Texas Land Market Developments — 2005

Executive Summary of Texas Land Market Developments – 2005

• Prices rose 16 percent from $1,274 per acre in 2004 to $1,483 per acre in 2005. This was a record high for a 100-acre tract.
• Prices rose strongly throughout the state. The area stretching from San Antonio to the Gulf Coast registered especially high percentage increases.
• The 2005 market saw an increased presence of investment-minded buyers bringing an influx of tax sheltered cash.
• Out-of-state investors were more prevalent.
• Some investors appear to perceive inflation in the future.
• Buyers are flocking to the market to buy before rising prices force them out.
• The dearth of quality properties for sale continues.
• Sizable price gains should continue into 2007.

Demand for recreational land and an influx of investment-driven buyers combined to propel the 2005 land market to an historic high. These factors also pushed up the price of an acre of Texas rural land by 16 percent, from $1,274 per acre in 2004 to $1,483 per acre in 2005. That milestone, marked the fourth double-digit percentage increase in the past five years (Figure 1). In the aftermath of the 9-11 attacks, only 2002 with an aenemic 3 percent rise failed to post gains exceeding 10 percent.

The 2005 performance extended bullish market results for the third straight year. The 16 percent gain matched the 2004 expansion and was the third highest annual gain in the past 40 years. Only 1973 and 1974 experienced larger price increases. Table 1 reports the prices reflected in Figure 1.

The real or inflation-adjusted price of $306 per acre in 1966 dollars pushed past the previous record high of $288 set in 1984-85. Nominal prices shown in Figure 1 reflect the actual prices paid while real prices reflect the nominal prices adjusted for inflation. This strong upward trend produced a 76 percent, five year gain in nominal prices since 2000. That gain yielded a 12 percent annual compound return over 2000–05.

Fueled by high levels of activity, the 2005 markets recorded 8,368 total sales, exceeding the 2004 record volume of 8,073 sales. Figure 2 indicates the reported sales volume for each year between 1982 and 2004. The chart reveals an explosion in the level of activity following 2002 that continues unabated.

Typical Tract Transaction

At 100 acres, the typical transaction remained small. Tract size has settled at a modest level since size peaked in 1997-98 (Figure 3). That size drop roughly coincided with the increase in volume of sales as a growing number of buyers scoured the countryside for properties that fit their land purchase budget. Sellers often split larger holdings to broaden the potential market for their land and boost its price per acre. The rush to subdivide larger holdings has resulted in a shortage of large properties.

Many investors approach land markets with a specific sum earmarked for land purchases. That amount determines the total price range of property they will consider. For example, a buyer with $5 million to invest will seek out properties with asking prices near that amount. Consequently, sellers of large properties generally face a restricted market because relatively few potential buyers can muster the resources needed for such large purchases.

Offering smaller properties tends to attract more competing buyers, increasing the bidding pressure and shortening marketing time. The falling tract size and increasing numbers of sales in Texas markets reflect these realities.

Figure 4 suggests that sales of small properties ebbed during the 1970s and early 1980s, settling at historic lows in the latter part of the decade. The numbers of small sales began a gradual increase after 1993, only to see an explosion in the sales volume from 2001 through 2005.

Historically averaging 42 percent of total sales, small tracts composed more than 48 percent of the total in four of the past five years. Along with the increase in absolute numbers of sales, small properties have also posted dramatic increases in price per acre, especially in 2004 and 2005. These market developments have coincided with a rush to the countryside in all parts of Texas.

From the late 1990s, the percentage of small sales moving through the market has increased substantially until small sales now compose half of all sales reported to the Center (Figure 5).

For investors with substantial amounts to invest, the array of available properties often is limited owing to the breakup of large holdings. The resulting dearth of large property offerings may have created conditions allowing sellers to capture a per-acre premium. The number of properties greater than 5,000 acres sold in the past two years has increased when compared to the norm in the 1980s (Figure 6). Although the volume of 80-90 sales is a small proportion of the market, that level is much greater than the approximately 30 sales from the earlier era. In addition to the increased volume, the median price paid for these tracts increased substantially above historical precedents.

Obviously, large ranch sales compose a small proportion of the entire market (Figure 7). However, the focus of the large property portion of the market has shifted since 2001. During the 1966-2006 interval, the large portion of the market concentrated in West Texas, Land Market Areas (LMA) 1–9, (see appendix for geographic boundaries of LMAs). West Texas has historically accounted for more than 70 percent of such sales. In 2002, however, that volume fell to 65 percent and in 2005 declined to just 50 percent of large sales. In 2005, half of large sales occurred throughout the remainder of Texas with the largest volume, 12 sales or 15 percent, taking place in Rio Grande Plains of South Texas (LMA 11). The North Central Plains (LMA 12) accounted for another nine sales or 11.25 percent of large transactions. Obviously, large property buyers are spread across the state.

Non-Agricultural Purchases Expand

Viewing land prices as the result of agriculturally based activities increasingly reflects the conventional wisdom from a simpler time. In past decades, land prices tended to strictly reflect the productive capabilities of the soil as they were converted into agricultural income. As Texas evolved to an urban based society, nonfarm buyers flocked to the countryside buying acreage for recreation and investment.

