Landslide

The ongoing recession took a toll on Texas land markets in 2009. Most rural land markets throughout the state saw remarkable face-offs between bargain-seeking buyers and unmotivated sellers. Fearing further financial turmoil and a retreat in land values, bidders submitted offers well below asking prices.

On the other side of the equation, sellers accustomed to the preceding four years of soaring prices resisted reduced price offers. Many sellers who needed to cash out of their land holdings had to take sizable discounts. The resulting series of transactions indicated a profound drop in sales volume as well as a smaller proportion of large properties in the mix.

Dynamics differed depending on the type of land in the market. Most Texas acreage is grazing land with a strong recreational usage element. Markets for that kind of property weakened in 2009 while cropland markets generally continued to prosper. Because pasture and rangeland make up more than 80 percent of the land in Texas, overall market indicators largely reflect conditions in the market for those property types.

The year-end 2009 price per acre ($2,086), adjusted to reflect a normalized mixture of sizes, fell 7 percent from the record-high 2008 year-end overall price ($2,247; see figure). Sales volume dropped to 4,138, the lowest number of transactions recorded since 1995 and well below the 2005 high of 8,005.

The real or inflation-adjusted price of $389 per acre in 1966 dollars dropped 8 percent from the 2008 record level of $425. Nominal prices shown in Figure 1 reflect the actual prices paid while real prices represent those nominal prices adjusted for inflation.

Market tract size plummeted to 73 acres in 2009, the smallest overall size ever recorded, compared with 90 acres in 2008 (Figure 2). The small size reflected an acute absence of large property sales. Market participants universally reported lack of property sales of more than $1 million. This suggests that prospective buyers with ample resources are unwilling to risk losses if prices weaken further.

Prospects for the future are mixed. Cropland is enjoying strong demand, with institutional buyers competing with farmers to buy available properties. Currently, buyers interested in cropland report a shortage of listings. The market appears to be robust throughout the nation. Strong prices for the commodities produced on the land are driving that market. Prices for this type of land will depend on the fundamentals driving those crop prices.

For the remainder of the market, conditions remain clouded. The impasse between buyers and sellers indicates strong differences of opinion regarding future market clearing prices. Buyers anticipate falling prices, while sellers are hoping for a turnaround in the near future. Only time will tell who is right.

The pronounced drop-off in sales volume is unprecedented in this decade (Figure 3). However, the 2009 activity level approximates levels posted in most years between 1974 and 2001. This number of sales may be the new “normal” for the next few years. The market is now waiting to see whether buyers will gain the confidence to step up and pay a higher percentage of asking prices or if sellers will blink first.

Dr. Gilliland ([email protected]) is a research economist and Gunadekar is a research assistant with the Real Estate Center at Texas A&M University.