Frank Albert Fetter.

Source book in economics, selected and ed. for the use of college classes online

. (page 11 of 30)
Online LibraryFrank Albert FetterSource book in economics, selected and ed. for the use of college classes → online text (page 11 of 30)
Font size
QR-code for this ebook

they, how diversified, are they strengthening and what is the
resulting index figure, to wit, the rate of increase of the city's
population ; next, what are the characteristics of the section of
the city in which the property is located, its past history, its
present stability, its future prospects; what is the central
strength of the property, how near the main center of the city
or the various subcenters of attraction; what is its axial
strength, the quantity, quality and regularity of the passing
travel, what is the character of building on the property as to
suitability, planning, physical condition, prospect of changing
utility, management, convertibility, gross and net income; at
what prices have surrounding property been selling, are they
rising or falling, and do they suggest any factors not yet taken
into account; is the property liable to be injured or benefited
by changes in the building laws; is there any special enter-
prise or strength on the part of the owner or of surrounding
owners likely to affect the property, what would be the prob-
able effect of any inventions or improvements in transporta-
tion or the construction of buildings; and, finally, what are
the general commercial conditions as affecting the earning
power of tenants, actual or prospective, and financial condi-
tions as affecting the capitalization rate.

The problem is never a simple one, being as complex as city
life itself, but it is not insoluble, since the forces creating cities
are governed by uniform laws, like causes producing like re-
sults, apparent exceptions being due to the influence of factors
not reckoned on. The popular impression that the ability to


forecast future movomoiits of city growth points a quick way
to fortune is an overestimate, since real estate movements are
slow, large capital is reciuired to handle it, carrying charges
are heavy, and even though the forecast may be ultimately
correct, tlie rate of movement is uncertain, depending on the
operation of vast economic forces impossible of exact predic-

Unequal changes in values. If business expands and pop-
ulation increases in a city, the sum total of land values is cer-
tain to increase. All the land, however, will by no means
increase in value, the great mass of medium business and
residence property advancing but slowly since it supplies the
wants of a large number of people of moderate earning power
who cannot pay beyond a certain price. Coincident with the
gradual lifting of values as population becomes more dense,
decaying sections, left behind in the onward march, drop down
the scale of inferior utilities and values, sometimes to the point
of extinction. Such worn-out property exhibits in its dilapi-
dations both absence of utility and public confession of that
fact. If population and business become stationary the sum
total of land values will decrease in proportion to the previous
discounting of future growth, subsequent movements consist-
ing of redistribution of value, as one part of the city or an-
other, or one individual or another, flourishes or declines.

1"he principal causes of the redistribution of value in all
oities are, increase in population and wealth, especially in
causing relocation or extension of the best residence district,
changes in transportation, such as new surface, elevated, or
underground lines, new bridges, tunnels, ferries and railroads,
and the readjustment of new utilities in new areas harmoniz-
ing the complex contending factors.

Present tendencies point towards greatly increased values
at strategic points, with relative and frequently absolute drops
in value in locations formerly competitive. The quiet side
streets, the back alley^ and deserted nooks and corners where
land has almost no value, despite its proximity to valuable


land, will doubtless continue at their present low planes, un-
less they are either reached by the spreading growth from
some center or are intersected by some new traffic street.

The most valuable location. The point of highest value,
responding in scale and location to the growth of the city,
moves from the first business center towards the best residence
district, the crest of the wave usually being the middle of the
retail shopping district, frequently strengthened by excep-
tionally large and handsome buildings, and occasionally
checked by cross-traffic streets. Apart from any factors which
may deflect the line of growth, the land lying in its path is
certain to increase in value, the time of such increase however,
being difficult to gage, while the land left behind will usually
sink in value, although in the largest cities, while decreasing
relatively in value and utility, it sometimes increases slightly
in absolute value. New York, the one financial center of the
country, is an exception in that its financial land is more val-
uable than its shopping land.

