Today I received an e-mail from a client who wanted to know what I thought about land prices relative to the stock market and other commodities. Here's what I wrote back:
"Good question. I don’t know.
Here is what I do know.
1. Oil and therefore gas prices were manipulated up by speculative buying (read hedge funds and private equity) and now have been crushed by selling resulting from redemptions. Now it looks like the market should maintain between $40-$60/barrel or lower for the foreseeable future.
2. The stock market always reflects the collective attitude of investors with regard to the future. Investors and the public in general expect the economy to continue to slow for some time and the market is merely a reflection of this mind set.
3. Residential real estate will not bottom out until lending institutions bite the bullet and bail on foreclosed properties at sacrificial prices and new buyers can borrow at 4.5% or less.
4. The risk of inflation makes long bonds look extremely speculative.
And land?
1. We didn’t have the speculative run-up associated with other commodities or housing.
2. Sellers realize it is a buyer’s market and are willing to make concessions with regard to price and terms, however prices have remained relatively firm for two very important reasons:
a. Many sellers of ranch and recreational property are perfectly willing to wait, there is a tradition with ranch properties in particular that it often takes a long time to move a property
b. There is a relatively limited supply. Whereas there are millions of residential properties on the market and supply and demand is fairly homogenous, ranch and recreational property is not. A motivated buyer knows that when they find a perfect property they will not be able to duplicate its purchase if they do not act. The one size fits all style of residential real estate makes homes a commodity. For the ranch buyer a purchase is a unique long term investment.
3. One of the positive signs in today’s economy is the rise in personal savings. The public is spending less in all areas and beginning to put money aside. As these savings grow and as the economy heals, people will begin to look for alternatives to the cash they are holding.
4. In the last 90 days I have written five contracts. Two fell out because of financing. The buyers were motivated and had cash for down payments but the lending community raised standards to a level that made these purchases impossible. However, three of these deals are going to close and they are all cash. In each case the sellers were willing to accept offers below asking price but there were no large discounts.
5. I continue to have interest at every price point from motivated and qualified buyers. There is no sense of urgency but a steady sense of pursuit for the appropriate property. The market is and has been product driven. If a property with identifiable desirable characteristics arrives on the market it will attract immediate interest and a buyer.
Well, so much for pontificating. I’m confident that long term we will look back at these times and see opportunities we might currently be overlooking."
Best,
Dale