In the past decade, these nonagricultural buyers have come to dominate market activity. Increasingly, the prevalence of purchases driven by the desire to avoid capital gain taxes on the sale of real estate has prompted sellers to take advantage of the 1031 exchange opportunities in the IRS regulations. The 1031 exchange allows an owner to convert one real estate investment with another without recognizing the gain as taxable income.

Many market participants now frequently note that 1031 exchanges, often involving buyers from outside Texas, are inspiring a growing number of transactions in the Texas land markets. Resident Texans have reacted by accelerating plans to purchase land before prices move too high. Together, these forces have created a feverish struggle to identify attractive properties and attempting to induce the owner to sell.

Regional Land Market Developments

In 2005, the geographic distribution of land prices continued to reflect both population density and the draw of scenic amenities (Figure 8). The highest prices surrounded cities: Dallas-Fort Worth, Houston, El Paso, Austin and the Lower Rio Grande Valley. Responding to the scenic appeal of the Hill Country, the high prices stretched westward from Austin through Fredericksburg to Kerrville. The lowest price land found a column through West Texas from Amarillo through the Trans-Pecos area to the Rio Grande. As Figure 8 clearly indicates, most of the higher prices in Texas occur in the heavily populated eastern portion of the state.

Figures 9 shows regional percentage changes in median price per acre from 2004 to 2005. The highest percentage price gains prevailed in a strip from San Antonio through Gonzales to the Coastal Bend, land market areas 18, 19 and 21. The second tier of percentage price jumps prevailed from the Stephenville region through Wichita Falls, Lake Texoma to Texarkana, LMAs 13, 12, 22 and 29.

The South Texas brush country (LMA 11) also posted large price increases. Much of the remainder of the state saw sizable escalation of prices with only the Highland Lakes, Trans-Pecos and Mule Shoe areas taking a breather in 2005 following their hot markets in 2004.

Market developments in 2005 reflected the increased presence of investment-minded buyers and an influx of tax-sheltered cash. Prices rose strongly throughout Texas. Market anomalies accounted for the only regions exhibiting lower prices and did not signal a general weakening market-wide trend. Those regions will likely rebound in 2006.

Prospects for 2006

Forces propelling prices upward have accelerated into 2006, pushing markets even higher. Investors seem to perceive inflation ahead and desire to plow funds into tangible assets like land. Tax considerations add to the demand for land. Despite high energy price levels, recession does not appear to be on the immediate horizon, and the economy continues to thrive.

The thriving economy contributes to incomes that support the demand for recreational property. Buyers have begun to seek out land to avoid being priced out of the market as increasing demand drives prices up. These circumstances lead market participants to note repeatedly a dearth of quality listings and long lists of potential buyers.

The troubling market influences consist of high energy prices and rising interest rates. At some point, continued high oil prices will sabotage economic activity. However, they have not derailed the recovery at this time. Future interest rate hikes may take a toll. Farm policy is in complete disarray, so no one can realistically predict operating conditions for farmers in the near future. And drought stalks across Texas, weakening both farming and ranching. Despite these potential problems, current activity suggests that by 2007, land prices should post another sizable increase.

Regional Developments

The following LMAs registered especially strong (statistically significant) trends compared with markets levels in of 2004. All of these regions experienced price increases with some posting large percentage gains. The local developments reflected a voracious appetite for land. The analysis notes some of the forces driving those trends and Table 2 contains detailed statistics documenting regional developments.

LMAs 10, 11, 18, 19 and 21.

Hottest Texas region in 2005 (price increases from 24 to 33 percent)

• Recreation still drives this market resulting in premium prices for ranches with established game management plans.
• Investors have also appeared in increasing numbers with many using 1031 exchanges to purchase property.
• Nonhunting recreation is becoming more common.
• Demand for developable land is strong.
• High oil prices have increased income to royalty owners and some of that money is finding its way into the land market.
• The inventory of available properties continues to be tight.

LMAs 12, 13, 14, 22, 29, 30 and 31.

The second hottest region in 2005 (percentage increases ranging from 9 to 32 percent)

• Prices throughout this region experienced a dramatic rise.
• Recreational and investment purchases are driving prices.
• Purchases with 1031 exchange money has become more prevalent.
• Buyers from metropolitan areas have expanded into much of this area in search of cheaper land.
• Markets have been extremely active.

LMAs 20, 23, 24, 25, 26 and 27.

Booming urban regions (percentage increases ranging from 7 percent to 22 percent)

• Demand for development land is driving good quality land prices higher.
• Investors are positioning themselves for future expansion and development. Buyers appear to be positioning purchases to be in the path of development in the next two to three years.
• Mineral development activity over the Barnett Shale is influencing the market near Fort Worth.
• Recreational users must compete with developers for land in these regions.

LMAs 15 and 17.

Vigorous Hill Country market (11 to 18 percent increase)

• At $5,785 per acre, the Kerrville area posted the highest median price in Texas.
• The volume of reported sales increased across the area.
• Recreational demand and investment buyers dominated the market.
• Developments are spreading in much of the area.