Against the backdrop of a slowing economy in general and a slump in the residential real estate market during the second quarter of 2006 and into the third quarter, a moderate to sharp increase in rural land prices and sales volume in many parts of the country stands out sharply.
The U.S. Economy: The U.S. economy slowed during the second quarter of 2006. According to the U.S. Bureau of Economic Analysis, the real gross domestic product (GDP) increased just 2.5% during the second quarter after increasing 5.6% during the first quarter.
This was primarily due to a slowdown in consumer spending, a downturn in business investment in equipment and software, and a deceleration of exports. Concurrently, inflation increased 4.0% during the quarter, after just a 2.7% increase the previous quarter. Excluding food and energy, prices increased 2.9%, while real disposable personal income increased just 1.0%.
The Residential Real Estate Market: This slowdown has been reflected in the general real estate market, which lagged during the second quarter and continues to rein in somewhat during the third quarter, chiefly due to tighter interest rates and affordability concerns.
According to the National Association of Realtors® (NAR) U.S. Economic Outlook for August, housing indicators, such as existing and new home sales, were down an average of 6.7% during the second quarter and the forecast average for the third quarter is down 10.3%. Meanwhile, median home prices increased by an average of 3.8% during the second quarter, with an average increase of 2.4% for the third quarter to date.
The NAR reported August 23 that existing home sales during July fell 4.1%, more than expected, with home prices in many areas slightly below year-ago levels.
Regionally, existing home sales in the south fell 1.2% in July, 7% below July, 2005. The median existing home price in the south was $192,000, up 3.2% from a year earlier. In the northeast, sales dropped 5.4%, down 12.5% from a year ago. The median price was $276,000, down 2.1% from last July. Existing home sales in the Midwest fell 5.9% in July, 10.1% lower than July, 2005. The median price was $178,000, .6% below last year. In the west, sales dropped 6.4%, or 18% lower than a year earlier. The median price was $348,000, down .3% from last year.
The downturn was less obvious in Canada, according to Statistics Canada, Canada's National Statistics Agency. Housing starts for July, 2006 (seasonally adjusted at annual rates) was unchanged from June, but down 4.8% from a year ago. Nationwide, the construction price index increased 1.4% over the previous month, and 9.8% over a year ago.
According to the Canada Mortgage and Housing Corporation (CMHC) third quarter Housing Market Outlook, housing starts will register another strong year in 2006, reaching 227,900 units, before decreasing to 209,100 units next year. Although residential construction will ease, 2007 will mark the sixth consecutive year in which housing starts exceed 200,000 units.
Sales of new homes in the U.S. are also down - 21.6 percent in the past year, the biggest drop since late 1994, according to Rex Nutting, of MarketWatch. Inventories of unsold homes rose to an 11 year high, while median prices flattened out.
National mortgage lender Freddie Mac reported the average 30-year conventional fixed rate mortgage was 6.76% in July, up from 6.68% in June. The rate was 5.7% in July, 2005.
In the NAR's 2nd Quarter, 2006 MRIS Economic and Market Watch Report, economist Ken Fears cites the rise in mortgage rates as the chief cause of the slowing of home sales in most areas of the country, of the increase in inventory of homes for sale (now at an all-time high), and an increase in time on the market.
With the real estate market forecast to cool further in the face of rising mortgage rates, he said, many builders are reducing plans to build, while flippers and speculators are getting out of the market completely. He believes the long-term effect of this will be a reduction in the supply of homes.
David Lereah, NAR chief economist, also said higher interest rates dampened sales, but that price softening is good news for the housing market because it is drawing buyers who have been on the sidelines waiting for sellers to compromise on prices and terms.
"Now sellers in many areas of the country are pricing to reflect current market realities," he said, adding that an unexpected quarter point drop in mortgage interest over the last month also could help to stimulate the housing market.
As the biggest housing boom in recent U.S. history comes to an end, people are asking how bad the aftermath will be. According to the Wall Street Journal Mark Whitehouse, most economists expect a soft landing.
"But there is a good chance they are being too optimistic. The boom has depended heavily on the upbeat psychology of consumers, builders, and lenders. As moods swing, the landing could be very hard indeed, he said. Because the market has risen so far, he said that economists worry it has the potential to fall much harder than their main forecasts would suggest.
The forecast? Existing home sales will decline nationally in 2006, according to Lawrence Yun, Senior Research Forecaster for NAR/MRIS. New home sales are projected to fall 13.4%. Declining sales mean more homes will stay on the market for a longer period. The rise in inventory will continue to exert downward pressure on home price growth. The west and the south are creating jobs at a good pace, so the decline in home values will likely lead to a quick pick-up in home buying by an army of ready bargain hunters in these regions.
Agricultural Land: Farmland values across the nation continue to rise. The USDA latest Land Values and Cash Rents summary reported that farm real estate values were up 15% from this time in 2005, at a record high of $1,900 per acre, $250 more than a year earlier. Cropland and pasture values rose by 13% and 22%, respectively. Cropland values averaged $2,390 per acre and pasture values averaged $1,000 per acre, compared with $2,110 and $820 per acre, respectively, a year earlier. Cropland cash rents reported so far in 2006 increased in all regions except the Appalachian, Delta, and Southern Plains regions, where rental rates declined marginally.
