Buying Rural Land in Texas

3 Understanding Contemporary and Future Texas Land Prices

Understanding Contemporary and Future Texas Land Prices 3 The rugged hills of the Trans-Pecos area. Photograph by J. P. Beato III UnDersTanDinG Texas LanD Prices | 25 S eeing the end from the beginning frequently requires an owner to examine the various scenarios for future land market conditions . Will value growth create potential tax liabilities? Is value growth occurring, and is it accelerating or slowing down? Finding answers to these kinds of questions depends on having a good grasp of what makes markets tick. Historical information can provide one vital key to forming a reasonable forecast of land price dynamics. Any foray into Texas land markets should begin with a review of information about current and past market developments. Historical Land Market Trends Learning about land market dynamics reduces the risks inherent in buying land with a casual, laid-back approach. Being well informed does not entirely eliminate the risk of failing to match planned results, but potential buyers will at least know to anticipate possible reversals of fortune and plan accordingly. Between 1966 and 2010, rural land prices in Texas rose from $172 per acre to $2,098 per acre. In the accompanying chart showing land prices, the top of the red portion represents the nominal prices (the prices paid in the current dollars of the indicated years). Nominal price peaked at $2,247 per acre in 2008. The top of the solid blue area of the chart presents “real” prices, which are nominal prices adjusted for changes in the value of money since 1966. Those constant-valued 1966 dollars provide a measure of the real change in the wealth of landowners at any given point in time. Although 2,500 2,000 1,500 1,000 500 0 Dollars Texas Statewide Rural Land Prices 1966 1970 1974 1978 1982 1986 1990 1994 1998 2002 2006 2010 Source: Real Estate Center at Texas A&M University Note: Real values are in 1966 dollars. Nominal Real 26 | cHaPTer 3 a current buyer will not have 1966 dollars to spend, looking at a current nominal price at its real level equivalent shows the relative amount of resources a buyer would need to divert from other uses to acquire an acre of Texas. For example, in 1966, a buyer would have forgone spending $172 on other goods to gain an acre of land. By 1973, spurred by increasing crop and livestock prices coupled with rising oil prices and migration to Texas, the nominal price swelled to $323 per acre, a roughly 88 percent increase. However, the sacrifice of $323 in 1973 equated to only $236 in 1966 currency, meaning that the purchasing power of the value gain actually increased only about 37 percent rather than the apparent 88 percent bulge suggested by the change in nominal prices. By 2008, the nominal price had ballooned to 13.06 times the 1966 price level. However, at $424 per acre, the real price had actually grown to only 2.47 times the 1966 level. That change represented a 147 percent increase in the quantity of resources needed to purchase an acre of Texas in 2008. It means that landowners in 2008 were nearly two and a half times as wealthy as their 1966 counterparts when land-based wealth is considered. Incidentally, the wealth of landowners in 2008 had grown to 180 percent of the 1973 Texas owners’ land-based wealth. This remarkable growth reflected relative levels of social and economic activities in Texas at those points in time. In general, real prices should rise as increasing population creates more competition for space. However , changes in circumstances can divert or derail social and economic progress. When that happens, real land prices mark the depth of the setback . In the 1980s,Texas suffered through a regional depression that substantially hindered economic activity. Farmers faced declining foreign demand for their output as the strengthening US dollar priced them out of international competition. Then oil prices plummeted, slowing royalty payments to trickles or stopping them entirely. Congress changed tax laws, eliminating many of the tax shelter aspects driving real estate investment . The resulting financial distress led to falling incomes and defaults on mortgages on a broad scale. Foreclosures and owners’ need to raise cash led to an unanticipated swelling of the amount of land offered for sale. By 1993, at $560 per acre, Texas land prices had risen to 326 percent of 1966 prices. However, the deflated real price...