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Time To Talk Dirt

A few days ago, a presentation was made at the national convention of the Realtors Land Institute in Denver. Land brokers from all over America attended, and I had a great opportunity to get a sense of the current trends in the land market. In my mind, the land market has three subgroups: agricultural land, recreational property and transitional land. Agricultural land includes cropland and pasture for cattle. Ag land produces income to the owner; it can be categorized as an investment. Recreational land describes properties purchased, not for income, but purely for enjoyment. A small acreage in the woods of Minnesota, or a lakefront property in New York or an arid place to hunt birds are examples. These properties are toys. You buy a toy just because you can. You buy a toy just because you want to. You buy a toy so you can have a good story to tell. Transitional land is purchased for its development potential. This is typically land on the suburban fringe that is likely to become the next housing subdivision or the next industrial park. Therefore, when someone asks, “How is the land market these days?” you have to recognize that each of these three categories is behaving very differently. Farmland is on fire. Since Federal Reserve monetary policy has just destroyed any opportunity for savers, investors are searching for other “alternative investments.” In my mind, cropland is a viable alternative to owning gold. If the United States ever collapses into hyperinflation, food will retain its intrinsic value similar to gold. Cropland has been increasing dramatically in value for the past three years. The neighboring farmer is often the buyer at these higher prices. Many sales are for cash. No leverage here. Quality cropland can still be purchased with an expected return of 4 to 6 percent. Pastureland has also increased in value but not at the same pace as cropland. Recreational land is still languishing from the aftermath of the Great Recession and the periodic collapses that occur in the stock market. People buy toys when they feel confident that they have enough savings to support their business and their retirement plans. The Fed zero-interest policy is hurting this market. With heavy stock market losses in recent years and bonds earning virtually nothing, people anticipating retirement are ramping up savings significantly. The expected returns on retirement portfolios have dropped dramatically in just the past three years. Retirees are hit even harder. Interest income on their portfolios has been crushed. Many retirees are re-evaluating how they spend their income because the government has stripped their assets of earning power. It’s difficult to make any generalizations about price trends in this land sector. Some prices are reported to be down 40 percent from peak levels, but other properties haven’t seen that decline. However, transaction volume is way off. When properties aren’t selling, it’s hard to ascertain price trends. I don’t expect recreational transaction volume to pick up until the United States is clearly experiencing a sustainable economic recovery and interest rates return to “normal” levels. According to Ben Bernanke, this might not happen for “an extended period of time.” Transitional land is starting to awaken from a long and deep slumber. If you haven’t noticed, homebuilding has been almost nonexistent for the past three years. Who wants to own land for the next subdivision when you can’t predict when anybody would want the lots that you create? The banking system has flushed many broken subdivisions back into the market after foreclosure. Banks don’t want to “extend and pretend” with these alligators, which voraciously eat cash every day. Some of these subdivisions have been sold to investors for “zero” value for the lots to investors who realize they will have to add huge capital improvements to complete the subdivision and don’t know how long they will have to hold the lots before they can be sold. This is not true for all transitional land. In some areas of the country, jobs are being created and local economies are improving. Housing demand is gently increasing in these cities, and there is talk of “lot shortages” for desirable locations. Industrial demand is picking up some energy too. Housing developers and industrial developers sometimes compete for transitional land. Don’t get me wrong, we are just in the very earliest stages of recovery in transitional land. In other parts of the country, land that was purchased by a developer has been foreclosed and sold at a huge loss to a farmer to put it back into crop production. In Austin: In Austin, Texas new home construction is finally picking up some steam. As Realtors we keep our eyes on the local market trends and we are projecting that in the very near future Austin will begin to start talking about the lack of new inventory. The demand here has been robust since Q4 2011 and the absorption has reduced inventory levels from a buyers market (over 6 months of inventory) to neutral or in my opinion a Sellers market (less than 4 months inventory). If this trend continues, which we expect it will headed into our "selling season", the media will start reporting this supply and demand reversal very soon causing a big of a frenzy for quality property in central Austin. It's time to make your move before the market moves up and inventory levels get stretched even more.   Gary Dolch

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