Housing downturns, reasons why? What happens when a parcel of land gets to it's highest valued use? Let's assume for a moment that the housing market and the transfer of parcels of land follows what we've been talking about in class. Over time the parcels of land will transfer from one user to another based on their highest and most valued use. This is represented by the sales price between two parties. In our modern land transfer system this is skewed by governmental policies such as zoning however we may assume that the transfer is the highest and most valued land use under the existing rules and regulations.
So why do house prices ever go down? It's because of the dynamic nature of people and the decisions they make and the trial and error nature of people's decisions. We've been talking about this in class and here is an example of it. What if you buy a parcel of land and the attached improvements (real estate speak for buildings) and you pay more for it then anyone else has and maybe ever will. Maybe you didn't get what you expected out of the land parcel and it's improvements. Maybe if it was a business it didn't turn the profit that you expected and the sales price you paid was a 'mistake' in that it wasn't worth the return it provided. Many of these factors transform themselves into some degree of risk and uncertainty. They may also be further exacerbated by risk from outside parties regarding financing and fund availability. When their value on the parcel changes and goes down another steps up to take place as it's owner.
So what does this have to do with Urban Economics? It's a manifestation of how the decisions of previous land owners and their actions may change the opportunity costs of current or future owners. Which do some degree may change specific uses of land parcels, how they are valued and how other uses change around them. We've talked about how business and residential parcels develop simultaneously and prices change dynamically. This I believe is a contribute to the way communities develop and are shaped. A misconception is that real estate always goes up in value but here is one reason and I think a baseline reason why this may not always be the case.
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I agree that parcels of land will be subject to uncertainty and to trial and error and to mistakes. Over time, I expect, as I think you do, each land parcel to end up in the most highly valued use (constrained as you suggest by government actions). But, the beginning of your post makes reference to not just one parcel but land values in general perhaps falling. It seems to me you don't really tackle that question. You stick to an analysis for one parcel at a time.
Of course this recession involves parcels in general decreasing in value. What might explain that? To consider an answer you might want to read the following:
http://mises.org/tradcycl/econdepr.asp
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