Demand exceeded availability in Southwest land in 2012

Jan 4, 2013

By all accounts, last year was a good year for real estate in the Southwest regions. When asked how his year had gone in 2012, realtor Sherman Shanklin of Shanklin Realty, which covers Oklahoma and Kansas markets, said it was “Real good.”

“There wasn’t enough to go around. There was more demand than there was product.”

Craig Buford, owner of Buford Resources which brokers for Eddie Haynes Real Estate and Auction and covers Oklahoma and Texas real estate markets, had much the same experience with 2012.

“We saw a good year. It was spotty somewhat, a little up and down, but good ranch properties sold well. We had such a great income in our area,” he said, referencing the oil- and gas-related wealth bringing potential land-buyers out of Texas.

Buford noted that 2012 didn’t differ much in what drove sellers and potential buyers—the same economic and environmental pressures and political uncertainties existed—but that there was a lot more buyer confidence in 2012 than in 2011. Shanklin, too, mentioned how those who bought certain properties made good investments more so last year than in 2011.

On demand in 2012

Demand for cropland was especially high. Shanklin said all of the cropland he had sold early on in the year and that his group no longer has any because decent cropland in Oklahoma gets snapped up so fast. Investors were especially interested in cropland over pasture or recreation land given the higher rate of return in 2012 and the high prices paid for staple crops.

Shanklin commented at length regarding the limited amount of relevant cropland—class 1 and class 2 soil—in Oklahoma and quoted some extreme price per acre jumps in value on what he experienced early in 2012.

“We saw values go from $1,150 to $2,150 acre. And right now in my market, it would be tough to find a place to run 100 cow/calf pairs.”

This observation is in keeping with the findings of a report released by Texas A&M University (TAMU) earlier in the year. The report found high prices paid for staple crops would keep cropland value high in 2012. It described buyers as “clamoring for irrigated cropland.”

A lot of what drove buyers of land in the Southwest— aside from the aforementioned investor interest in the returns on cropland— was the pursuit of grass. The TAMU report also mentioned high-wealth individuals acquiring large ranchland parcels. This was something both Shanklin and Buford also experienced in 2012.

“When we got into large or native grass land, those were hard to find,” said Buford. He had a couple stories of clients who went away empty handed because they were looking for large tracks of pasture land with sufficient water for decent-sized cow herds. The problem was, that simply wasn’t available.

The situation was different, according to Buford, when the scope of the real estate market was expanded beyond traditional agland.

“When you get away from the strictly farm property, it was still a buyer’s markets. They could be picky. But certainly on the larger ranch side, those things were tougher to find.”

Shanklin said they had an extreme shortage of largetrack pasture land relative to the amount of interest they got, and most of what was available was smaller plots—ranging from 10 to 80 acres—suitable for “ranchettes” or hobby farms.

“The only way we’re getting [large-track] inventory is a death or a divorce. Or someone inherits the ground and has no interest in it.”

Much of the unmet interest in large ranch properties was fueled by long-standing drought conditions. “It took two years of drought for people to wise up to buy some land,” said Shanklin of the situation.

“Due to the cattle market being so high from the two years of drought, we had a lot of people from Texas looking to buy grass to save their herds.”

As has been said before of the ongoing drought issues of the past two years, and just about any financial hard times, having cash on hand when others are forced to sell is a great situation. And such was the case with pasture land last year. Interest in procuring grass was a big draw into and within the Southwest real estate market.

“We had so many out-ofstate buyers looking to buy grass.”

However, Shanklin reported the outside interest in buying grassland and how people were using their land had stressful impacts on the local hay markets. Not only were there local demands for hay, but since the drought’s effects were felt everywhere and prices for the scant hay available were astronomical, economic pressures saw hay being shipped elsewhere as often as not.

The drought had other impacts on land buying behavior as well.

“It appeared that water was more of a factor than was the shortage of grass,” said Shanklin. He told an anecdote about a rancher having grazing land with enough grass for cattle, but with dry stock ponds which forced him to look elsewhere for his herd.

“The same thing on the smaller props,” said Buford of the drought. “Creeks weren’t necessarily running and stock ponds were low.”

Water had a big impact on land sales for more than just water use reasons. Buford told of a situation where a commercial property which had been sold with the feature of lakeside views in the past couldn’t claim that last year. The drought had made

the lake recede so dramatically that “you needed binoculars to see the lake.” He also cited other drought-related aesthetic impacts on land values, such as vistas of once-verdant rolling hills lacking their picturesque green.

Lay of the financial land

While the drought had a lot of impact on the land part of buying land, there were numerous financial elements which affected the buying part of buying land. Among some of the most relevant were, of course, the concerns over the fiscal cliff, uncertainty over taxes, the potential for a stagnating economy, and interest rates, among so many others.

Economic and political uncertainty was a reoccurring theme in both the experiences of Shanklin and Buford, as well as the academic report on the Southwestern real estate market.

“You cannot believe how many closings we had in the month of December because [buyers] were concerned they were going to have to pay more in capital gains,” said Shanklin, passionately. “We were pushed to the wall to close on or before Dec. 31. We closed five properties on that day alone, just our little office.”

