USA Today
03/09/06
Hot real estate prices extend to rural land
By Sue Kirchhoff, USA TODAY
WASHINGTON — The fastest-growing commodity in Florida farm country last
year? Land values, which jumped 50% to 88%, depending on the area.
Rural acreage (this in Pennsylvania) has seen "whopping increases" across the
country.
By Jimmy May, Bloomsburg Press Enterprise via AP
While not quite as dramatic, a similar story has been playing out across the
country. Rural real estate prices soared 11% to an average of $1,510 per acre
from Jan. 1, 2004, to Jan. 1, 2005. That's the fastest annual increase since 1981
and the biggest on record in dollar terms, according to the U.S. Department of
Agriculture (USDA).
More recent data from Iowa State University show prices in Iowa rose nearly
11% in 2005. In Texas, the median rural land price rose 15% in 2005. State and
USDA estimates differ because of sampling times and techniques but show
similar trends.
"Those ... are whopping increases," says Charles Gilliland of the Texas A&M
Real Estate Center. "Everybody is waiting for it to level off."
The escalation is the steepest since the response to the fat years of the 1970s,
when world food prices soared and Agriculture secretary Earl Butz exhorted
farmers to get bigger or get out. Many expanded, only to face a crisis in the mid'80s when the good times ended. Land values sank 27% from 1982 to 1987.
Different from last land rush
While the current price run-up is not without risk, economists and real estate
agents call it much different than the previous land rush. Purchases are not as
highly leveraged. Farm income has been at record or near-record levels in the
past several years, but land sales are not driven solely, or even mainly in many
areas, by farm expansion.
A majority of buyers in some regions are real estate developers, individuals who
want to convert a ranch or farm to a recreational purpose, such as hunting or
fishing, or those who see land as a good investment given low interest rates.
Farmland that could be immediately developed sold for a big premium in 2005 —
more than $6,050 an acre, according to USDA.
"This is a starkly different episode," says Mark Drabenstott, director of the
Kansas City Federal Reserve Bank's Center for the Study of Rural America.
"We've seen considerable off-farm investors interested in farmland, in part a
lingering result of the (low) stock market performance of recent years."
James Vine of San Antonio's Vine and Associates, an appraisal and consulting
firm, doesn't see the value of many properties fluctuating with changes in the
farm economy, noting that 40% to 50% of the sales he's recently seen are cash
transactions.
"This recreational deal has taken over the rural land market, except in markets
where there is no romance or row crop agriculture still makes sense," says Vine,
noting a recent Texas drought "didn't impact the prices of real estate. It kept
going up."
Unlike homeowners taking out loans against the rapidly rising value of their
houses in the past few years, farmers aren't borrowing as heavily against their
land.
"Farm income to farmland values have been improving over the past two years,
because farm income has been so high," says John Anderlik of the Federal
Deposit Insurance Corp., an expert on rural lending. "Bubble-like factors have
been declining."
Sales fueled by tax law
Still, as the Kansas City Fed noted in a recent publication, the price increases are
"raising the eyebrows" of lenders and producers. The record housing market,
which has helped propel land sales, may be slowing. In a large swath of the
Midwest, the value of the land is tied at least partly to federal crop supports.
Anderlik notes that farm subsidies, accounting for about a third of net farm
income since 1997, are under attack, in world trade talks and from Congress.
Many sales have been fueled by a federal tax provision called a 1031 exchange
that allows an owner to sell an income, business or investment property, replace
it with like-kind property and defer capital gains taxes.
Growers near urban areas have been selling to developers, then purchasing
more-isolated properties, artificially escalating prices in outlying areas. An August
study by the Illinois Society of Professional Farm Managers and Rural Appraisers
found more than half of recent sales used the 1031 provision.
Zbynek Zidlicky, a former corn and soybean producer, sold his 78-acre farm near
Oswego, Ill., to a developer several years ago. Using the 1031 provision, he then
bought four properties out of the area.
"A lot of people do 1031 exchanges, so that filters down and increases the price
on other properties," Zidlicky said, adding the price in some areas has doubled
since he bought.
John Reynolds, a professor who conducts the annual farmland value survey for
the University of Florida, says the 1031 provisions have helped push land price
inflation in that state northward from fast-growing urban counties.
"The income stream from agriculture just can't support these prices," Reynolds
says.
For many growers, particularly older farmers, it makes sense to sell while prices
are at peaks. But the price run-up has made it hard for some younger growers to
buy land.
Conservation efforts
The American Farmland Trust, which seeks to preserve farmland, notes that in
1999 the national average cost for agricultural conservation easement programs
— voluntary, binding agreements that limit land uses or prevent future
development — was $1,519 per acre. In 2004, it was $2,899 per acre.
High prices also make it tougher to keep protected land in the hands of farmers,
says Jennifer Dempsey of American Farmland Trust. "Someone could come in
and say, 'Here's 50 acres that are protected,' and they can make it their private
estate."
Appraisers and real estate agents expect prices to slow but haven't seen a lot of
firm evidence of it yet.
"It's not going to burst at all. In fact, I continue to see a strong rural real estate
market for years to come," says Ray Brownfield, a real estate broker at John
Greene Land Co. in Illinois. "It may not be as aggressive as it was because
interest rates are starting to climb."
Vine says he's seen some softening in the volume of sales but says that may be
because it's getting harder to find enough land. That's echoed by Florida's
Reynolds, who now works as an appraiser at a Florida firm called Natural
Resource Planning Services.
"Our firm also has a brokerage division, and we simply can't find enough land,"
Reynolds says.