Will interest rates slow land prices?

By Matt Reese

While officials with the Federal Reserve have kept interest rates near zero since 2020, they approved a .25 percentage point increase in March, the first increase in more than three years, with additional increases expected in 2022.

Bart Sheridan

With a long, continued stretch of very strong farmland values, will the increasing interest rates slow things down?

“This will affect those who are in the residential side of things, and this will have an effect on the land, but it is hard to say what it will be. It always lags after the interest hikes,” said Bart Sheridan, of Sheridans, LLC based in Cedarville. “Those 25 basis point jumps — we are expecting to have as many as four this year. The first increase may be an impetus to go out and buy more land before it goes higher. The first one was in March and might propel some people to get out and do it before it really hits. That 1% over a year, is that really going to do much at all when you’re talking about this kind of money?”

Interest rates will definitely be a factor to watch with regard to the land market, but Sheridan said there are other big factors at play. 

“A lot of it comes down to legacy. That is a big driver we see. Older farming families who want to continue to farm, over the years they inherited acres and financed land at $1,500 an acre or $2,000 an acre, and their leverage potential is higher and they can go higher. If there are children or grandchildren who want to stay in the business, they need to get bigger. They realize they can’t do anything without the dirt, so they are willing to pay those prices. Over time, they’re making it work. These prices for crops now are going to fuel it even more. This is not all of it, but it is a lot of it,” he said. “We also see 1031 tax deferred exchanges continuing to happen. We had seen a slowdown in that since 2008, but now we are seeing more 1031 money come in. The legacy farmers, the good crop prices and the 1031 money are conspiring together to shoot these land prices sky high.”

How high?

“There is an end, but I don’t see it in my sights yet. Back 25 years ago, if you got $3,000 an acre for land you’d think ‘I’ve got it made.’ Then it was $4,000, then it was $7,000, and now it is $10,000 and up. We just sold a farm for $13,000 an acre not too long ago. That is why the auction method is such a good tool to have at our disposal. We sell properties both through private listing and auction, but in a sellers’ market like this it is hard to set a list price and feel good about it,” Sheridan said. “I have talked to people saying, ‘You know maybe if I wait it will get even higher.’ We have seen things slow down and with less land for sale it has driven prices up. It is a great time to sell, even with the interest rate hikes. It is a great time to get out while it is as high as it is right now.”

The demand is out there for those looking to sell. It may be a different situation for those looking to buy.

“We’re getting calls from people looking for land. You have to get out and beat the bushes. When you have a low supply of anything, you have to go and find it. If you do a search in any individual county in Ohio and look at absentee landlords, those are the people who may be looking at transactions here soon. I would suggest that now is the time to do that,” Sheridan said. “The number of sales we are seeing in our area is not strong. But the sales themselves are. The real estate market on the ag side is strong. It is a great place to put your money, but you need to be careful. Legacy farmers can do that, but if you are just getting into the market or looking for a place to put your money into a tangible market, it could be a good time to buy, but it also could be a good time just to wait and see what happens. I hate to give that advice, but something has to give at some time. It is hard to see land going up a tremendous amount right now. When people tell me, ‘Well it could get little higher,’ I tell them, ‘It could get a lot lower.’”

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