A Case Study of Rural Land Prices at the Urban Fringe Including Subjective Buyer Expectations

It is well known that the (present) value of rural land is dependent upon anticipated future net benefits appropriately discounted. In his Principles of Economics in the late 1890s, Marshall noted that the capital value of land "is the actuarial 'discounted' value of all the net incomes which it is likely to afford" (1898, p. 718-emphasis added). Modern researchers like Harris and Nehring (1976), Lee and Rask (1976), Melichar (1979), Reinsel and Reinsel (1979), and many others readily acknowledge the importance of expectations in their theoretic models. Nevertheless, expectations apparently have been incorporated in only one cross-sectional, econometric analysis of land values. Reynolds and Timmons (1969) included two variables in their empirical study to proxy future expectations: expected capital gains and expected net farm income. These variables were calculated as a weighted average of historical returns. No empirical analyses using actual market transactions have incorporated variables to quantify the role of expectations based on the subjective beliefs of the land market participants. The role of subjective expectations is especially important in a rapidly developing county where much of the growth is in the form of relatively small residential lots scattered throughout the urban fringe. In such counties, there are many "speculators" in the urban fringe land market. In an area with fewer "speculators," less demand for building sites, and a lower probability of conversion, expectations may not be quite as important. Nevertheless, subjective expectations should be a significant determinant of price variations in any rural land market via their impact on an-