Monday, August 16, 2010

Yet another outlandish prediction...

Folks have asked me several times whether I think we are in a land value "bubble".  Bubbles are notoriously hard to identify when in progress.
 On the way up, bubbles encourage excessive investment in the bubble sector.  On the way down a bursting bubble can create wealth shocks, liquidity shortages, and balance-sheet death-spirals.  For both of these reasons, it would be good to be able to identify and pop bubbles.  Identifying bubbles isn't easy, however, because, especially when interest rates are low, prices can increase rapidly with small, rational changes in investor expectations.  But the difficulty of identifying bubbles is reasonably well known.  What I think may be less appreciated is that bubbles are hard to pop even when you know that they exist. [More]
Therefore, my opinion will be a pure shot in the dark.  But here it is:

We're entering a farmland bubble.

What this means is I expect farmland gains in value in double digit percent for 2-4 years, ending at least 50% higher than today, and depressing rent yields (even though they will rise, too) to 2% or lower.  By entering, I mean today's values will be viewed as rational and the level to which we might return when and if the general economy can accelerate growth above 2%.

This bubble could last far longer, however.  This is the primary reason IMHO:
“The number-one fixed-income conundrum is ‘Where do I go?’” said Mitchell Stapley, the chief fixed-income officer for Fifth Third Asset Management, who oversees $22 billion in assets. In credit markets, “the supply of sleep-at-night quality bonds has just collapsed,” he said in an interview from Grand Rapids, Michigan. [More]
It is by comparison that a hard-to-understand land market will perhaps make a little sense. Farmland is a "sleep-at-night" asset.

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