WHAT LAND PRICES ARE DOING NOW

by Mason Spurgeon, General Certified Real Estate Appraiser

November 2019

I recently completed an appraisal on a marginal farm property, about 77% open tillable/pasture ground, in rural Adams County, Illinois. Another appraiser in our office had completed an appraisal on the same farm in 2015. The changes to the property were minimal over those four years with only minor improvements and yearly maintenance. However, after completing the assignment, it appeared that the value for the farmland had decreased by about 16%. This is a decrease in value that I have never seen nor been able to prove until this project.

After completing the assignment, I started thinking about all the recent auction sales and other appraisals I had done recently, and I wondered if the value changes have been there without me giving it much thought. I typically don’t need to look back further than a couple of years to find comparable sales (since Spurgeon Appraisals keeps a very up-to-date database on all the farm sales in the area), so changes in farm prices over several years might not be as noticeable to me.

In doing my research I found that, much like many of the other market studies I have completed, the data was inconclusive. For every sale that seemed to prove a decline in value, I found another sale which seemed like proof that the value had increased or remained stable. But a certain pattern did appear, that many of the marginally tillable farms, and more rolling/sloping farms with thin soils, have remained stable or decreased slightly in value, while the highly tillable tracts and hunting tracts appear to be holding steady or increasing in value. The exact reason for these changes in value is unknown to me, but I have some speculations on what may or may not be happening.

(1) In 2008, when the stock market dropped substantially, the real estate market for farm ground went through the roof. People were selling stocks to invest in a more tangible asset. This may be what’s happening today. The stock market appears to be heavily inflated. Investors could be seeing volatility in the market and looking to invest in a more stable asset that could increase in value if the stock market starts to decline.

(2) I don’t think the commodity prices are driving the price of higher quality farmland. The chart below shows the past 10 years of corn prices from Macrotrends.net. While the corn prices have dropped substantially since 2012, they have remained consistent over the past few years with small ups and downs, just like any market. The commodity prices may have influenced the land prices many years ago when prices were around $8 a bushel, but they currently do not appear to be a deciding factor when purchasing a farm. Many of the contracts that I have analyzed indicate less than a 2% return, and that is not a lot of bang for your buck, but it is a safe investment in an asset that can be walked on, touched, and used, as opposed to pieces of paper like money, stocks, and bonds. These intangible investments are only worth what someone else is willing to give you. Meanwhile, if land prices begin to fall, there is still a use for the farm, food—and we all like to eat.

(3) However, low interest rates might be driving the prices of good quality farms. This is evident in the chart below from Macrotrends.net which shows the 30-year fixed mortgage rate. Interest rates are still historically low and appear to be dropping from November 2018. In November 2018 the rate was 4.81%, and the current rate is 3.78%. This is just over a 1% decrease in the rate, which is huge when you are looking at a million-dollar investment. The market bottomed out in November 2012 at 3.32% which is just shy of a half percent less than the current rate. In my opinion, it’s time to BUY!

(4) My last thought is from a conversation I recently had with a county collector. She indicated that they have been very busy with people paying their taxes much earlier than usual—which is true for me well. I usually wait until the last day to pay my taxes, but this year I have already paid them. This may be a good indication of the current state of the economy. The unemployment numbers are at an all-time low (see chart below), and people appear to have more money in their pockets. This fact could be driving the recreational buyer. These types of properties are not typically purchased for their income potential. They are purchased by people with discretionary income. We saw a decline in the recreational market when the stock market declined in 2008, but when the stock market and economy started to rebound, we began to see the recreational farm market rebound. There appears to be a direct correlation, and times are good for a lot of people!

In conclusion, the market appears to be stable for high quality farmland and for recreational tracts, but marginal cropland tracts are taking a hit. The desire for tangible assets, due to uncertainty in the market, matched with low interest rates, has made large, highly tillable farms with very productive soils more popular. Investors are looking for such tracts that can be leased for years with a high return on investment and little maintenance. Meanwhile, marginal farms require more upkeep to retain the thin soils, and these are not as popular. Such marginal farms are also unpopular with recreational buyers looking to spend their newfound discretionary income on smaller tracts with a high percentage of wooded ground.

As indicated in the opening paragraphs, I do not have all the answers, but I do know that the real estate market is in full swing. Consequently, the demand for appraisals appears to be at an all-time high. All the appraisers I know are doing their best to keep up with all the appraisal assignments being sent their way. At Spurgeon Appraisals, we also do our very best to keep up with your needs. If you are in need of an appraisal, please give us a call, and we will do our best to help you in any way we can.