The Housing Bubble

A report from the Associated Press. “Pale green and 8 feet tall, tightly packed corn stalks reach to the horizon throughout the Midwest in what is likely to be the biggest harvest the U.S. has ever seen. Aside from a sense of pride in breaking the previous record by nearly a billion bushels, farmers won’t benefit. They’ll lose money on virtually every cob. It’ll be the third consecutive year in which most corn farmers will spend more than they’ll earn. The growing has been too good and the resulting glut of corn depressed prices to a decade-low. It’s a similar story for soybeans, the second most common Midwest crop.”

“As a result, farmers are cutting costs, dipping into savings or going further into debt. The drop in farm profits raises questions about agriculture’s boom-and-bust cycles and why people adhere to what at times is seemingly not a sustainable business model. The less-established farmers who rent expensive farmland or went into debt to purchase land or new equipment are ‘the ones I worry about,’ said Harold Wolle, a fifth-generation family farmer from south-central Minnesota.”

“But sixth-generation Iowa farmer Grant Kimberley, who farms with his father, cautions that all is not well for those who’ve been doing this for a while, either. ‘It’s getting to a tougher stage even for farms that are more established. Everybody’s feeling it now, especially guys like my dad. He’s 65 years old and has done really well and built things up, but we hope this doesn’t last forever because you hate to see a lot of those gains they’ve made over the years virtually get eroded,’ Kimberley said.”

The Farmers Exchange. “Purdue University agricultural economist Chris Hurt came to Goshen with a message about the farm economy: ‘Something’s got to give.’ With bumper corn and soybean crops forecast, farmers will have more bushels to sell. But with crop prices lagging below the cost of production, those extra bushels won’t be worth as much. Hurt said the farm economy is nearing the middle of a five-year stretch in which costs are higher than revenues. Currently, farmers are earning almost $600 per acre on a corn-soybean rotation, while the cost of production is $718 per acre.”

“Back in 2012, when crop prices were high, farmers were earning $824 per acre while costs averaged $707. Hurt expects to see a gradual pullback in farmland values and cash rent prices. According to Purdue’s own survey, farmland values reached a peak of $7,976 per acre in 2014. They are now at $7,041 per acre and are expected to decline further, reaching $6,020 per acre in 2019.”

“Next year, cash rents will decline by 4 percent to 6 percent, he said. The current cash rent price for average farmland in north central Indiana is $202 per acre, down 11 percent from 2015. Rather than prices going up, Hurt said the best chance for improved margins is for costs to come down. ‘One thing we do know from the marketplace,’ Hurt said, ‘that is, if there’s enough financial pain, things will eventually adjust.’”

The Des Moines Register. “A panel of farm leaders explored how much further rents and land values will fall, how growers will fare in growing mega mergers mania, the ag economy and other issues at the Iowa Bankers Association’s annual convention in Des Moines. Even though farmland values have fallen — nearly 9 percent over the past year, according to a new survey this month — tight supplies, low interest rates and investors looking for alternatives to the stock market have help slow price declines across the state, experts said.”

“‘We’re really puzzled why people pay what they’re paying’ for farmland in some areas, said Bruce Rastetter, CEO of Summit Agricultural Group, a diverse farming and investment business in north Iowa, even with investors wanting to jump out of the stock market. Already, price declines are hurting some buyers who purchased when values were at their peak. Bruere said it’s difficult for a seller to get the same $12,000 he paid for land a couple years ago. ‘There are some tough conversations being had right now,’ he said.”

“Typically, on Sept. 1, landowners terminate Iowa farmland leases to negotiate higher rents, said Steve Bruere, president of Peoples Co., a Clive farm management and real estate group. ‘This is the first time in our farm management business that we’ve seen farmers terminate the lease’ to negotiate lower rents, he said. ‘A lot of it was driven by conversations with lenders, who said, ‘Hey, are you going to lose money or make money? Are you entering the year with an expected loss?’”

“‘This is the fourth year we’ve been in that environment. With liquidity drying up, those conversations have gotten a lot more real. The days of $400 and $500 (an acre) rents are over,’ he said.”

“Rastetter said: ‘A couple years ago … we had $1,200 gross acre revenue. Today the reality is that we’re at $600, and there is significant amount of pain going on. Maybe a lot of people aren’t talking about it. I assume a lot of you lenders are talking privately. … You will and should see those tough negotiations on cash rents. Instead of $300 and $350, I think you should be $225 and $250, and even then it’s a challenge to make money.’”

The High Plains Journal. “A new report from the Rabobank Food & Agribusiness Research and Advisory group finds in order for U.S. agricultural commodity production activity to remain economically viable, land rent must decline. The report, ‘The Land Value Wave Dips: Land Values Set to Decline Further, Despite Sticky Rental Prices,’ explores the impact of low commodity prices on land values and rent prices.”

“The report goes on to note that from 2006 to 2013, significant increases in commodity prices, due to surging demand, signaled the need for more land to be converted to row crop production. The subsequent steep increases in agricultural land values have pulled enough acres into row crop production to oversupply most commodities, both domestically and globally.”

“‘The result of this oversupply has been to drive agri commodity price levels below breakeven. After two years of economic losses at the farm level—which resulted largely from the significant drop in commodity prices—the cost of renting land remains sticky and unsustainably high,’ notes report author and Rabobank senior analyst Sterling Liddell.”

“‘The most significant driver in the deteriorating economics of farming is a 40 percent to 50 percent decline in commodity row crop prices and the inability for some costs—particularly land—to decline at the same rate,’ the report said. ‘The lack of decline is primarily a result of ample working capital that was available following the 2006-13 surge in profit margins. The availability of liquidity in the farm business and farmers’ desire to control land in the longer term, combined with land owners’ reluctance to accept reduced income, have led to a bidding process which kept rental values above breakeven levels.’”

