farm value farm debt home prices homeowners

Are Farms Headed For a Land Value Bubble?
property values mortgage debt henry george land value tax

A free-market fix to the nation's housing hangover

Some reformers know how to address the symptoms while few know how to transform the system. We trim, blend, and append three 2011 articles from: (1) Corn and Soybean Digest, Jly 26, on farm rent by Kent Thiesse (Vice President of MinnStar Bank); (2) Los Angeles Times, Jly 31, on debt by N. Gelinas (contributing editor to the Manhattan Institute's City Journal); and (3) Bay Citizen, on taxing land by E.L. Stevens, reprinted in the New York Times, Jly 30.

by Kent Thiesse, by Nicole Gelinas, and by Elizabeth Lesly Stevens

Based on the rapid increase in commodity prices and low interest rates, average farmland values across the U.S. nearly doubled in actual dollar value in the decade from 2000 to 2010, and increased by approximately 58% on an inflation-adjusted basis.

In Southern Minnesota, a majority of sales in the past 12 months for high-quality, tillable farm land ranged from $4,500 to $6,000/acre or more, with some recent sales topping $7,000/acre.

Both the FDIC and the Federal Reserve Bank raised concerns that farm land values may have risen too fast. Yet farm businesses and ag lenders might be in a stronger position today than they were in the 1980s:

* The average farm debt-to-asset ratio in the U.S. has declined considerably in recent years, and is now only 10%, which is well below average farm debt levels in the 1980s.

* Much of the farmland today is being purchased by well-established farmers, who are combining this with other owned and rented land, limiting the overall cash flow impact.

* Many farm operators are paying 50% or more down on the land parcels that they purchase, and thus are only financing 50% or less of the purchase price, as compared to financing 75-80% in the 1980s.

* Most ag lenders are limiting how much they will borrow on farm land purchases, both in terms of percent of purchase cost, as well as total dollars per acre, which provides some room for a downward adjustment in land values.

But there are still many farmers who could be quite vulnerable to sudden changes in farm profitability.

To see the whole article, click here .

JJS: If farm sites lose value, their future could be like that of housing. Note, however, it’s not “housing” so much as it is housing locations that fluctuate in value. The value of the structure gradually declines over time.

From 2000 to mid-2006, home prices across the nation doubled, outpacing inflation six times. In the Los Angeles area, prices nearly tripled. Even though home prices have plummeted, much of the debt that funded the bubble remains and is still hampering the economy.

In California, nearly a third of California homeowners with mortgages -- 2.1 million families -- owe more than their homes are worth. And each of those borrowers is underwater by an average of about $93,000. This all adds up to $196 billion in dead-weight debt in California that isn't backed by property value.

Almost $200 billion is more than twice the $79 billion in general obligation bond debt that Californians owe. State bonds, though, generally pay for something useful, like road repairs. Dead mortgage debt doesn't pay for anything but a forehead-slapping "what were we thinking?"

It would cost California's underwater homeowners more than $12 billion annually over 30 years to pay off this debt, even at today's super-low interest rates. That's money that people can't save for retirement or their kids' education, or can't put into businesses to create jobs.

Elected officials have been reluctant to do the one thing that would make a difference: forcing lenders to accept responsibility for their bad lending practices.

The Federal Reserve Board's cheap money has kept banks from having to cut their losses by either seizing and selling off properties that are underwater or reducing loan amounts so that people can stay in their homes. Instead, they have strung out their bad loans.

Federal regulators exacted a $108-million settlement from Countrywide, once the nation's largest mortgage lender. Yet through the Home Affordable Modification Program, federal taxpayers have spent $132 million in "incentive payments" to Countrywide and its investors and borrowers.

The current high number of bad loans in limbo guarantees economic chaos. House prices need to find their lows. That would give buyers confidence to jump back in at prices they could afford without sacrificing their futures to debt.

To see the whole article, click here .

JJS: While the writer’s demands make sense and would help end the this bottom phase of the 18-year land price cycle, they’d do nothing to flatten the cycle forever. To do that, all the money that society spends for land can not stay an object of speculation but needs to be redirected, as was suggested over a century ago.

Henry George, the 19th-century political economist, spent his seminal years in San Francisco. His ideas are remarkably relevant now.

George proposed taxation on land, but not the value of buildings or improvements; that would satisfy all of government’s revenue needs. No complicated income tax code. No dog’s breakfast of special fees and gimmicks to balance government budgets. A tax on land would be devastating for real estate speculators and large landowners, but would be painless for most everyone else.

In California, none less than Willie L. Brown Jr., the former San Francisco mayor and State Assembly speaker, championed Georgist policies, sometimes with the support of John Burton, the longtime Democratic power broker.

Mr. Brown twice introduced state legislation to create a Georgist land-tax regime. A few years later, voters opted instead to slash property taxes via Proposition 13.

Mr. Brown moved on, first to an enormously successful (and centrist) political career, and then to his current gig as a high-powered lawyer who counts major real estate developers and corporate landowners among his clients.

But Mr. Brown was certainly in good company as a Georgist. Devotees over the years have included Leo Tolstoy, Winston Churchill, Sun Yat-Sen, and the inventor of the board game that would become Monopoly.

Joseph E. Stiglitz, the Nobel Prize-winning Columbia University economist, called for the adoption of “Henry George Principles” as part of his prescription to resuscitate the American economy.

To see the whole article, click here .

JJS: While the public recovery of land value is vital, it might not be enough. It might still be necessary to use some amount of that public revenue to pay citizens a dividend. A dividend might make a big difference to farmers, especially small ones, and the dividend might make middle class homeowners willing to pay over the value of their land to their government.


Editor Jeffery J. Smith runs the Forum on Geonomics.

Also see:

Fed balance sheet hits another record size as ...

How a Few Bankers Blew Up Merrill Lynch

When the value of good land rises …

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