April 2024

Land values, expectations, and land affordability

Land markets are changing directions after recent record highs, and agricultural professionals are mixed on the outlook for land values. While many expect values to fall before they rise again, over half the respondents from the 2023 ISU Land Value Survey expect land values to increase over the next year. This was not the first time such an expectation came to surface.

Expectations about land values

Figure 1 shows the land value expectations since May 2018 provided by the attendees of the Soil Management and Land Valuation (SMLV) conference held annually in May. The attendees were asked about their expected land values 6 months, 18 months, and 24 months into the future, in addition to common checkpoints in the future of November 2025 and November 2040. The expectations for November 2040 in every iteration of the survey predict an increase in land values between 40-60% from current values. Shorter-run expectations, transformed into percent changes for comparability, are displayed in Figure 1.

When the expectations for 2018 and 2019 were collected, Iowa land values reflected a downward trend and had experienced a decline for four and five consecutive years, respectively. So, the predictions about land values in these two survey years are naturally colored by the persistent observed declines, which were expected to continue for the next two or three prediction periods (i.e., 6 months, 18 months, and 24 months into the future), with a rosier outlook a little further out in 2025.

Figure 1. Changes in land values.

Interestingly, land value predictions from May 2023 also show a decline expected in the next three periods (6 months, 18 months, and 24 months into the future) ending in November 2025. In a way, last year’s land value predictions are similar to 2019 despite very different economic conditions. On the other hand, the 2021 responses were very optimistic, predicting continual large increases as the onset of the pandemic brought, with the 2022 predictions tilting towards a more cautious optimism with smaller increases as pandemic support pulled back and interest rates increases were announced when predictions had to be made in May.

Such expectations, while reflective of the sentiment at the time, also influence market dynamics as they feed into the decision-making processes of buyers and sellers. When market data and forecasts suggest declining land values, sellers might be prompted to lower their expectations and accept lesser offers, while buyers adjust their perceived value of land downwards, thus affecting actual transaction prices.

Figure 2 shows annual changes in Iowa land values between 2018 and 2023 from three sources: ISU Land Value Survey (surveyed in November), the January edition of the Federal Reserve Bank of Chicago’s Ag Letter publication, and REALTORS® Land Institute’s March edition. Chicago Fed and ISU surveys show decreases in land values over 2019, and Chicago Fed and RLI show decreases in land values over 2023. ISU survey shows high increases in land values in 2021 and 2022 and a very mild increase in 2023. Some of the differences among these results are due to the timing of the various surveys.

Figures 2 and 3. Percent changes in average land values.

Long-term thinking

Despite the short-term changes that may increase or decrease, investment in land remains a constant hedge against inflation to most, depicted in strong value expectations in 2030 and 2040. Even if that particular year in the future does not show an increase in land values, zooming out enough will show an upward trend in land values. Figure 3 shows the percentage change in land values that have been averaged over the previous 20 years. Note that except for a negative value (i.e., decrease in longer-term averaged land values) in three years at the end of the century, land values have always increased over a couple of decades. The instances where land values decreased even over the long horizon of 20 years are a function of the 1980s farm crisis, leading to less than 2% decreases in the long-term land values for three years. When changes in land values are compared to inflation rates (see Figure 4), the increase in land values beats inflation quite easily. While inflation-adjusted land values would surely show singular instances of decreases, their long-term average also shows a consecutive positive change every year since 2004. The decline in land values in the last decade, when averaged over the long term, is outweighed by the rise in values.

Figure 4. Annual percentage change in Iowa land values and inflation.

Changes in the land market

While land values will pick back up again given enough time and generally appreciate more than inflation, their fluctuations still significantly affect the prospective buyers and sellers currently active in the land markets. By extension, these changes also impact farm managers, rural appraisers, real estate brokers, and others interested in the land market, making it imperative to understand the drivers of land markets and be prepared for the upcoming changes.

We look forward to learning about the direction of the market, the magnitude of expected changes in land values and commodity prices, as well as the major movers in the Iowa land markets at the next Soil Management and Land Valuation conference in Ames, Iowa, on Wednesday, May 15th, 2024.

References

Chandio, R. 2023. "2023 Iowa State University Land Value Survey: Overview." CARD working paper 23-WP 655, Iowa State University Extension and Outreach, Center for Agricultural and Rural Development.
Oppedahl, D., and E. Kepner. 2024. "AgLetter: February 2024." Federal Reserve Bank of Chicago.
U.S. Bureau of Labor Statistics. 2024. "Consumer Price Index for All Urban Consumers (CPI-U)."
Vegter, M., and E. Siefert. 2024. "March 2024 Survey of Farm Land Values In Dollars Per Acre." REALTORS® Land Institute – Iowa Chapter.

 

Rabail Chandio, extension economist, 515-294-6181, rchandio@iastate.edu