Regional increases in the average value of farm ground ranged from 8.9% in the Delta region (Includes Mississippi and surrounding states) to 35% in the Mountain region. The highest farm real estate values are in the Northeast, where urban influences have pushed the average value to $4,550 per acre. In the Corn Belt, located in the north central plains, including Iowa, Illinois, southern Minnesota, southeast South Dakota, eastern Nebraska, northeast Kansas, northern Missouri, Indiana, and western Ohio), farm real estate values rose 12%, to $3,040 per acre. The Northern Plains region, with its expanse of pasture and range land, had the lowest farm real estate value, at $834 per acre. But even here, there are places that greatly exceed the average.
Prices for ranch land remain extremely high, and the supply is quite low, said Pat Thompson, Associate Broker, High Plains Realty, in Bassett, Nebraska. What little is for sale usually goes to the neighbor, because today ranches have to get larger to survive. We have recently seen about a 50% increase in prices. Ranch land in the Nebraska sandhills is now between $300 and $400 per acre. Thompson sees that trend continuing for ranch land, but not for farmland, due to an extended drought occurring in the central plains.
Farm ground, hit its high in 2005, and farmers here are no longer able to command the same prices, she said. Prices now run between $1,500 and $2,500 per acre here. For farmers, the emphasis is on water. Irrigators won't get water they need from the reservoirs due to the extended drought. Western Nebraska's Lake McConaughy was once 21 miles long, now it's seven. The Republican River, running from the Rocky Mountains through southern Nebraska and northern Kansas to the Missouri River, is now just a little stream. The federal farm programs are another big problem. Even though the CRP program was renewed for another seven years, the status of the other programs remains uncertain. Another concern is the proliferation of ethanol plants throughout the region. With everyone planting corn, corn prices are almost certain to fall. One local rancher told me his break-even price is $3 per bushel. Yesterday price was $2.16. Without some sort of government subsidy, these farmers can make it. Thompson doesn't believe this will affect farmland prices, in the long term, but it will affect who owns the farmland. Investors will still want farm ground they know will appreciate in value.
North Dakota's farm real estate value is up for the seventh straight year, according to the state's Agriculture Department. This year average value of $560 per acre is a jump of nearly 11% from last year, and 23 percent from 2004. The average value of North Dakota crop land is $610 per acre, up 11.7% from 2005 and 24.5% from 2004.
The main reason is that net farm income went up substantially, said Won Koo, a professor of agribusiness and applied science at North Dakota State University, as quoted in the Bismarck Tribune. Farm real estate is directly related to net farm income. He said the average values are not likely to decrease much, even if farmers have a poor financial year in 2006.
The Southeast had the highest average increase in cropland value, at $4,550, up $890 per acre. In the Corn Belt, cropland values rose 12% to $3,230 per acre. The Great Lake states values rose 12% as well, to $2,550 per acre. Together, the Corn Belt and the Great Lake states account for nearly a third of the U.S. total cropland acres.
The Southeast also had the highest average increase in pasture value, up $1,510 per acre. In the Northern Plains, Southern Plains, Mountain, and Pacific regions (17 western states) pasture values per acre increased 15%, 24%, 54%, and 13%, respectively. These 17 states account for about 89% of the total pasture acres on farms in the lower 48 states.
According to Farm Futures, the increase in farm real estate values continues to be driven by a combination of mostly nonagricultural factors, including relatively low interest rates and strong demand for nonagricultural land uses. Demand for farm real estate as an investment continues to be a strong market influence.
Both economists and real estate agents believe the current agricultural "land rush" is different from previous land rushes. Farm income has enjoyed record levels in recent years, and purchases are not as highly leveraged. Unlike homeowners taking out loans against the rapidly rising value of their houses, farmers aren't borrowing as heavily against their land.
A majority of buyers in many areas are developers who convert agricultural land into recreational property. Many buyers see agricultural land as a good investment. Farmland that can be immediately developed sells for a big premium. But all is not rosy. Farmers near urban areas are selling to developers, then purchasing more isolated properties, artificially escalating prices in outlying areas. John Reynolds, a professor who conducts the annual farmland value survey for the University of Florida, believes that the income from agriculture can't support these prices.
Appraisers and real estate agents in the U.S. expect prices to slow, but have not seen much evidence of that so far. Some real estate professionals believe that what softening they are seeing is attributable to a decline in the number of properties available.
The average value of Canadian farmland increased 1.5% during the last six months of 2005, and this increase is continuing well into 2006, according to Farm Credit Canada. The largest increase is in British Columbia, where values grew by 10%. Ontario shows the second largest increase at 3.8%. Newfoundland and Alberta follow with increases at 3.0% and 2.8%, respectively. Saskatchewan and Manitoba increased slightly by 0.5% and 0.2%, respectively. Values remain the same in the rest of the country.
