|Hot real estate prices extend to rural
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
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
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
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.
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
"Our firm also has a brokerage division, and we
simply can't find enough land," Reynolds says.