Causes of future changes. New inventions and new habits
and customs will probably cause the most marked future
changes other than those due to growth and transportation.
All cheapening of the cost of buildings, all improvements in
construction, all inventions, tend constantly to destroy the
value of existing buildings. All improvements in transporta-
tion, such as the trolley, the elevated, the underground, the
bicycle, the automobile — and in future possibly the flying ma-
chine — tend to destroy the value of these locations which de-
pend on existing transportation. All changes in social cus-
toms, such as longer summer absences from the city, shift
values, as in this instance from the city to the summer resorts.
The great interchange of travel throughout the year from one
city to another strengthens the radiating influence of the
hotels, while the movement from residences to flats and apart-
ments, concentrates population and augments the power of
capital to attract.

Change is a law of lifC; and as long as human activity con-


tinues to alter the conditions of city life, and human tastes,
prejudices, fashions, habits and customs continue to vary, city
structure and values will shift and change, but the study of
the basic principles of city growth should reduce errors in
forecasting to a minimum, permitting Avell-equipped intelli-
gence, whether in buying, selling, renting, loaning on, or in
any way dealing- with, city real estate, to largely eliminate the
power of chance.


[In The A. B. C. of Taxation (New York, Doubleday, Page and Co.,
1909), C. B. Fillebrown, president of the Massachusetts Single Tax
League, has estimated the ground rent of Boston, and has given a
number of examples of changes in the valuation of real estate. By
the kind permission of the author the following extracts are here
given without the accompanying argument in favor of the single tax,
of which Mr. Fillebrown is a zealous, but fair-minded, advocate.]

A calculation of Boston's ground rent [page 16]. In a
systematic attempt ... to demonstrate beyond a reasonable
doubt about how much gross ground rent there is in the city
of Boston, actual sales for the year 1902 and actual rentals
have been collected from official sources.

One hundred and twenty pieces of real estate in various
sections of the city are shown to have been sold at prices aver-
aging one-fifth higher than their assessed valuation, indicating
that at least in these one hundred and twenty cases the valu-
ations were less than five-sixths of the selling price.

Landlords and real estate men are the best judges of the
following calculation which, taking into account the fact that
the prices given in these tables are those indicated by the
revenue stamps on deeds, assumes that the buildings sold for
one-third more than their assessed valuation:

Deducting from the total of prices indicated by the footing

of the 120 sales $7,291,375

Four-thirds of assessed valuation of buildings 2,772,933

Would give perhaps a fair estimate of what the land sold for 4,518,442
To this it is necessary to add the capitalized tax upon the
land for the same year, 1900, $3,758,600 x $14.70 (the
number of dollars tax per thousand) x20 (the number of
years' purchase) 1,105,028

In order to get the gross capitalized ground rental value of

the land 5,623^70

Of which the assessed valuations were only two-thirds.



Seven hmuliecl ami lU'ty-one rentals of estates, together with
tlieir assessed valuations, averaging $47,680 each, were also
obtained from reliable sources. In the total for these it is
found that the net rent is 5 per cent. (4.8), and the gross
rent — net rent plus taxes — is 6 per cent, of the assessed valu-
ation. That is to say, the net value, based upon net income
to the owner, corresponds with the assessed valuation, and is
five-sixths of the gross value, based upon what the user pays
for the land. It is probable that these estates are in the aggre-
gate improved to less than one-half of their normal efficiency,
and hence the income which they now yield is less than 5 per
cent, of the price that they would actually sell for.

In the absence of contradictory or correcting testimony, it
is fair to ask the reader to accept these lists of 120 sales and
751 estate rentals respectively as an indication of the ratio ex-
isting between assessed valuation and selling value.

Based upon the foregoing ratio, the following conservative
estimate of the gross land value of Boston is submitted for
scrutiny and criticism :

If the assessed valuation of Boston's land for 1907, which

is in round numbers $ 653,000,000

Is five-sixths of its selling value, then the addition of

one-fifth 130,600,000

Would give us as the net selling value 783,600,000

Adding to this the capitalized value of the amount of
tax now on the land, $15.90 per thousand on $653,-
000,000, or $10,382,000 at twenty years' purchase 207,600,000

Would give us as the true capitalized ground rental value 991,200,000
Add moderate estimate for franchises, say 108,800,000

And we should have a total capitalized ground-rental

value of at least 1,100,000,000

At 5 per cent, this would indicate for Boston a ground

rent of 55,000,000

or considerably more than double the total taxes of
Boston. • . .