Timberland: Change is afoot, affecting the very nature of timberland ownership in the U.S. There is an ongoing migration of timberland ownership from the traditional integrated forest products companies to investors. These owners emphasize financial returns over time horizons of eight to fifteen years, which could be problematic in terms of the fluctuating timber market and long rotation period involved.
Over 12.6 million acres of large timberland deals have closed or been announced in the U.S. in 2005 and YTD 2006, according to Brooks Mendell and Matt Camp in Timber Mart-South Market News Quarterly for the 2nd Quarter of 2006. Of the over seven million of these acres located in the south, this includes 4.65 million of the 5.1 million acres sold by International Paper in April. This transaction included two multi-party investment groups. Each participant evaluated their portion of the transaction with objectives ranging from managing long-term for timber income to maximizing development potential. Timberland transactions such as this result in an increasing fragmentation of large industrial ownerships.
Research published in the Journal of Forestry by David Wear (USDA Forest Service) and David Newman (University of Georgia) associated timberland transactions and potential conversion with certain variables. They estimated the effects of population density, site class, farm earnings, and household income on assessed property values in Georgia, and identified a land value of $800 per acre as the threshold above which land was likely to be converted to a non-timber use. The research indicated strong relationships between population density and land values, with an average of 150 people per square mile being the point where land values begin to increase rapidly into conversion value classes.
The Mendell-Camp study showed that relatively undeveloped counties with negative population growth, low income levels, and the lowest percentage of high school graduates are best suited for long-term timberland investments. The study noted that examining taxes and land values also offers important insights. Timber production is basically an agricultural operation, and the amount of agricultural land in an area provides an indication of key alternative land use.
Location matters, the study says. As counties grow, property values increase and timberlands convert to other uses. Identifying counties with slow growth and a large agricultural land base can indicate suitable areas for sustaining timberland investments.
During the second quarter of 2006, about a million new U.S. timberland sales were announced, according to Timber Mart-South. For example, Molpus Woodlands Group LLC, a Mississippi based timberland investment fund, acquired about 41,400 acres in Arkansas and Louisiana for $42.5 million, about $1,025 per acre. Private owner Vernon Barnett sold about 1,935 acres of Tennessee mountain property at auction in April for $1,175 per acre, to Cardin Forest Products, which intends to manage for recreation as well as timber production. In the northeast, International Paper agreed to sell 275,000 acres of forest land in New York's Adirondack Park to Lyme Timber Company of Hanover,NH for about $500 per acre.
According to LandVest, timberland markets nationwide continue to experience high turnover, as consolidation continues among paper and forest products companies. The surviving entities are often faced with redundant timber ownerships, which are rapidly monetized to pay down merger debt. Consolidation has also led to an aggressive program to rationalize pulp and paper capacity. Many recent mill shutdowns have been immediately followed by timberland sales. The overwhelming trend continues to be a shift in ownership from traditional paper and forest products companies to institutional timberland investors. Pricing for timberland continues to be strong despite low product prices.
Recreational Property and Rural Residential: Recreational property includes a host of property types from hunting land, to lake cabins, to ski chalets, horse farms, hobby farms, and more. This market is finally slowing down this year as the economy in general slows.
One trend that has recently emerged is the conversion of traditional get-away cabins to year-round residences by baby boomers nearing retirement age. This often involves remodeling, winterizing, or even tearing down and rebuilding Spartan or adequate summer cabins into comfortable or even luxurious retirement homes.
Although some of this can be attributed to a change in demographics and the aging of the baby boomers, it is also an affordability issue. Rural residential and recreational property prices have skyrocketed in recent years, driving vacation home values in the most desirable areas out of reach of all but the very wealthy. New vacation home buyers are looking in less desirable areas or choosing secondary lots instead of waterfront property. For people who already own older vacation homes on prime property, it makes sense for them to re-vamp homes they already own to suit their changing needs.
This trend has been particularly noticeable in the northeast and across Canada. The RE/MAX Recreational Property Report 2006 profiles popular recreational home areas in Canada from British Columbia to the maritime provinces. Almost without exception each area reports a high level of remodeling and/or tear-down activity due to extremely high prices of what few properties are for sale.
The report notes that although sales in the mid-level price range have generally leveled off, many areas continue to see an increase in the upper end of the market. Across the board, the report states that baby boomers are driving the market, looking for waterfront and/or retirement properties several years before retirement. Prices are expected to continue to climb in areas with a strong demand, few listings, and a limited footprint for development.
In the southwestern part of the U.S. sales of recreational properties have slowed.
Prices doubled or tripled last year in most areas, said Jake Crites, Broker, Jake's Old West Properties Inc., in Ash Fork, Arizona, where he sells mostly smaller recreational acreages. "The market went flat this year , and things are still very slow. We sold out most of our listings last year. It seems that people are even holding back on listings now.
In the central plains, Pat Thompson agrees. She thinks recreational land prices peaked some time ago, and will continue to drop as long as the area remains in the clutches of drought.
To sell, recreational pieces need to have running water, a river or stream. Lake properties won't be moving as long as there is such a severe water shortage. Even though there are not many recreational parcels left in our area, that hasn't caused prices to increase because demand is down, she said.
