Strong farm earnings dampen impact of downturn in residential land markets

Over the last decade, most regions of the country experienced a boom-and-bust cycle in housing values. Because farmland is often the source of land used for new residential construction in urbanizing areas, changes in housing markets can affect farmland values. The effects are likely to be greatest for farmland closest to urban areas. Examining the relationship between value and distance reveals that the value of farm real estate is typically highest for farmland located less than 10 miles from the borders of a population center, and then tapers off at greater distances. Further, farm real estate values are higher for farmland near larger cities. For example, the average value in 2008 for agricultural parcels within 5 miles of a city of at least 50,000 residents is approximately $16,801 per acre, but when parcels the same distance from a town of at least 5,000 residents are included, the average value is $10,705. While the effects of the housing downturn may have the largest impacts on the 20 percent of farmland that ERS estimates to be subject to some form of urban influence, residential housing exists even in the most rural areas--so changes in rural housing markets have the potential to affect the values of far more farmland.

A comparison of farm real estate values between the boom-and-bust periods in the residential housing market reveals that average farm real estate values increased in all States during 2001-04, and the gains were often as great as or greater than gains in the rural housing market. From 2007 to 2009, average farm real estate values declined in many States as the housing bubble burst, but the reversals were generally more moderate than in the rural housing sector. In 19 States, notably California, Oregon, Washington, and Nevada, farm real estate values actually increased in 2007-09 while rural housing values declined. These trends suggest that strong gains in farm earnings and declining interest rates during 2007-09 helped the farmland market withstand the significant downturn in housing markets.

Many factors affect whether current trends continue

The current demand for crops for food and as an energy source continues to help support farm incomes. While stable farm incomes and interest rates could keep farmland values at or above their current levels, increasing interest rates, increasing volatility in agricultural markets, or sharp reductions in or elimination of government payment programs could lead to reductions in farmland values. Interest rates on farm loans and investments continue to be relatively low and stable, but they are sensitive to many factors outside of the agricultural sector's control, including the impacts of changes in monetary policy, tighter credit markets as the general economy recovers, and rising risk premiums on loans in general. Though as a whole the farm sector is currently not highly leveraged, if interest rates increase rapidly some highly leveraged farms may have difficulty servicing real estate debt. Gradual changes in interest rates are more the norm, however, and are less likely to have as immediate an effect in farmland markets because market participants have more time to adjust as expectations change.