The wrong way to estimate land value

I do appreciate that our wealthy colleagues at the Lincoln Institute of Land Policy have compiled and published estimates of residential land value for states and major metropolitan areas. I just wish they had been more careful.

Geoists are often challenged to demonstrate that it’s feasible to estimate land value.  It’s a fair question, and we have good responses. Assessor Ted Gwartney wrote an accessible paper on the subject, as did Alex Anas and William Vickery (neither on the ‘net, afaik, but if anyone asks I will try to dig up the cites). There are several valid approaches, depending on the specific situation.  For instance, in an area with many teardowns, the value of land is the purchase price of the teardown parcel, plus the cost of demolition. Other methods are used where there’s more vacant land, or new development is taking place, or land is being condemned for public purposes, or land ground leasing is common, etc.  Once you have values for a few parcels, you estimate the remainder by comparing their size, location, and other characteristics to those you have good numbers for.

Lincoln’s estimates illustrate why it’s wrong to estimate land value by subtracting depreciated improvement value from total parcel value. They have undertaken to estimate the land and improvement value for the average single family home in each state, for each calendar quarter since 1975, most recently for the first quarter of 2009.  And they did it by subtracting depreciated improvement value from total value.  Thus they find that the average house in Illinois sits on a lot worth $12,480,  compared to $23,260 in South Dakota. Montana’s average is $69,949, Arizona’s $90,040.  These numbers simply make no sense.

Their MSA estimates are a bit less bizarre, but don’t seem consistent with the state-level estimates.  One reason may be that for the metro’s they could use American Housing Survey information.

It is good that somebody is trying to estimate some portion of land value.  It would be even better if it were done reasonably well.

Lincoln are also starting to compile some comprehensive information on how and how much the ownership of property is taxed in the various states. So far the information seems quite limited, but eventually, if carefully done, it may be exceedingly useful.

btw, with this post I am initiating a new category, “dependent scholars.”  This is to distinguish the employees and grantees of Lincoln (and many many other institutions) from actual independent scholars.

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