The Housing Bubble

A report from the Des Moines Register. “Iowa’s average farmland value declined for the third year in a row, down 5.9 percent to $7,183 an acre over the past year. It’s the first time since the 1980s farm crisis that land values have fallen three straight years, according to an Iowa State University report. Average Iowa farmland values are now 17.5 percent lower than the historic high set in 2013 at $8,716 an acre. Values dropped $449 per acre over the past year. U.S. farm income is projected to be $66.9 billion this year, 46 percent below record profits in 2013, the year following a devastating drought that drove commodity prices to new highs.”

“Since then, corn prices have tumbled close to 60 percent and soybeans, about 40 percent. At the same time, seed, herbicide, farmland rents and operating costs have been slow to decline, squeezing producers. Iowa livestock producers have struggled as well, said Wendong Zhang, an ISU assistant economics professor who leads the university’s annual farmland survey. ‘While corn and soybean prices continue to fall short of production costs, livestock producers faced a tougher environment in 2016 with hog, cattle and dairy prices all down by at least 30 percent compared to two years ago,’ he said.”

“Iowa’s average farmland value is still 173 percent higher than 2004, when prices began to climb, thanks to the ethanol boom, historically low interest rates, drought and other factors. ‘Looking ahead, land values might continue to adjust downward in the next year or two,’ Zhang said. ‘This is consistent with the stagnant corn and soybean futures prices and potential rise in interest rates.’”

From Country Guide. “This past fall, harvest stumbled to a finish. In parts of Ontario, combines chewed through spindly, drought-stricken corn on the same days that Prairie farmers drove their machines into swathes that had been buried in snow. It was enough to make those sporadic reports of feedlots shutting down, U.S. crop farms going bankrupt, and Midwest farmland prices dropping seem all the more foreboding.”

“Compared to 2013, Chapter 12 bankruptcy filings across the top grain-producing states in the U.S. climbed 50 per cent in the 12-month period ending on June 30. In Iowa, the biggest corn producer of all, they jumped a massive 125 per cent. (These Chapter 12 bankruptcies involve farms with less than $4.03 million in debt.)”

“Then in August, the 2016 Purdue Farmland Value Survey revealed that Indiana farmland values had plunged another 8.2 to 8.7 per cent after having fallen five per cent in 2015. Declines this big have not been seen since the mid-’80s, the university said. And now, farm surveys were also reporting similar drops across the Midwest in cash rents.”

“Michael Langemier, Timothy Baker and Michael Boehje, agricultural economics professors at Purdue University, Indiana, further examined the worrying trends in farmland prices and cash rents, using data from surveys by Iowa State University (Ag Decision Maker), the Illinois Society of Professional Farm Managers and Rural Appraisers, and Purdue (Dobbins and Cook).”

“They compared declines in cash rents and farmland prices to what happened in the grain price bear market of the 1980s, which lasted six years after the initial crash. Over the first year of the six-year decline back then, average cash rents in the three states increased two per cent, and average farmland prices declined 5.3 per cent. This time, however, from 2014 to 2015, average cash rents and farmland prices for the three states both declined, falling 2.1 per cent and 2.2 per cent, respectively.”

“One major difference between the two periods is interest rates, so there’s much more cash flow now. Also, they note that inflation is much lower, and they say the percentage declines in cash rents and farmland prices in Iowa, Illinois, and Indiana are not expected to be as large as those experienced in the 1980s, unless earnings per acre collapse even more, or inflation and interest rates increase dramatically.”

“When they analyzed farmland price per acre divided by cash rent per acre and then cyclically adjusted this P/rent ratio for interest and inflation, they found it continued to be substantially higher than historical values in the 1980s. This means that to maintain current high farmland values, cash rents would have to remain very high, or even move higher, while inflation and interest rates would have to remain very low.”

From Illinois Farmer Today. “Some farmers and farm managers negotiated with their landlords to lower cash rents last year. Even if changes weren’t made, farmers continue to look carefully at land costs. ‘For the majority of my farms, we made the adjustment a year ago,’ said David Klein, vice president and managing real estate broker for Soy Capital Ag Services based in Bloomington, Ill. ‘It depends where you started. If it was extremely high, you may get a reduction (this year).’”

“When commodity prices were higher, from 2006 to 2013-14, it made a lot of sense for landowners to get price increases, said Gary Schnitkey, University of Illinois agricultural economist. It doesn’t make sense now, and farmers need to negotiate these downward. ‘Some of the rents need to come down quite a little bit,’ he said.”

“Ruth Hambleton, Southern Illinois University farm management instructor, uses such a system with land she manages for the Fleck Trust in Lee and Bureau counties. It saves time, eliminating the need to negotiate every year. She says a bonus system may work well if a landowner can’t understand why farmers want rent lowered. The landowner can experience first-hand why the income is higher some years than others.”

“There are always some operators who are willing to overpay in rent or when buying land. If they pay over break-even too many years, they are likely be in the 6 percent of farmers leaving the business, she said.”

From Successful Farming. “While it’s less common to see farms for sale in the Midwest as farmers hold on to their property and hope for the record-high prices to return, the land that is put on the block often gets snapped up by other growers who want to work the acres rather than by investors or large-scale family producers, according to real estate agents and analysts.”

“While declining land prices are keeping a lot of producers from selling, those who have decided to part with their farms aren’t having a hard time finding buyers. Local growers have recently made up the bulk of those purchasing farmland, often outbidding fund managers or large-scale owners who want to rent to single or multiple tenants, says Tomm Pfitzenmaier, president of Summit Commodity Brokerage in Des Moines.”

