot B is worth 1.6 M.
Let's go back 7 years to 2010, the same house may only be worth $400/sf, in other words, about 800 k. The land value at that is a lot lower, whereas the house value is about the same as today, assuming new construction cost is the same.
In 2010, the house is still worth about $200K ish (of course lower, due to its an older house), the land is worth about 800K minus the structure value (let's assume 150K), which equals about 650K. Therefore, you can probably sell the lot C for <650K (assume 200k profit for developer, 450K).
In 2017, the same house is worth $800/sf, or 1.6 M. The structure itself did not increase in value that much (since the new construction cost did not go up that much). How much is lot C worth now? A developer can sell a new 2000 sf house on lot c for 1.6 M, with a construction cost of 200K (again, assuming no significant change in construction cost). The lot C will be worth about 1.6 M -200 K (construction cost) - profit margin (200K) = 1.2 M.
So in this scenario, the land appreciated from 450 K to 1.2 M, whereas the house probably depreciated over the 7 year period, due to wear and tear.
Of course, you can argue that the construction cost may go up. Sure, that is inflation factor. It is correct that inflation will cause an increase in structural value over time. If construction cost increase significantly, then the structure value will increase.
It is a very complex mathematical system that we investors need to be keenly aware of. There is no simple answer to this question.
To the other extreme, in areas where land is worthless, the value actually comes from the cash flow and structure itself. We can write another few pages on this, but if land does not appreciate, only cash flow matters.
Some BP friends invested in Detroit metro and got great appreciation (3X), but I bet they picked the right location for it. If they invested in war zones, they won't see any appreciation at all. What appreciated in their case is also land, nor structure. Because the same structure in the same city (detroit), if it is in a wrong neighborhood, the value did not increase. This further supports that structure itself can not really appreciate that much (except the inflation factor or antique factor).
