Agricultural Land Prices Soar

Aside from North Dakota and the Washington D.C. metro region, home prices have yet to show definitive and consistent upward movement.  Though there has been no meaningful change in the 20-metro Case-Shiller home price index for the past three years, farm land prices in the Midwest have been soaring.

Farm land prices in Illinois, Indiana, Iowa, and Wisconsin have risen by better than 50 percent from 2006 to 2010.  They are on track to notch up another strong gain in 2011.  As of the third quarter this year, land prices were up 25 percent from just one year ago.

The rising agricultural commodity prices, along with higher values of livestock, are contributing to the land price gains.  But the much stronger land price gain may reflect a desire to protect against higher potential inflationary pressures.  There has been a lot of printing of money, not only in the U.S. but in many other countries as well.  The very high gold and silver prices partly reflect investors’ desire to hold on to something tangible.  However, given the extraordinary run-up in gold prices, which have gone from under $300 up to now almost $1800 per ounce, some investors have been searching for alternate inflation-hedge investments.  Farm land has been one beneficiary.  Farm prices soared during the inflationary times of the 1970s, before falling abruptly in the early- to mid-1980s when combined forces of very high interest rates, economic recession, and falling inflation reversed some of the price increases.

Could home prices soon follow the recent farm land price movement?  They are not an apple-to-apple ratio because some land is not suited for agriculture. More importantly, there is plenty of land in the U.S. from a country-wide point of view.  But one should not be surprised if home prices at some point get a little lift from the broad rising wave in land values.  The timing of when home prices would get that partial lift is always difficult.  But given that housing prices have already fallen significantly (overcorrected in many parts of the country) and thereby have brought about exceptionally high affordability conditions for fresh buyers, the price gain occurrences could be sooner than most people expect.