An object lesson in land values [page 56]. In this and
the following object lessons the valuations, luiless otherwise
noted, are those of 1907. The total valuations on both sides


of Winter Street, including the estates on the Tremont and
Washington Street comers, were :

1898 . .

.. $5,142,600

$61.57 per sq.


$2,681,989 per acre.

1907 ..

. . 8,272,000

97.50 per sq.



4,247,100 per acre.

1898 . .

. . $675,000

$8.08 per sq.


$353,836 per acre.

1907 ..


7.13 per sq.


310,582 per acre.

Showing for nine years an increase of 58 per cent, in land,
and a decrease of 11 per cent, in buildings.

The assessed valuation of the estate at the southwest corner
of Winter and Washington Street was in 1907 $557,000 of
which $19,400 was for buildings. The land alone, 1,955 square
feet, increased from $342,000, $175 per square foot, in 1898, to
$537,600, $275 per square foot, in 1907. This assessed valua-
tion of $275 per square foot for land is the highest in Boston.
In 1893 the estate had been sold for $350,000. The present
building was erected in 1881, but it is no distinct improvement,
in height or otherwise, over its predecessor. . . .

In 1907 the estate was paying the owner an income of about
$25,000. The Transit Commission took this estate by eminent
domain, and settled for it in 1908 for $630,000 or $320 per
square foot for the land and buildings. After appropriating
subway station accommodations, it leased the balance of the
estate for the sum of $28,000 a year and taxes, or $36,000 as
long as no taxes are assessed. This is a return of about 4^/2
per cent, net on the purchase price of $630,000, on which sum
the city is paying — as the money was borrowed — about 4 per
cent, . . ,

[Page 59.] The land in Winter Street, which was assessed
at less than $4 per square foot in 1850, was assessed in 1907 at
$130 per square foot. During the fifty-seven years interven-
ing, the income, above taxes, from the land, in rent and appre-
ciation has amounted to an average of 150 per cent, annually
on the investment of 1850. . , .

Ratio of buildings to land [page 62]. Massachusetts has


fourteen counties. lu every one ol" thirteen of these counties
the assessed value of the buihlings exceeds and in most cases
largely exceeds the assessed value of the laud. In the one
other county, Suffolk (Boston, Chelsea, Eevere, and Win-
throp"), containing- 49 per cent, of the whole land value of the
state, the buildings fall far below the land in value.

Again, eighty-eight towns (out of Massachusetts' 354 cities
and towns), having lowest valuations, show average assess-
ments as follows: Of buildings, $130,000; of land, $145,000.
. . . The following figures show Winter Street in company
with the three smallest towns:

Buildings. Land. Ratio.

Mashpee $ 46,530 $ 140,020 33-100

Peru 22,680 84,825 27-100

Florida 30,790 1 19,246 25-100

Winter St., Boston. 605,200 8,272,000 7-100

For the coimty of Suffolk, which contains the city of Boston,
as well as for the State, no such discrepancy appears. Fol-
lowing are the figures :

Buildings. Land. Ratio.

County of Suffolk.. $ 444,441,725 $ 673,208,750 66-100

Other 13 counties.. 949,283,781 679,071,599 140-1,00

Whole state 1,393,725,486 1,352,280,349 101-100

In the twelve following large cities and towns the value of
the buildings greatly exceeds that of the land.

Buildings. Land. Ratio.

Lenox $ 2.306.500 $ 1.731,375 133-100

PittsHeld 8,685,715 6,971,255 124-100

North Attleborough 2,411.210 1,256,613 191-100

Gloucester 9,388.650 7,886,470 119-100

Haverhill 12,392,960 9,772,050 126-100

Lawrence 22,854.800 18,587,850 123-100

Lvnn 29,892,705 23,238,785 12S-100

Hulvoke 18,194,860 15,450,380 117-100

Springfield 37,188,415 36,131,445 103-100

Cambridge 49,245,700 39,989,600 123-100

Lowell 33,293,590 26,389.020 126-100

Wewton 27,.590,.325 22.878,475 120-100

Total 253,445,430 210,289,318 120-100


In the following seventeen cities and towns, representative
of their class, the valuation of the buildings is in the average
double that of the land :

Buildings. Land. Ratio.

