Our View of the Farms & Land Market

by Gayle on July 28, 2011

Virginia Farm Sales 2011

Central Virginia Farm Sales 2005-2011

We will begin by recapping where we are now and then speculate on where the market is heading for farms and land. Both market segments, which include many of the estate properties sold in the Charlottesville area, suffered a significant drop-off from the top of the market in 2005. Beginning in 2006 and carrying into 2009, unit sales in farms fell to 32% of peak and land sales to 21%. With general residential sales only falling to between 50-54% of their 2005 levels by 2009, it is apparent that the land and farm markets have taken the biggest hit during the downturn.  Why is this?  For land sales, the initial change was likely the result of the precipitous fall in new home construction. Once it was apparent that new homes were not in demand, builders stopped buying and selling lots. That explains the sharp fall in sales of parcels under 5 acres.  But the percentage of sales under 5 acres remained fairly constant, dropping from 63% in 2005 to around 57% for each year afterwards, and the drop-off from 2005 levels for these properties was slightly less than for the sales of 5 acres or more.

 The greater drop in sales of properties over 5 acres is partially explained by the problems in new home construction as fewer large tracts were being purchased for development purposes.  That explains the commercial side of residential land sales, but the bulk of sales in this area have been to individuals.  And for that explanation we will now shift our focus to farm properties, as we believe the causes for the two are very similar.

The number of farm properties is very low relative to the other categories (158 currently active properties compared to 1798 for land and 2400 for residential), so it is very difficult to analyze specific trends.  However, the two thirds drop in total farm sales from 2005 to 2009 appears to be statistically significant. So, why have farm sales dropped off so much?  There are a number of reasons. Firstly, in our experience, many people looking for farms, and acreage too, are not looking for a primary residence.  They are either looking for second homes or lining up their future retirement property.  These buyers have never been in a great hurry to purchase and, with the recent recession and general collapse of the real estate market, have pulled back from actively searching.  Those who have been willing to purchase have found the financing rules have changed.  Many banks have all but pulled out of the market for loans where significant value is in land, whether for acreage alone or farms.  Finally (and this one covers all types of real estate) buyers are shopping deals and many feel that the market has yet to reach bottom.

Virginia Land Sales 2005-2011

Central Virginia Land Sales 2005-2011

So where is the area market for land and farms heading?   Three months ago the answer might have been “recovering.”   It looked like we had reached bottom in the number of sales in 2009 and began to see an upswing in 2010.

The numbers for the first quarter of 2011 were promising, indicating that 2011 would at least be as good as 2010.  Within the past three months, however, the recovery seems to be showing signs of sputtering, government stimulus for first time homebuyers has ended and foreclosures continue to flood the market with distressed sales.  Though some of these are not major factors directly affecting farms and land, it has an unsettling effect on buyers.  Until the fundamentals in the economy improve, we should not expect any drastic improvement in the market.  For the buyers that are out there, sellers should expect lower than hoped for offers. And new sellers who have not turned on the news in a few years and put their properties on the market at 2005-2006 prices should expect to hear more than once that their property is overpriced as farms show 34 months of supply and land a whopping 95 months at the rate of sales over the past twelve months.  Add to this the drop in conforming loan ceilings (max $729,750 now down to $629,250 October 1, 2011 unless congress extends it) which could see the cost of borrowing and difficulty in qualifying for jumbo loans rising, giving potential buyers further cause for delay. 

So is there anything positive in all this?   We think so.  Properties are now currently at bargain prices and there are people currently looking seriously.  Sellers who have priced their properties at the current market have found receptive buyers.  And this area is still attractive to people looking to escape the congestion and taxes elsewhere.  We continue to see that there is a tremendous amount of pent-up demand out there, waiting for the right signals to move into the market.  Expect supply to go up along with an increase in buyers as there are a large number of people waiting to sell their current properties before buying new ones.  But don’t expect this trend to begin until the economy turns around.   The strength of the recovery in real estate will not be any greater than the economic recovery.

And what if a second dip becomes a trough?   Well, for people looking for a farm or acreage, that might seem like a good place to sit out an economic Armageddon.

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