Texas Land Market Developments — 2004

Summary of Texas Land Market Developments – 2004

• Prices rose 16 percent from $1,097 per acre in 2003 to $1,273 per acre.
• All 21 areas with identifiable regionwide (statistically significant) price trends posted strong increases with a range from 5 percent in the Blacklands–South to 40 percent in the Canadian Breaks.
• The typical size of property sold inched upward by 1 percent, making the median size 102 acres.
• Volume of sales increased from 7,283 in 2003 to 8,073 in 2004. The increased volume reflected strong demand with many observers noting buyers coming from other parts of the country.
• Recreational demand continued to dominate markets throughout most of the state.
• Investment demand appears to have gained momentum as a strong driver of markets throughout Texas.
• Farmers and ranchers who are willing to pay prices above historical norms have appeared in some agricultural areas.
• Even remote areas (the Rolling Plains–North and Trans-Pecos for example) are seeing active markets with rising prices, indicating a shift of buyers from higher-priced regions.
• Agents report a shortage of good-quality land for sale in most areas.
• Low interest rates and a desire for a safe store of wealth continue to motivate buyers.
• Prospects for 2005 appear to be mostly positive.

Focusing on recreation and investment, Texas land buyers bid 2004 prices into the stratosphere. The price of an acre of rural Texas soared 16 percent, from $1,097 per acre in 2003 to $1,273 per acre in 2004 (Figure 1 and Table 1). That surge is the largest single-year percentage increase since 1972–74 and the third highest annual gain in the past 38 years.

At $273 per acre, real prices adjusted to reflect 1966 dollars reached 1980–81 price levels, settling below the 1984 peak of $288 per acre. Nominal prices in Figure 1 represent amounts paid in the years shown while real prices reflect those prices after adjusting for inflation to 1966 dollars. This strong performance represents a 62 percent five-year gain in nominal prices since 1999. That is a 10 percent annual compound return from 1999 to 2004.

These developments resulted from feverish land-buying activity with market volume rising to 8,073 reported sales, outpacing the 2003 record volume of 7,283 by 10 percent. Figure 2 shows annual reported sales volume from 1982 to 2004, and reveals a dramatic increase in sales activity since 2001.

Tract Size

The typical size of properties sold declined. Typical tract size in 2004 was 102 acres, continuing a trend toward sales of smaller properties statewide that established the new norm of approximately 100 acres sales in 2001 (Figure 3).

Nevertheless, the 2004 market produced increasing activity for large tracts as well. Sales of properties of more than 5,000 acres doubled between 2003 and 2004. Volume of sales for these larger properties increased from 29 in 2001 to 46 in 2003 (Figure 4). However, the volume of large property sales increased to 87 in 2004, a noticeable gain in activity for that segment of the market. Volume of sales of properties smaller than 150 acres accelerated from 1,864 sales in 2001 to 3,009 sales in 2004. Both segments of the market exhibited a substantial increase in activity during 2004, confirming feverish activity in Texas land markets.

Nonagricultural Purchases Expand

In past decades, land prices tended to reflect the soil’s capacity to produce agricultural income. As Texas has evolved to an urban-based society, nonfarm buyers have flocked to the countryside, buying acreage for recreation and investment. In the past decade, these nonagricultural buyers have come to dominate market activity. Market trends comparing agricultural and nonagricultural income patterns confirm that nonagricultural income has an increasingly important influence on land prices.

Figure 6 shows the correlation of land prices with cash income to farms, net farm income and personal income. Cash income and net farm income provide a measure of profitability and prosperity in farming and ranching in Texas. The latter series (personal income) measures prosperity in the general economy of the state. The correlation coefficients shown in the chart are statistical measures of the relationship between their underlying numbers. They indicate the strength of the association between those related quantities. A coefficient of one indicates a perfect positive association between the two data series and indicates that each time one series increases the other series increases as well. A correlation of zero indicates that increases in one series have no effect on the other series. Amounts between zero and one show the relative strength of association between the two data series. A correlation of 0.25 represents a relatively weak connection while a correlation coefficient of 0.75 indicates a strong relationship.

Correlations can also be negative. For example, a correlation of –1 indicates that each time the number in one series increases, the item in the second series falls by an equivalent amount. For example, one might expect a high negative correlation between unemployment rates and total income.

Figure 6 shows the results of correlating Texas land prices with the previously mentioned income quantities between 1969 and 2004. The 0.672 coefficient for cash income to farms shows the degree of association between that quantity and median Texas land prices. That correlation is greater than that for net farm income, which registered a correlation coefficient of 0.573. Net farm income is the residual from cash income to farms after adjusting for depreciation, nonpaid labor and various other items. Cash income to farms represents the net cash flow to farms while net farm income represents the real income after adjusting for long-term liabilities. The results indicate that land prices are related more to cash flow than to the net wealth position of farms.