“‘Just before harvest, there were about a half dozen for sale up in the north-central part of Iowa, and they all sold pretty well – from $7,800 to $8,500 an acre,’ he says. ‘Every single one of those sold to a local farmer or a neighbor. Not one sold to an outside investor.’”

“The collapse in grain prices and the impact of tighter gross margins are working their way through the agricultural economy, Purdue ag economists Craig Dobbins and Kim Cook, write in the report. ‘While the underlying reasons for multiple years of tight gross margins now are not the same as in the 1980s, a series of years with downward adjustments in farmland values and cash rents like the 1980s may still be the result,’ the economists write.”

“Jim Hughes, the owner of Jim Hughes Real Estate in Glenwood, Iowa, says there aren’t a lot of farms for sale in his area, but the ones that have sold did so at ’solid’ prices, even if they are down from the lofty levels of 2012 and 2013. Farmers in his part of the state also are the main buyers, partly due to laws that forbid corporate farming and partly because farmers like to own land. Interest rates are favorable as the Federal Reserve keeps down its federal funds rate, which affects long-term debt such as land and equipment purchases, he says.”

A report from the Naples Daily News in Florida. “In November the Naples area saw a year-over-year drop in the median price paid for home resales — the first time that’s happened all year. In November the median price for single-family homes fell 7 percent to $397,000, down from $426,000 a year ago. In the condominium market, there was a 3 percent drop to $251,000 — from $258,000 last year. More sellers entered the Naples market in November, with home inventory increasing 40 percent over last year. There were 5,733 properties listed, compared to 4,095 last year. From October to November, another 300 properties hit the market.”

“There is now a more than eight-month supply of existing homes available. A year ago, there was a little more than a fourth-month supply, said Cindy Carroll with Carroll & Carroll Inc., a Naples-based real estate consultant and appraisal firm. ‘Rising inventories require properties to be appropriately and competitively priced in order to achieve a sale,’ she said. ‘Overpriced properties tend to languish on the market, contributing to an oversupply condition.’”

“One obstacle continues to be what broker analysts describe as ‘irrational legacy pricing behaviors,’ with some sellers asking too much for their homes when buyers have plenty of other more affordable options to choose from. ‘The number of properties selling in under 30 days is increasing, while those in the 30- to 90-day and 90-day-and-up segments are stagnant,’ said Jeff Jones, managing broker at the Naples-Park Shore office of Coldwell Banker. ‘This tells me that there are still properties improperly priced out there.’”

The New York Times. “Things are getting choppy in New York’s once-rocketing residential real estate market. Last week, the developers of what was planned as the city’s tallest tower outside of Manhattan gave up and sold their site next to the historic clock tower building in Queens Plaza to the Durst Organization for $173.5 million. The developers, Kevin Maloney and Kamran Hakim, spent nearly three years buying land in Long Island City for the $750 million skyscraper. But, Mr. Maloney said in an interview this week, ‘we didn’t have the horsepower to get it done.’”

“Mr. Maloney, who sold the Queens clock tower site, is completing another, 45-story building in Queens Plaza. But his acquisition loan was coming due on the clock tower project. And he was unable to get a construction loan after spending almost $160 million unless he put in more equity, so he decided it was best to sell. ‘There’s no denying the high-end market has slowed down,’ he said. ‘The good news is that land prices should start coming down.’”

From Property Wire on California. “The first interest rate rise in the United States for a year could hit the housing market in California where there are already signs of the real estate sector cooling, new research suggests. The property market in California have been regarded as overheating for a while with house prices falling in some locations such as San Jose which has seen values fall for the first time since 2011. According to the latest analysis report from real estate firm Clear Capital San Jose, one of the nation’s previously top performing housing markets, is reporting negative quarterly price growth for the first time in five years.”

“And there could be further cooling as, although it is only the second interest rate rise since the downturn in 2008, the US Federal Reserve has indicated that three more rate rises can be expected in 2017, meaning home loans are set to become more expensive. If the market climate of San Jose is any indication of what is in store for other high priced Californian markets, more cities may dip into the red during 2017, according to Alex Villacorta, Clear Capital vice president of research and analytics.”

“‘San Jose going negative over the last quarter is a huge deal, although no surprise given that growth in this market, and the Bay Area region as a whole, has greatly slowed over the last couple of years,’ said Villacorta. ‘Rapid price growth combined with lagging, sticky income levels quickly pushed home prices out of the affordable range for a majority of home buyers.’”

The Portland Tribune in Oregon. “Rents have gone down more than half a percentage point in Portland since last year, after flattening out in the past few months, according to a report released by Apartment List this month, showing rents fell for three straight months in 55 of the top 100 cities. Apartment List calculates rent growth on a same-unit basis. ‘What that means is for a unit that is available during this time period last year, and the time period this year, the rent they’re asking for is actually less than what they were asking last year,’ said Andrew Woo, Apartment List’s director of growth and data science.”

“The rule of thumb says people should spend 30 percent or less of their income on housing. People who spend more than that are considered ‘cost-burdened,’ because at that level it’s difficult to afford healthcare or put money into savings. ‘Nationwide, this has gone up in recent years,’ Woo said. ‘In Portland, it actually went down from 2014-2015.’”

“In 2014, 54 percent of renters in Portland were cost-burdened. In 2015, it dropped to 50 percent. ‘It’s a significant drop. That compares to a nationwide average of right around 50.6 percent,’ Woo said. ‘But it’s a nice little drop, from slightly below the nationwide average from the year before.’”