Real estate prices on hold

Feb 3, 2012
by DTN
Real estate prices on hold

—Land values stable for now.

Farmland owners were told to expect 2012 to be a “year of paralysis” in the general economy when economists addressed the Land Investment Expo last week. But contrary to popular belief, that might not be so bad for farmland sellers and owners.

Land values actually have more to lose if the general economy recovers. With chaos in budgets, taxes and the eurozone, that doesn’t appear to be a threat any time soon.

“I think agricultural land will do better if we don’t have an economic recovery,” said Mark Dotzour, chief economist with the Real Estate Center at Texas A&M University.

Currently, financial assets are “paralyzed” because of the failure of policymakers to deal with the debt problems in the U.S. and around the world, said Vince Malanga of Lasalle Economics.

“There is very little momentum in the economy and we expect it to really kind of lay an egg in the first half of the year. But if we do get a policy to reduce the federal deficit, we could have a boon in financial assets from pentup demand.”

Corporate profits are up 15 percent over last year. “If I didn’t know better, I’d say we were in the middle of a big economic expansion,” said Dotzour. “But investors are not willing to pay for those profits and companies are not willing to hire because no one thinks Congress will do the right thing and deal with the federal deficit.”

What happens if Congress does take some positive action, the stock market gains strength, and Treasury bond yields climb? “Investors will turn more to financial assets,” said Malanga. “The investment market is a fickle investor. Private equity funds and hedge funds don’t care about agriculture; they care only for the rate of return.”

Hard assets (like gold and farmland) will decline with the reversal of investment flow. “If [institutional investors] look at financial assets starting to be viewed as undervalued, they certainly wouldn’t have any qualms about selling that land and going back into financial assets,” Malanga added.

Prices are set at margins

Even if the speculators are a small segment of the market, they turn the trend, said Malanga. “Once the marginal buyers start moving away, the market will turn. That’s what will turn the trend.”

If an improving U.S. economy could weigh on farmland prices, so could a souring global economy. “I personally believe corn prices will go below $5, assuming average weather and slow global economics,” Malanga predicted. “When economies tend to slide, we often underestimate how fast they can slide. Two to three months ago, world economic growth was predicted to be 3.5 to 4 percent in 2012. Last week, the World Bank predicted 2012 world economic growth to be 2.5 to 3 percent. China’s expected economic slide will negatively affect U.S. commodity prices.”

Texas A&M economist Dotzour worries that insolvent European banks will stop loaning to emerging markets such as Africa and intense credit pressure will be felt all around the globe, keeping a lid on economic activity.

While we may be able to limp through 2012 from political inaction, a financial time bomb will go off in January 2013, warned Malanga. “That’s when the Bush-era tax cuts will expire, which will raise taxes for everyone. Medicare surcharge, increase in capital gains tax and dividends tax are scheduled to increase. Automatic spending cuts— $1.2 trillion over 10 years with 50 percent from defense—are scheduled to go into effect. The implementation of all those actions would lead to a depression. In the second half of 2012, everyone will wonder: What are we going to do?” Malanga noted. “Expect an acrimonious debate.”

So, what can an American farmer do now? “My advice is keep leverage low,” said Dotzour. “If crop prices drop 40 percent, I’ll still own my land and I can wait for the market to turn around.”

That’s the same advice Malanga gives farmland owners. “If I consider myself a caretaker of the land (not an investor who gets in and out of the market), my best recommendation is to get out of debt. Then it doesn’t matter what happens to land prices. One way or another, we will need to deal with the federal budget deficit and agriculture will be a target for policy makers,” Malanga warned. — Elizabeth Williams, DTN