Athol $ 2,324,908

Clinton 4,246,230

Abington 1,749,697

Plymouth 5,477,025

Amherst 1,839,225

Chicopee 6,115,900

Amesbury 2,841,815

Newburyport 5,269,850

Adams 2,598,950

North Adams 7,257,210

Attleborough 5,479,385

Taunton 11,024,365

Easthampton 3,412,906

Rockland 2,346,350

Chelsea 14,600,570

Blackstone 1,244,065

Gardner 3,767,096

Total 81,595,727

Another illustration [page 86]. The St. Paul's Church
property on Tremont Street, Boston, standing between two
large stores, furnishes another good illustration of what we
have been saying and reiterating.

Less than ten years ago $1,500,000 was offered for this prop-
erty for business purposes, and the offer was declined. Since
then the assessed valuations of the adjacent Tremont Street
estates between "Winter Street and Temple Place have in-
creased more than 75 per cent. In view of these facts it
should be very conservative to estimate to-day :

The value of St. Paul's Church property at $2,000,000

For this value the St. Paul Society paid in 1820 100,000

$ 1,204,097




































The people of Boston have since contributed by their aggre-
gate and particular activities, industries and expenditures 1,900,000
An annual contribution for 87 years of much above 20,000

But, in recent years, this increase in value has been at the

annual rate of not less than 75,000


Church property heing oxompt from tnxation. the people of

Boston liave to make up the amount of the exemption.

This, in the case of St. Paul's is $22,500, and for all

church property in the city is $38.5,000, a year.
If then to the above average annual contribution of the

public there be added these taxes for 1907, more than.... 22,000

The total annual contribution amounts to 97,000

An amount equal to the 5 per cent, ground rent of almost
$2,000,000 worth of land, or to the taxes, at $15.90 per
thousand, on $6,100,000 worth of property ! . . .

The undervaluation of urban or village land [page 125].
A few illustrations will show how this potential agency,
ground rent, escapes observation both in small and large towns,
and in small cities as well.

In the following illustrative examples, the ratio between
assessed valuation and actual net value of land, as indicated
by actual rentals, is calculated by deducting from the net
income of the entire estate (i.e., total income less taxes)
an amount equal to 10 per cent, of the assessed valuation of
the buildings, to cover interest, insurance, repairs, and de-
preciation. Twenty-five specimen estates in Lawrence, Scitu-
ate, Clinton, and Whitman, Mass., show ratios, thus
calculated, as follows:

25 estates . . . average tax rate per thousand $16.85

r Land $ 197,828

Assessed valuation J Buildings 236.955

[ Total 434,783

Gross rental of properties actually received by the owners.. 56,067

Taxes (on $434,783, at $16.85 per thousand) 7,325

Net rental after paying all taxes 48,742

Less 10 per cent, on buildings ($236,955) for interest, in-
surance, repairs, and depreciation 23,695

Met income from land alone (equaling 12 per cent, on

$197,828) 25,047

This income is 5 per cent, return on an indicated net value

of at least 500,940

Instead of less than 40 per cent, of that amount, or the

amount at which the land is assessed 197,828


Leaving out the city of Lawrence, the ratio for the three
smaller communities of Scituate, Clinton, and Whitman av-
erages only 30 per cent.

The figures for the above twenty-five estates in detail are
as follows:

In Lawrence, a cotton manufacturing city of 70,000 in-
habitants, of seven estates the several assessed valuations were
respectively 72, 67, 62, 48, 42, 38, and 15 per cent, of the
net value. The average valuation was 48 per cent, of the net
land value.

In Scituate, Mass., a shore town of 2600 inhabitants, of four
estates the several assessed valuations were respectively 52 V^,
50, 48, and 13 per cent, of the net value. The average assessed
valuation was 37 V^ per cent, of the net land value.

In Clinton, a manufacturing town of 13,000 inhabitants, of
five estates the several assessed valuations were respectively
38, 37, 341/2, 271/2, and 221/2 per cent, of the net value. The
average assessed valuation was 32 per cent, of the net land

In Whitman, a shoe manufacturing town of 6500 inhabit-
ants, of nine estates the several assessed valuations were re-
spectively 83, 62, 451/2, 43, 32, 27, 23, 19, and 14 per cent,
of the net value. The average assessed valuation was 21
per cent, of the net land value. . . .

