The price of vacant land situated on the edges of built-up parts of major US metropolitan areas has traditionally risen faster than either the general price level (as measured by the Consumer Price Index), the prices of most other types of real estate, or the prices of financial assets. Such land has appreciated rapidly in the past because the outward growth of urban activities from the cores of most metropolitan areas has caused much of that land to be transformed from agricultural uses to urban uses. Urban uses involve much more intensive employment of the land. This increases the income that can be earned from each acre, or the market value of each acre if used for non-income-earning purposes (such as single family, owner-occupied housing).

There is good reason to believe that this superior market-price appreciation of peripheral parcels of vacant land around metropolitan areas will continue in the next few decades, especially regarding the best located and most usable parcels. They are likely to appreciate faster than most other real or financial assets, even if inflation in general remains much lower than it was in the 1970's. That is true because existing demographic forces, plus likely future immigration into the US, almost guarantee that the total population of all US metropolitan areas combined will rise substantially for at least the next two decades. US Census Bureau projections indicate increases of about 10% in the 1980's and 7% in the 1990's. Populations of the fastest-growing areas will go up even more rapidly.

The rate at which agricultural land is transformed into urban uses depends upon those key factors that influence the speed of outward movement of urban development within each metropolitan area. Reliable forecasts of the absolute magnitudes of the slowest-changing of these factors (such as topography and transport networks) can be made for long periods. Reliable forecasts of the relative magnitudes among metropolitan areas of other key factors can usually be made over short time periods; say, three to seven years. However, the reliability of such forecasts declines markedly for longer time periods. Both types of these factors include, but are not limited to, the following:

The area's overall rate of population growth. The faster this growth rate, the greater the pressure to convert more land to urban use.

Its overall rate of employment growth. The faster this growth rate, the more total purchasing power is available to the area's residents, other things being equal.

The rate of growth of nominal incomes per household. The greater the nominal (current dollar) incomes available to the area's residents, the more total nominal purchasing power they can offer to acquire the most accessible or otherwise desirable sites in the area.

The nature and extent of the highway transportation network serving the area, especially of radial highways extending outward from its core and beltways around its periphery. The more extensive this network, and the more it facilitates movement to and from the area's periphery, the more pressure will be brought upon peripheral vacant land to be converted to urban uses. The accessibility of specific sites can change dramatically as new roads or other transport linkages are built.

The relative attraction of the area's major downtown business district as a location for office space, compared with more outlying locations. This, in turn, depends upon the transportation network serving the downtown area … how centrally the downtown is located within the entire area, the size of the past agglomeration of facilities and activities downtown, and the proximity of the downtown to the area's major airport(s). The greater the relative attraction of downtown, the slower the movement of office employment to suburban areas, and the less the pressure on further-out peripheral areas to be converted to urban uses. But, non-office-located activities may move to peripheral areas regardless of how attractive the downtown is for office-located activities.

The topography of the area, in particular, the presence or absence of geographic obstacles to its growth outward from downtown in any particular direction. Such obstacles include lakes, rivers, oceans, mountains, and areas with unsuitable drainage. These obstacles usually influence the direction of urban growth, rather than its total extent.

The presence or absence of political obstacles to urban growth outward from downtown in any particular direction, or within any particular portion of the entire area. Such obstacles include very low-density zoning requirements, political resistance by local residents to further development, and the setting aside of large amounts of vacant land for recreational or other open-space use.

The availability for land developers and speculators of funds borrowable on favorable terms. During periods of extremely high interest rates or unavailability of funds to borrowers (because of disintermediation from financial institutions), developers and land speculators cannot readily borrow funds with which to purchase sites. These periods often coincide with the early stages of general economic recession brought on by high interest rates. At such times, the demand for converting additional vacant land at the periphery of most metropolitan areas tends to stabilize or fall. Conversely, easy availability of funds for land developers and speculators on favorable terms — especially low interest rates and high mortgage-to-value ratios — tends to encourage speculation, thereby pushing prices of such land upward.

As the population of any metropolitan area grows, there are more households and businesses in it bidding in competition with each other for the best sites. Moreover, these bidders have higher nominal incomes available to them if average nominal incomes rise, as they have in the US every decade since 1945. Hence, the nominal-dollar prices of the best sites usually rise faster than the population or the level of employment. All other sites derive their market prices by reference to the prices of the most desirable sites. As a result, the average nominal (current dollar) price of urbanized land in each metropolitan area tends to rise faster than the population there as its total population grows.

Reducing the uncertainties connected with the above key variables requires carrying out a complex process of both research and interactions with local governments. This process must include "deep immersion" of the persons carrying it out in local real estate markets and in local governments. Detailed information must be obtained about both.

In particular, the rezoning of particular vacant parcels into categories appropriate for development, with their potentially highest and best use, demands unusual skill, knowledge, and the ability to relate to public authorities. Those completing this analysis must cultivate intimate knowledge of local property markets and local government policies, procedures, and personnel. Such knowledge cannot be obtained in a short period, or by persons visiting each area intermittently. Rather, obtaining it requires continuous familiarity with day-to-day real estate transactions in the key zones of the metropolitan area. Transactions in the key zones of the metropolitan area are required. These persons must also develop strong relationships with local zoning personnel so the latter have confidence in the integrity and the abilities of the former.

This whole process requires major investments of time and money. Those possessing the skills, time, and money required to carry it out have an enormous advantage in adding value to as-yet-unrezoned vacant land, compared to those who do not possess these capabilities.

This process will work most effectively if those carrying it out also possess the following advantages:

Investing in such vacant land has never produced the large tax shelters for income, unrelated to real estate that were available from investments in real estate structures. That was mainly because land is not subject to depreciation allowances. Hence, the adoption of the tax reforms passed by the Senate Finance Committee would have much smaller adverse impacts upon the desirability of investing in vacant land than upon the desirability of investing in most income-oriented real estate. This would be true even though those reforms would end preferential tax treatment of capital gains, and would permit smaller deductions for interest on money to buy land. So, the relative desirability of investing in vacant land would increase, compared to that of investing in most income-oriented real estate, or in those financial assets or other types of investments very adversely affected by the tax reforms.