20th Annual Outlook for Texas Land Markets - Excerpts from 20th Annual Outlook for Texas Land Markets - May 6 - 7, 2010 by James Gaines and Charlie Gilliland.
Texas is poised for a 21st Century Boom due to:
• Population and Economic growth
• Low cost, available labor
• Pro growth attitude
• Migration into Texas from elsewhere
• Attractive retirement area
• Pressure on infrastructure, government services & public finance
• Most affordable state for land, housing and overall cost of living
Riding Out The Slide
by Jason Buch - San Antonio Express News
Rural land prices fell in 2009 and are expected to slide more this year, says Charles Gilliland, a research economist for the Real Estate Center at Texas A&M University. Gilliland spoke at the Outlook for Texas Land Markets conference in San Antonio on Thursday.
“The statewide price index went down about 7 percent in 2009, the first time it’s gone down since the early ‘90s and certainly a big departure from the increases in recent years,” he said.
Last year, land values fell to $2,086 per acre, according to Gilliland’s conference presentation at the Omni San Antonio Hotel at the Colonnade. Despite transaction volume falling in 2008, values increased 8 percent.
“My guess is, on a statewide basis, there’s probably going to be further decline (in values) in 2010,” Gilliland said. “How big it will be, I have no idea at this point.”
Values slid as transactions fell 29 percent compared with 2008 and almost 50 percent compared with 2005. And the properties that did sell were smaller than they have been in past years. The median tract sold in 2009 was 73 acres, down from almost 100 acres in 2008, and the lowest recorded, he said.
According to Gilliland sales have taken such a hit because buyers and sellers can’t agree on prices.
“The market basically was at an impasse between potential buyers and potential sellers,” he said. “The sellers are thinking 2007, and the buyers are thinking 1930s.”
At the peak of the market in 2007, sales volume was about 8,000 a year. Since then, it’s fallen by about half.
“We’re basically back down to the level of sales we saw in 1995 to 2001.”
The bright spots have been in sales of cropland and small recreational properties. The cropland has moved largely in the Panhandle and Rio Grande Valley, and most of the recreational properties have sold near Houston.
In the region that includes South Texas, drought and the economy drove down transactions, according to a report from the American Society of Farm Managers and Rural Appraisers. That report was the subject of a panel discussion Thursday.
There is a market for recreational properties with improvements and amenities and within easy driving distance of population centers, according to the report. The prices for irrigated farms over the Edwards Aquifer increased, driven by water rights speculation.
Like other real estate markets, the land market is being pinched by tightened lending standards, said Larry Doyle, CEO of Farm Credit Bank of Texas, although he said there are loans available.
“We’re going to be a lot more stringent about analyzing cash flows,” he said. “We’re going to be a lot more stringent about liquidity. We’re going to be a lot more stringent about solvency.”
Mark Dotzour, chief economist at Texas A&M’s Real Estate Center, said potential buyers with money sitting on the sidelines will start making purchases despite the risky economic situation.
“Americans don’t like to hide it under the covers,” Dotzour said. “People are starting to come out, even if they might take a bullet.”
His advice for sellers: Make owner-financed sales with a 20 percent down payment and hope the buyer defaults.
Effect of IRC Code 1031 on Texas Agricultral Land Price
2010 Journal of the ASFMRA
IRC code 1031 (Section 1031) allows land owners to sell real property without capital gains tax when they buy so-called “like-kind” properties within 45 days. To defer capital gains taxes, sellers must find the replacement properties in a short period, thus increasing the demand for like-kind properties. In general, the Section 1031 tax provision has an effect on the demand and supply of land and will result in a land market price change.
Beom Su Park, James W. Richardson, Ph. D. and Charles Gilliland, Ph.D. examined the effect of Section 1031 tax deferred payment on Texas agricultural land prices: to analyze the effects, we estimate the market equilibrium price function using the dynamic panel model and Texas agricultural land sales for 1965-2007. We argue that Section 1031 increases both demand and supply of agricultural land by its tax reducing effect. Our empirical estimation shows that Section 1031 decreases the market price which means the supply curve shifted to the right more than the demand curve.
Theoretically, the effect of Section 1031 on farmland values is determined by both demand and supply shifts caused by land transactions taking advantage of Section 1031 exchanges. To detect the effect of Section 1031 on farmland prices in Texas this study estimates the market equilibrium price function related to tax reforms in Section 1031. The empirical results verify that the effect is to reduce agricultural land prices in Texas. These results are consistent with Helmers, Shaik and Atwood’s (2008) analysis of farmland in Nebraska and other Plains states.
The reason for the negative effect on price is inferred by the difference between supply shifts and demand shifts. The supply curve shifts to the right more by Section 1031 than the demand curve, and equilibrium price point moves from E0E1. Many forces in the Texas farmland market can help explain these shifts. The majority of farmland buyers are purchasing farmland for recreational/non-consumptive purposes. Non-farm income is driving these purchases more than farm incomes. Large developers have, until recently, been purchasing large ranches to subdivide them into more affordable parcels for consumers wanting a rural residence/recreation experience. Consequently demand shifts have been more responsive to non-farm income in the near term. Supply shifts have been in part driven by the sale of high priced farmland near urban development and the breakup of large parcels in rural areas of the state; these types of sales are facilitated by 1031 exchange provisions.
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