That’s an interesting comment. Although my personal bet is that prices won’t drop that much (35%-50%), I don’t think that there is “replacement value” support 10%-15% under current prices either. Let me explain.
The cost of the housing structures in SD (materials, labor) is not much higher than elsewhere in the country. It is the implicit cost of land that makes housing very expensive. But the implicit cost of land is extremely volatile, and it includes a very high speculative “lot premium”. In a downturn the cost of land and the lot premium will likely go down.
Let me give an example of lot premiums: say you have a 10,000 sq ft lot with one house on it (large back yard). You can compute the “implicit cost of land” by substracting the construction costs from the market value of the house. Then let’s say you divide the 10,000 sqt ft lot into two 5,000 sq ft lots, and put two houses on them (identical houses, but with small yards now). You repeat the calculation: the implicit cost of the land equals the market value of the houses minus construction costs for the two houses.
If you do this calculation (and I read a report that did just that, I’ll try to see if I can post a link later), you will be surprised to find out that the single 10,000 sq ft lot is worth much less than the two 5,000 sq ft lots. Actually, a 10,000 sq ft lot is worth just a bit more than a SINGLE 5,000 sq ft lot.
This is the very definition of land speculation and speculative lot premium. Land is not valuable per se, in $/sq ft. It is valuable as long as a house can be built on the parcel. As I said, I would be surprised if the lot premium held up during a downturn.
