SOME ECONOMIC ASPECTS OF FARM OWNERSHIP v7 
ASSUMPTIONS IN USING VALUATION FORMULAS 
The formulas are designed to define the relationship between real- 
estate valuations on the one hand, and on the other hand the rate 
of capitalization, the amount of rental income, and the anticipated 
changes in rental income expected from time to time by those who 
contribute the marginal supply and demand that determine the 
market valuation of this real estate. 
These formulas are more commonly used to compute the rate of 
capitalization when the other factors are known. In this case, how- 
ever, current rates of interest are assumed to be identical with cur- 
rent rates of capitalization.1? On this basis it is possible to compute 
divergences that may indicate the amount of the futurity element 
present in the valuations at various times. 
Before taking it for granted that the full amounts of the indicated 
divergences are to be regarded as measuring the futurity element 
accurately, it is necessary to examine some of the limitations of the 
method and the data. 
In making the indicated use of current interest rates, rates paid 
by borrowers are used instead of net rates received by lenders. No 
deductions for commission, guaranty, or other charges are taken into 
account. The interest rate is that which the lenders received only in 
case they avoided paying for services by intermediaries. It is 
assumed that the ratio of tax to income in the case of first farm- 
mortgage loans in no instance exceeded the ratio of tax to income in 
the case of these farms. The expected changes in long-time invest- 
ment loan rates are taken into account only so far as they conform 
to those anticipated in the general money market and so far as they 
are allowed for in the current rates by the tendency to discount 
future trends as forecasted in that broader market. To whatever 
extent actual or potential owners of this real estate expected changes 
in long-time investment rates proportionally larger or smaller or 
otherwise different from those taken into account by the general 
money market, the data used here are inadequate. Under the 
formulas used, all such imperfections are concealed influences modi- 
fying, to an unknown extent, the indicated future expectations as to 
rental income. 
It is also assumed that those portions of the total farm real estate 
which are primarily used for the consumption of the operator, for 
example, the farmstead, pasture for cows milked for family use, 
ground cultivated for the operator’s family living, and other per- 
quisite real estate, occupy as large a proportional place in the rent 
as in the valuation of the real estate. In certain individual years it 
would not be entirely correct to make this assumption, and in com- 
parisons between farms it is difficult to be assured that rents are 
varied to correspond with differences in these items. The desirable- 
ness of the community as a living place was probably a uniform ele- 
ment in the valuation of these farmsteads. The distance of the 
dwellings from town may have varied the valuations of the farm- 
steads, just as they probably varied the valuations of the other parts 
of the inc. Anticipations of the future may not in all cases have 
affected the real estate used for subsistence in the same way that 
t 
12 Grounds for such action are given in U. 8. Dept. Agr. Bull. 1224, Relation of Land 
Income to Land Value, by C. R. Chambers. 
