Developers respond to market prices by choosing different densities and higher-quality projects with different costs. That's why there is no such think as "the cost of building a home"
God Bless Cameron. Doing God’s work. Go here to get the March 10, 2026 Palo Alto Policy & Services Committee staff report. First, be careful. It’s a huge packet in a single .pdf. No I'm not spamming the site. But know that this is a .pdf download not a web site.
Item 2 is a staff report and economic study to determine where multi-family housing is feasible and/or where it could be made feasible as a matter of policy. The staff report precedes the EPS economic study in the packet.
The study uses an RLV methodology, and makes findings that make me and Cameron grin. Office is usually always the so-called highest-and-best-use. Where housing is the clear winner, it is for lower density housing ("townhomes.") Mult-family housing comes in third. (Table 8).
The pro formas for real sites are also vetted by local developers. These outcomes are not applicable to every real sub-market of every city, but this confirms that the methods, and analysis Cameron is using are real and valid, and sometimes non-intuitive outcomes are still so-called "highest and best use."
A useful argument, although I think it moves rather quickly from residual land value as an equilibrium relationship to the price actually paid for land.
That connection depends on informed and sufficiently patient owners operating in a reasonably competitive market. In practice, owners may not know what redevelopment a site can support. They may overprice it by assuming an optimistic scheme while underestimating planning, remediation, financing and phasing risks. They may also underprice its potential because they lack information, development expertise or bargaining power.
Zoning is central to this. With clear and fixed development rights, the feasible scheme is relatively easy to estimate and more of its expected value can be capitalised into the land price. With discretionary zoning, however, land value depends on uncertain negotiations, political decisions and future permissions. The owner may price in an expected rezoning, while the buyer discounts the site for the risk that it will never happen.
Owners do not always wait for the theoretically highest value either. A cash-constrained owner may accept a lower price for speed and certainty. A site with only a few suitable buyers may also transact below its theoretical redevelopment value.
This becomes particularly important in complex regeneration. Where zoning is uncertain and only a handful of parties have the capital, knowledge and organisational capacity to deliver, those buyers gain considerable bargaining power. They do not determine value alone, but they strongly influence how the uncertain development surplus is divided.
Market prices may therefore shape feasible density, quality and costs without mechanically determining the transaction price of land. That price also reflects zoning, information, liquidity, risk, timing and bargaining power.
Great comment. Thanks Remco. I hope you are enjoying this article series.
"although I think it moves rather quickly from residual land value as an equilibrium relationship to the price actually paid for land."
Interesting that you noticed that, because I tried to avoid the price paid for land and simply look at the residual of price minus non-land development costs.
Maybe I wasn't clear enough.
It is certainly true that there is risk/uncertainty about what can be built. You are right that clear zoning rules can reduce this risk to some degree compared to discretionary rules, or none at all.
Yes, some cash-constrained owners might choose lower intensity, but to do this they give up the chance to sell to a less cash-constrained owner who might pay more for the site.
you are 100% right that high prices make homes more expensive and not the other way around
there is another unintuitive thing happening: higher prices cause more construction
God Bless Cameron. Doing God’s work. Go here to get the March 10, 2026 Palo Alto Policy & Services Committee staff report. First, be careful. It’s a huge packet in a single .pdf. No I'm not spamming the site. But know that this is a .pdf download not a web site.
https://cityofpaloalto.primegov.com/Public/CompiledDocument?meetingTemplateId=18366&compileOutputType=1
Item 2 is a staff report and economic study to determine where multi-family housing is feasible and/or where it could be made feasible as a matter of policy. The staff report precedes the EPS economic study in the packet.
The study uses an RLV methodology, and makes findings that make me and Cameron grin. Office is usually always the so-called highest-and-best-use. Where housing is the clear winner, it is for lower density housing ("townhomes.") Mult-family housing comes in third. (Table 8).
The pro formas for real sites are also vetted by local developers. These outcomes are not applicable to every real sub-market of every city, but this confirms that the methods, and analysis Cameron is using are real and valid, and sometimes non-intuitive outcomes are still so-called "highest and best use."
Interesting. Any chance you could download that document and email it to me? Thanks
Yep. I guessed at two or your emails. Let me know if you don't get the doc.
Got it. Thanks
A useful argument, although I think it moves rather quickly from residual land value as an equilibrium relationship to the price actually paid for land.
That connection depends on informed and sufficiently patient owners operating in a reasonably competitive market. In practice, owners may not know what redevelopment a site can support. They may overprice it by assuming an optimistic scheme while underestimating planning, remediation, financing and phasing risks. They may also underprice its potential because they lack information, development expertise or bargaining power.
Zoning is central to this. With clear and fixed development rights, the feasible scheme is relatively easy to estimate and more of its expected value can be capitalised into the land price. With discretionary zoning, however, land value depends on uncertain negotiations, political decisions and future permissions. The owner may price in an expected rezoning, while the buyer discounts the site for the risk that it will never happen.
Owners do not always wait for the theoretically highest value either. A cash-constrained owner may accept a lower price for speed and certainty. A site with only a few suitable buyers may also transact below its theoretical redevelopment value.
This becomes particularly important in complex regeneration. Where zoning is uncertain and only a handful of parties have the capital, knowledge and organisational capacity to deliver, those buyers gain considerable bargaining power. They do not determine value alone, but they strongly influence how the uncertain development surplus is divided.
Market prices may therefore shape feasible density, quality and costs without mechanically determining the transaction price of land. That price also reflects zoning, information, liquidity, risk, timing and bargaining power.
Great comment. Thanks Remco. I hope you are enjoying this article series.
"although I think it moves rather quickly from residual land value as an equilibrium relationship to the price actually paid for land."
Interesting that you noticed that, because I tried to avoid the price paid for land and simply look at the residual of price minus non-land development costs.
Maybe I wasn't clear enough.
It is certainly true that there is risk/uncertainty about what can be built. You are right that clear zoning rules can reduce this risk to some degree compared to discretionary rules, or none at all.
Yes, some cash-constrained owners might choose lower intensity, but to do this they give up the chance to sell to a less cash-constrained owner who might pay more for the site.