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The Changing Landscape for Vacant Land Investors
By John | August 22, 2010
The vacant land investing landscape is changing.
Several years ago, a farmer commented to me that his land would be worth more if he planted it to brush than if he planted traditional crops, such as corn. What he was saying was that buyers of recreational land were not only actively acquiring vacant land, they were doing so with little regard to cost.
Why?
Recreational land typically doesn’t generate revenue. It is used by the owner for personal enjoyment. So, there was no way to relate land cost to income, like someone might do with traditional income property. What should I pay for this land? Well, what does the market tell me? If I can buy it at the “market price” (i.e., the price everyone else is paying for it), isn’t that what I should pay for it? And, if this type of land has been going up in price, doesn’t that make it a good investment?
Recreation land in many areas became detached from reality, as its soaring price was fueled by more and more investors entering the market – the typical “Bubble” scenario. It quickly bypassed the price point at which the typical user could no longer afford to buy it.
Now, several years later, the market price for recreational land has declined by 50% or more in many areas. The bubble has burst.
In the meantime, back on the farm, the value of many of those traditional farming crops has continued to escalate. In turn, the price of the underlying land has escalated. In fact, for many types of farmland, while recreation land was losing 50% of its value, farmland was doubling in price. Is this the new bubble?
In the 1980s, farmland in the U.S. did become a bubble. Remember, the U.S. was going to become the OPEC of food, dictating food prices to the rest of the world. Credit to buy farmland became readily available, even for those with little farming experience. Prices rose, drawing in more inexperienced farmland investors, until it became evident that farm income could not service all that debt. The bubble burst. Farmland prices plummeted. Foreclosures escalated. A lot of farmland changed hands, at much lower prices, and, about 1986, prices stablized at levels supported by farm income.
Are we entering another farmland bubble? Those that argue against it point out that farm owners are much less leveraged now than in the 1980s, and farmland prices are following farm income up, not the other way around. They also point out that emerging markets around the world are able to buy more and better food and that, this time, U.S. farmers will be exporting food to satisfy those markets.
It should be pointed out, however, that much of the increase in farm income is attributable to U.S. Governmental interference in the market, especially the corn/ethanol market, and that U.S. agriculture has become very dependent on U.S. Government financial support.
And the U.S. Government is bankrupt.
Topics: Rural Land Investment | 4 Comments »
August 24th, 2010 at 9:12 pm
Terrific work! This is the type of information that should be shared around the web. Shame on the search engines for not positioning this post higher!
August 29th, 2010 at 12:30 am
Interesting topic considering that eminent economist Marc Faber has been talking about looking further into farmland as an investment over the next decade.
November 29th, 2010 at 1:58 am
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February 3rd, 2011 at 11:32 pm
Your blog constantly makes me think, I have just bookmarked it!