Uncertainty over what would happen to capital gains and estate taxes also saw a lot of tax-avoidance buying in Shanklin’s office.

“We did a lot of 1031 tax exchanges.”

But while uncertainty drove some buying, it also hampered it. The TAMU report pointed out how global unrest—politically as in the Middle East and economically as in the EU— coupled with domestic issues such as historically high unemployment, the frequent inability of Congress to reach agreement, and inflation concerns have dampened many potential buyers.

Buford’s experiences supported these findings. He described the issue of buyers running hot and cold on their motivation to buy based on political and economic goings-on in 2012.

One day, they would be very motivated and passionate about buying, then the next day, following some less than confidence-inspiring news, would “cool to the idea of buying.”

Uncertainty wasn’t the only double-edged financial sword in the 2012 Southwestern ranch real estate market. Record low interest rates and some spectacular deals on rural land loans both had their draws and their detractors.

Shanklin spoke of a bank in Tulsa, OK, offering an excellent loan offer for smalltrack properties with 0 percent down for a max $250,000 loan with five-year fixed interest on a minimum credit score of 660.

“It’s brought a lot of the urban people out to these little ranchettes,” he said of the deal.

It was a bit harder to find deals in the more traditional venues of ag-land loans, however. While Shanklin insisted the lack of largetrack inventory sufficient to meet demand was the primary problem of 2012, loan issues through traditional means were next in line.

“Even though we have low interest rates, there is more scrutiny on credit scores,” even if the borrower is otherwise attractive, Shanklin said. “They have to jump through more hoops than 36 months ago. It’s like the government doesn’t want to loan money without actually coming out and saying it.”

And the financials of real estate couldn’t properly or completely be discussed without mention of the specter of the so-called land value bubble. This topic weighed heavily on the minds of those in ag real estate. Shanklin spoke of his concern in no uncertain terms.

“I’m scared to death that this land bubble is going to pop. These prices are just too good to be true. What I’ve seen is, usually if you have low land values, you have high interest rates. And if you have high land values, you have low interest rates.”

He expressed concern over the potential for a reversal and reflected on the popped land value bubble of the ’80s.

Buford spoke of the potential for a land value bubble with a similar note of worry, but tempered with some optimism.

“It’s always scary to say this, but I think we’re a bit sheltered here in Oklahoma and Texas. We haven’t had that huge boom like they’ve had in the Northwest. And whenever you have the boom, you’ll have the bust.”

He said that though land values advanced in his area last year, the value gains were not to the extent of those in other parts of the country. From that, he expects that if or when the bubble pops, the impact on the Southwest will be commensurately smaller.

However, the issue of whether or not the currently climbing land values actually is a bubble is an uncertain one. Farm real estate value trend data from US-DA’s Economic Research Service (ERS) suggest that the recent run-up in average U.S. land values is supported by several fundamental factors.

“Since 2009, though farmland values have been high, the discounted returns from renting farmland have been higher. Also, in the last two years, average income from farming has been more than sufficient to service the debt on farm real estate purchases at current mortgage rates.

“A ‘speculative bubble’ forming in farmland markets cannot be ruled out, but at a national level, farmland values have been supported of late by fundamental farm factors such as farm earnings.”

The report additionally found that strong farm earnings in the years since the housing bust of the late 2000s have helped stave off many of the downturns suffered by the housing market.

Near-record prices paid for corn and cattle have certainly played their part in this regard in the beef-related side of ranch real estate.

Another thing supporting the real value of some ag land on average in the country has been location (location location). Somewhat irrespective of a property’s production abilities, ag land value goes up in proximity to urban areas, according to several ERS reports.

“In addition to its value in a farming use, farmland near urban areas derives value from its potential to be developed for residential housing and other nonfarm purposes,” read one report on the trends in farmland value.

“Because farmland is often the source of land used for new residential construction, changes in housing markets can affect farmland values. The value of farm real estate is typically highest for farmland located less than 10 miles from the borders of a population center, and then tapers off at greater distances.”

While this land value feature might not be the best in terms of the continuation of agriculture, it is a valuable facet for those who currently own or hope to invest in ag land.

The Southwestern future

Despite the potential of a bursting land bubble, there was still a lot of optimism about the Southwest ranch real estate market.

“I’m always optimistic,” said Buford cheerily. “I think we’ll have a good year.”

Those who have largetrack ranchland to sell will find a ready supply of eager buyers. Those looking to buy a smaller plot or rural land not solely farmland will find that it is their market. And there were a few other winners of 2012 which should carry over into the New Year.

“Obviously, the oil and gas market played a big role in the market,” said Buford. “Anyone on the mineral side of life did well. Mineral rights have been a hot commodity.”

With interest rates reported to stay low into the coming years for most types of loans, and expectations of at least continued high cattle prices, many of the fundamentals holding up land values may yet remain and improve. The urban-proximity value is only likely to increase as more people continue to need more space to expand into.

Buford ended his thoughts on the matter, saying, “I’m looking forward to a good ’13.” — Kerry Halladay, WLJ Editor