Working Paper: A New Back Casting Method for Valuing Urban Land: Comparison to Land Residuals

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We develop a new method for urban land valuation based on theory which implies that land and structure trade as a bundle until the structure has no economic value. This back casting method first estimates property value, construction costs and residual land value in the year of new construction. Thereafter, the ratio of land to property value changes primarily with structure depreciation; changes in property value are shared by land and structure components. In contrast, land residual methods (land value equals property value minus the depreciated cost to rebuild in the sales year) predicts that the ratio is volatile because it is leveraged by relatively stable replacement costs.

We fit both models to Maricopa County assessor data on houses up to 28 years old during a bust and recovery period (2007—2018) and we evaluate the models for relevance to property tax assessment. Our inability to distinguish from a counterfactual points towards future research focused on sample selection.

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