The Texas land market is beginning to show signs of cooling. In the second quarter of 2008, land prices failed to exceed 2007 2nd quarter prices. Ranch land sales fell 30% from 2007 levels and commercial land sales fell by even larger margins.
There are also signs of buyer resistance to seller asking prices and the buyer sentiment appears to be they feel they are buying at the top of the market. Sellers seem to share that sentiment and are electing to list their properties at today’s high prices.
If the economy continues to drag on the Texas land markets, land prices may stagnate or worse begin to decline. This may also lead to investor dollars being trapped if owners are not willing to reduce prices to induce sales. This reveals one of the pitfalls of investing in land. Land is not an easy investment to liquidate like stocks, bonds, and mutual funds.
If owners are highly leveraged, a slow land market coupled with a slow economy can wreak havoc on their finances. Unable to afford their land payments, owners may be forced to list their property. However, with a slow land market the property may not sale, forcing the owners to reduce their price; possibly to the point that proceeds will not be sufficient to cover debt.
This very scenario has been played out across the nation in the residential markets. In the land markets however, no one knows how highly leveraged owners are. Most likely there are a reasonable number of owners who are highly leveraged. However, if we look to history, most land buyers, especially large ranch buyers, generally had substantial amounts of money and either paid cash or were not highly leveraged.
This fact leads me to believe that most land owners who are highly leveraged will be owners of small tracts in and around metro areas such as Austin, San Antonio, and Dallas/Ft. Worth. The one exception being the large tracts purchased by developers. With the residential slow down, developers will have to scale back and may not have the resources necessary to hold the land until markets improve.
Fortunately for Texas land owners, the Texas land market cooling occurred late in the economic slow down. The economy is showing signs that we may be at the bottom and could possibly see improvement by the end of 2009, beginning of 2010. If this scenario plays out, Texas land markets may be spared the brutal cycles that other markets across the nation have endured.
Source: Tierra Grande – Journal of the Real Estate Center at Texas A&M January 2009
