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Down on the Farm
By Francis X. Gilpin
Associate Editor
One of the nation's leading proponents of the theory that American real estate isn't overvalued came to Lakeland to try to reassure big Florida landowners that they don't have to rush to sell out to developers.
"The boom is not going to last, but it's not going to burst," says David Lereah, chief economist for the National Association of Realtors. "The air will come out of the balloon, rather than the balloon popping."
Lereah made his remarks April 22 at a Polk County country club, where local commercial real estate broker Dean Saunders had gathered family farmers, ranchers and others with large land holdings that they might be looking to unload.
Saunders, a former state legislator, also brought in retired University of Florida professor John E. Reynolds, who took the occasion to release his annual survey of farm property values. "The percentage change in most categories was in the double-digits," Reynolds wrote in his report for 2004. "Survey respondents indicated that increases in agricultural land values were primarily due to strong nonagricultural demand for land."
Lereah attempted to put the stratospheric increases in American property values over the past three years into proper context. "You won't see these double-digit gains forever," Lereah says. "You can't sustain that kind of crazy, frenzied pace."
But Lereah acknowledged that the price frenzy hasn't stopped real estate speculators from descending on some Florida markets. There is considerable evidence that the most dangerous speculation is in the Orlando area and along the Southwest Florida coast, especially around Naples.
Investors are using adjustable-rate mortgages to finance the purchase of rental properties that project negative cash flow. Or they're using interest-only loans to scoop up condominiums before the units are even built.
"That means they are having very high expectations of future home values," says Lereah. With a three- to five-year holding period, these speculators assume double-digit price appreciation will continue and pay off for them when they sell.
"That's what they're basing their investment on," Lereah says. "That could come back to really haunt them down the road."
Reynolds sees a little of that in rural communities, too.
When the market for Florida farmland started heating up a few years ago, Reynolds says the sales were mostly for cash. Today, many deals are financed. "If it gets to be highly leveraged, then I'd be much more worried," says Reynolds.
Citrus groves in places such as South Florida fetch the highest prices from developers, according to Reynolds. Income from orange or grapefruit crops keeps down the holding cost of the land until building can take place, he says.
"If you look into the future, the demand could be a little greater where there is some cash flow," says Reynolds.
Aside from speculative pockets around the country, however, Lereah claims steadily rising real estate prices are entirely justified by legitimate market forces. "It's not just low mortgage rates," he says. "Something is happening in the real estate sector."
Baby Boomers are looking for vacation or retirement homes. Their children, so-called Echo Boomers, are entering the housing market for the first time. So are foreigners along with the many immigrants who entered the country in the 1970s and 1980s and now have the financial stability to achieve the American Dream.
On the supply side, senior citizens are living longer and healthier. They don't have to leave their nice old houses for the nursing home as quickly as their parents did.
Thus, prices are soaring. "This is why real estate is booming," says Lereah. "It's not low mortgage rates."
To hear Lereah tell it, the news media are among the biggest threats to a robust housing industry. "There's a lot of people out there that are very negative," says Lereah, who fields telephone calls from news reporters every business day. "The media, they want to see the end to this real estate boom."
Yet Lereah isn't a Pollyanna about the future.
Higher energy prices don't worry Lereah, but President George W. Bush's deficit spending does. "It's the deficit that will kill us," he says. "We are starting to look like the Reagan years once again."
The United States is heavily dependent on overseas funding for its bond markets. If foreign investors cool to U.S. Treasury obligations, interest rates will have to go up to attract new buyers.
Lereah doesn't like Bush-style Social Security privatization, either. The Realtors fear that working Americans with private Social Security investment accounts will move their wealth out of bonds and into equities, which also could jack up interest rates.
Finally, Lereah dislikes the Bush administration's political assault on government-sponsored enterprises such as the Federal National Mortgage Association, better known as Fannie Mae, and the Federal Home Loan Mortgage Corp., or Freddie Mac.
"Because of Fannie and Freddie, you have much higher home sales and lower interest rates," says Lereah. "You take that away: home sales decline, mortgage rates go up, and land values will follow suit and drop a bit."
Earlier in April, Lereah met with Alan Greenspan. The Federal Reserve chairman brought along most of the Fed board of governors, which the Realtors' economist took to be an acknowledgement of the importance of housing to the American economy.
Lereah declined to reveal much of what was discussed with Greenspan, after learning that news reporters were present for his speech in Lakeland. But he did venture to say that the average 30-year, fixed-rate mortgage should climb no higher than 6.5% by the end of 2005.
That's a full two percentage points below where Lereah says he would start to be concerned about the American housing market. Anything under 8.5%, Lereah says, "I think we're going to be in relatively good shape.
"It may not be a great market three years from now. But it'll still be a good market."
Central Florida agricultural land
Estimated value in dollars per acre
May of 2003 May of 2004 Change
Citrus Mature oranges $5,721 $6,409 12.0%
Mature grapefruit $3,914 $4,518 15.4%
5- to 7-year-old groves $4,889 $5,340 9.2%
Cropland Irrigated $2,998 $3,709 23.7%
Nonirrigated $2,597 $3,237 24.6%
Pastureland Improved $2,934 $3,608 23.0%
Unimproved $1,899 $2,267 19.4%
Source: Florida Land Value Survey, Department of Food and Resource Economics, University of Florida
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