The correlation coefficient for land prices and personal income was 0.793, revealing a much stronger relationship than for either of the farm-related income indicators during that time. Examining these relationships reveals a much stronger relationship between personal income and land prices (0.959) in the 1993 to 2004 period than over the entire 35-year period. This result confirms the fact that nonfarm prosperity is more heavily linked to price changes in rural land markets after 1993 than over the 35-year span. Further, the 0.959 coefficient substantially surpasses the correlations with cash income to farms (0.731) and net farm income (0.661). In both time frames, land markets were more closely related to nonfarm income than to farm income.

In fact, only during the 1986 to 1992 period, when many nonagricultural buyers avoided the land markets, did the land price–farm income relationships exceed those for Texas personal income. This suggests that the link between personal income and land prices is even stronger now than it was during the past 35 years. Analysis and anecdotal evidence indicate nonfarm buyers are dominating rural land markets like never before.

Regional Land Market Developments

The 2004 market saw regional median prices rise sharply across Texas. From the high-priced corridor stretching from Houston through Austin west into the Hill Country to the lower-priced areas of the Panhandle and Trans-Pecos areas, markets thrived in 2004. No regions registered a lower median price per acre in 2004 than in 2003. Ironically, Land Market Areas (LMAs) 1 and 5 registered two of the largest percentage increases while their cropland neighbors, LMAs 2 and 3, saw prices remain steady. However, most areas saw prices climb in 2004.

Figures 7 and 8 show regional 2004 prices and percentage changes from 2003 to 2004. Highest regional prices prevail in bands from Dallas to Fort Worth, Houston to Kerrville, the Rio Grande Valley and El Paso. The lowest prices are found in the Trans-Pecos area and the Panhandle and high plains. Table 1 contains the statistics reflected in these regional maps.

Prospects for 2005

The forces propelling prices upward in 2004 continue to push 2005 markets even higher. A general lack of alternative investments makes land acquisition more and more attractive. Low interest rates continue to attract buyers in all real estate markets. Recession does not appear to be on the immediate horizon, as the economy continues to thrive.

Nevertheless, danger signs have appeared. Oil prices stubbornly refuse to drop. Continued high oil prices may sabotage economic recovery. Future interest rate hikes may also take a toll. Still, economists are calling for robust farm income in Texas in 2005, and nothing has dampened enthusiasm for Texas land. Despite some anecdotal evidence of emerging price resistance, 2005 is shaping up to be another strong year in Texas land markets. By 2006, land prices may post another sizable increase.

Regional Developments

The following land market areas (LMAs) registered especially strong trends compared with markets in 2003.

LMAs 1, 5 and 6

• Recreational land market continues to be strong. Inventory is low, making good properties difficult to find and driving up prices.
• Much of the demand for these properties is coming from investors wanting a safe place to park their money. Additionally, 1031 Exchanges are keeping demand high.
• Water speculation and water rights issues are affecting sales (e.g. Roberts County)
• Some buyers are moving to Texas because of the state’s tradition of strong protection of property rights.

LMAs 9, 10, 11, 16, 17, 18, 19, 20 and 21

• Prices are continuing to climb steadily, rising at a half percent per month rate.
• Recreational and investment purchases are driving prices.
• There is no impetus for acquisition of agricultural land.
• Since the fourth quarter of 2004, large (5,000 to 8,000 acre) tracts have become scarce.
• Buyers tend to shy away from properties when the total price rises to $2.5 million.

LMAs 12, 13 14 and 15

• Everything is up, including farmland for the first time in a long time.
• Owners had a good cotton crop in what turned out to be an extremely wet year.
• There was a relatively low number of sales, but the quality of the land sold was high.
• Recreation-wildlife influence is stronger closer to Dallas-Fort Worth.
• The 2005 market looks strong.

LMAs 23, 24 and 25

• The Metroplex continues to see low interest rates leading to an influx of “money looking for deals.”
• Population growth continues due in large part to the expansion of downtown, including the proposed Trinity River Vision, Montgomery Ward building redevelopment and the new Radio Shack campus.
• Buyers appear to be positioning purchases to be in the path of development in the next two to three years.

LMA 26, 27, 28, 29, 30, and 31

• Timberland markets may still be roiled by the sell-off of large timber company holdings.
• Log prices on the remaining harvestable tracts are relatively flat, but buyers continue to bid up smaller tracts for recreational use.
• Outlook remains strong but could change quickly depending on interest rates.
• Overall values up are up substantially. City center values are increasing at a higher rate than rural properties.
• Timberland prices continue to rise.
• Prospects look good.