I know WHY it is that expensive (the land), but that really is irrelevant. Paying $700K for a small lot of land and then having to pay to have the house bulldozed and then to pay for another house to be built is even worse.
Well, as you said, a dumpy crap home is nothing anyone wants to live in. That's why there is preference to get these types of properties.
ie. If land value is $700000, and you want a huge modern home, then you want to get a property that costs close to $700000 - where the house is near worthless.
What you don't want is to get a similar property with a 1980s 2-story house for $900000, because the house won't be up to your specifications, but the land value is only $700000. You're basically paying $200000 too much for a $700000 property, since you're going to demolish the home anyway.
To put it another way, if you want to buy a house in these areas, your true price range isn't $700000. It's $1+ million. If you can't afford that, maybe you should be moving to a different area, or else renting.
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I was once speaking to an Asian friend in Vancouver who was telling me exactly this. He and a lot of his friends had moved from Asia to Vancouver, but were finding it hard to find such properties in the neighbourhoods they were looking in. The properties were too built up already. They wanted to build say a modern 4500 square foot house, but didn't want to pay for a property AND a 20 year-old 3000 square foot house. What they wanted was a property and a dumpy old house on it that was worthless, but that kind of property was exceptionally hard to find, because they had all been bought up in previous years.
BTW, this is sort of what is happening in my neighbourhood in Toronto. I live in upper-mid range neighbourhood in Toronto. Very nice neighbourhood, but a less nice toward the edges, and definitely not super high end. However, in the prime area of the neighbourhood, there are a lot of old homes on big lots, a lot of which are inhabited by very elderly people. There is kind of morbid old people death watch by the builders. When they die, the builders swoop in and buy the property, demolish the old war time bungalow, and build a modern 2-storey home on the property.
Note that this is in the city. These neighbourhoods are very well established, since the World War II era. It's just that these neighbourhoods are changing dramatically.
The difference in places like the midwest is that there are vast new suburbs that are built on farmland. There was nobody living there in the first place, except some cows and a farmer or two. It's a very different type of real estate.