“According to Rabobank, in 2017-18 and moving forward, rent values need to begin dropping in order to balance with lower commodity prices over the long term. ‘We believe this will lead to the valuation of land also adjusting lower,’ notes Liddell. ‘If rental costs remain sticky at unsustainable levels through the 2017-18 growing period, individual land assets face the threat of much deeper devaluation, as nutrient and crop protection programs are cut and abandonment (usage changes) increases.’”

A report from Bloomberg on Connecticut. “In Greenwich, the leafy Connecticut town famous for its cluster of hedge funds and the titans of Wall Street who occupy many a gated mansion, the rich are being maddeningly frugal. As Barry Sternlicht complained when he assailed his former hometown as possibly the country’s worst housing market. ‘You can’t give away a house in Greenwich,’ the head of Starwood Capital Group said, causing something of a ruckus. Many continue to try to sell their real estate holdings. As of Sept. 14, there were 46 homes at $10 million or more on the market, some that have been lingering since 2014, according to data from Miller Samuel and Douglas Elliman.”

“One problem is that risk levels have gone through the wringer. Members of the younger Wall Street crowd are quite conservative, says Robin Kencel, a broker with Douglas Elliman. ‘They used to say Oh, I’ll stretch.’ Now they’re more practical. They’ll ask ‘What are the utility bills? Oh, wait — I don’t want it.’”

The Casper Star Tribune in Wyoming. “Casper’s housing market was recently ranked as one of the least healthy in the country, largely due to the oil and gas bust. Realtors report that homes are retaining their value, and the current market offers opportunity. ‘Right now, the interests rates are screaming low, lower than they have ever been,’ said Gary Bryan, a real estate agent with Broker One Real Estate in Casper. ‘There are better houses on the market, better inventory than we’ve had before because we’ve had a little bit of an adjustment. It’s not a bad adjustment. It’s a good thing for buyers.’”

“Two years ago, Casper was a seller’s market, he said. But times have changed. ‘There is a little more negotiation going on,’ he said.”

The Williston Herald in North Dakota. “Despite the oil industry’s slowdown, Williams County’s population and housing needs continue to grow at one of the fastest rates in the nation, researchers say. Making predictions for Williston is challenging, though, in light of the dramatic swings that the city has seen in its housing needs, Nancy Hodur, assistant research professor and director for the North Dakota Center for Social Research, said.”

“‘Now all of a sudden you have vacant housing,’ she said, pointing out that although the market has opened up, what’s available needs to fit the needs of the majority of the population. ‘The tricky thing about saying you have a surplus of housing, is maybe you have too many $325,000 houses when what you need is houses for $125,000.’”

The Vindicator on Ohio. “Karen Humphries lives on Halls Heights Avenue on the Youngstown’s West Side, and she’s witnessed firsthand the damage out-of-state investors can do to a neighborhood. Out-of-state owners from various states own six of the 16 houses on the first block of Halls Heights and nine of 38 on the entire street. Humphries said those houses often sit empty for long periods of time. She sees children going in and out of them when they play.”

“Code enforcement scheduled two hearings for the property at 44 Halls Heights. Both times the property owner failed to appear in court. The Mahoning County Land Bank took control of the property on July 13 – nine years after it was purchased by a limited liability company in California. The land bank has since purchased three more properties on Halls Heights. ‘These out-of-town people have no idea what they’ve done to our neighborhood,’ Humphries said. ‘They’ve destroyed our neighborhood.’”

“The problem isn’t unique to the West Side’s Garden District. Out-of-state owners control 15 percent of properties citywide and 22 percent of the city’s 3,900 vacant properties. Out-of-state-owned properties are about 50 percent more likely to be vacant than locally owned properties. Nancy Martin, president of the Brownlee Woods Neighborhood Association, said investors from Taiwan and Australia own property in her neighborhood.”

“People from the Netherlands, England and Australia own property in the Garden District, said Jerry O’Hara, president of the Garden District Neighborhood Association. Out-of-state owners range from companies that specialize in flipping properties to ill-informed investors who get in over their heads purchasing homes over the internet. ‘Some of them have no idea what they’re doing,’ said Ian Beniston, executive director of the Youngstown Neighborhood Development Corp. ‘When you say, ‘Do you understand Youngstown has 4,000 vacant properties?’ You can feel their mouth drop over the phone.’”

“Houses will show up on the internet selling for just a few thousand dollars. ‘Then they buy it, and they’re stuck with it,’ O’Hara said. ‘That’s what happens a lot of times, and then they just sit because they can’t do anything with them.’”

WSIL TV in Illinois. “Dismal home sales numbers in Carbondale get worse as more folks hang out the ‘for sale’ sign. ‘Last year was the beginning of what’s going on this year, and this year it’s worse,’ explains realtor Terri Henry. Block by block, sign after sign, she says she hasn’t seen home sales this slow in the past two decades. ‘There were 11 homes on the market and up till now there’s only been one that has sold and closed, so it’s going to take us 66 months to get rid of these homes at that rate,’ says Henry.”

“Resident Ingrid Hansen noticed that same trend hit what she describes as a ‘well established’ neighborhood near the university. ‘The home next door has been vacant for four months but usually they sell within a year. I don’t know, maybe this year it will be different,’ she says.”

“Henry says it’s definitely a buyer’s market, but she doesn’t see many out there. ‘If you have 100 homes and you only have 25 people to buy, you’re going to be left over with 75 homes, so its going to be those homes that are in great condition, great area, ready to sell or the best deal,’ she explains.”

“Realtors say if a homeowner is having trouble selling the property they might choose to rent it out, but that creates another challenge since Carbondale already has a saturated rental market.”