The minor importance of agricultural rent [page 129],
The Massachusetts valuations for 1907 offer a market illus-
tration. . . .

Assessed valuations. Land. Buildings. Total.

33 cities $1,088,329,177 $ 998,896,745 $2,087,225,922

37 large towns 139,965,083 178,810,787 318,775,870

70 cities and towns. 1,228,294,260 1,177,707,532 2,406,001,792

284 small towns 123,986,089 216,017,954 340,004,043

354 cities and towns 1,352,280,349 1,393,725,486 $2,746,005,835

Thus the land valuations of the 284 small towns ($123,-
986,089) and of the 70 cities and large towns ($1,228,294,260)


are seeu to be about in tlie ratio oi' one to ten. Nor must it
be overlooked, that there is a larger proportion of urban prop-
ert}' in small towns ^ than of farm property in the large ones.
The State census, which gives farm values by themselves, cor-
roborates the above estimate.

1 [The Western reader may observe that the New England "small
town" is a township, largely rural. — Ed.1


[GoVEENOB Charles E. Hughes appointed in December, 1908, a com-
mittee consisting of business men and bankers and the economist,
John B. Clark, which was known as *'the Governor's commission on
speculation in securities and commodities." Its instructions were to
endeavor to ascertain "what changes, if any, are advisable in the laws
of the State, bearing upon speculation in securities and commodities,
or relating to the protection of investors, or wHth regard to the in-
strumentalities and organizations used in dealings in securities and
commodities which are the subject of speculation." The committee
reported June 7, 1909, The following extracts give the greater part
of the description of the exchanges and of their actual operations.
The parts omitted pertain very largely to foreign experience, to the
Committee's opinions as to the morality and harmfulness of the opera-
tions, and to the recommendations of reformative legislation. The
latter are summarized at the end of the extract.]

In New York City there are two exchanges dealing in se-
curities and seven in commodities. In addition there is a
security market, without fixed membership or regular officers,
known as the ' ' Curb. ' ' The exchanges dealing in commodities
are incorporated, while those dealing in securities are not. . . .

The New York Stock Exchange. The New York Stock
Exchange is a voluntary association, limited to 1100 members,
of whom about 700 are active, some of them residents of other
cities. Memberships are sold for about $80,000. The Ex-
change as such does no business, merely providing facilities
to members and regulating their conduct. The governing
power is an elected committee of forty members and is plenary
in scope. The business transacted on the floor is the pur-
chase and sale of stocks and bonds of corporations and govern-
ments. Practically all transactions must be completed by de-
livery and payment on the following day.

The mechanism of the Exchange, provided by its consti-



tution and rules, is the evolution of more than a century.
An organization of stockbrokers existed here in 1792, acquiring
more definite form in 1S17. It seems certain that for a long
period the members were brokers or agents only ; at the present
time many are principals as well as agents, trading for them-
selves as well as for their customers. A number of prominent
capitalists hold jnemberships merely for the purpose of availing
themselves of the reduced commission charge which the rules
authorize between members.

The volume of transactions indicates that the Exchange is
to-day probably the most important financial institution in
the world. In the past decade the average annual sales of
shares have been 196,500,000 at prices involving an annual
average turnover of nearly $15,500,000,000 ; bond transactions
averaged about $800,000,000. This enormous business affects
the financial and credit interests of the country in so large
a measure that its proper regulation is a matter of transcen-
dent importance. While radical changes in the mechanism,
which is now so nicely adjusted that the transactions are car-
ried on with the minimum of friction, might prove disastrous
to the whole country, nevertheless measures should be adopted
to correct existing abuses.

Patrons of the Exchange. The patrons of the Exchange
may be divided into the following groups:

(1) Investors, who personally examine the facts relating
to the value of securities or act on the advice of reputable
and experienced financiers, and pay in full for w^hat they buy.

(2) Manipulators, whose connection with corporations
issuing or controlling particular securities enables them un-
der certain circumstances to move the prices up or down, and
Avho are thus in- some degree protected from dangers encoun-
tered by other speculators.

(3) Floor traders, who keenly study the markets and the
general conditions of business, and acquire early information

Online LibraryFrank Albert FetterSource book in economics, selected and ed. for the use of college classes → online text (page 11 of 30)