New Wealth in Land

February 15, 2000                                               

People used to own land to make a living. Land provided a modest living and values were low. Now it seems many people make a living to own land. Thousands of Southerners with new-economy money are buying up rural land, and the consequences to forestry are potentially significant. As land ownership changes, the pace of rural life will quicken, and the new wealth will gradually spread through the countryside. Some pain may accompany the change, but that is usual with economic development.

Land values are skyrocketing. North Georgia, for example, which takes in about a third of the state, is in the middle of a land boom. Prices in many rural areas are routinely above $2,000 per acre, and rural land often sells for $6,000 or more per acre. Values may not be so robust in many parts of southern Georgia and Alabama, but it seems clear, even in some of the most rural counties, that land is going up.

The land boom derives from our unprecedented economic growth. In the last five years especially, business profits and professional incomes have surged. Many more people can afford land, and it is hard to resist. Land ownership combines spiritual, recreational, and productive enterprises, and it helps unify a person’s life in ways that are uncommon in the modern world.

Also, and perhaps not much noticed by the general market, research is showing that southern pines can grow 4 and 5 cords per acre per year when cultivated intensively. Long-term data are not yet available, but even 15-year pulpwood rotations can justify $1,000 or more per acre for bare land. If a person adds a little hope and speculation about sawtimber production, along with recreational value, $2,000 per acre may look cheap.

It seems that most of the new owners come from town. They bring money with them, and they will probably prefer a tidy world. Perhaps the first consequence of the land boom will be a gradual sprucing up of the rural South. New landowners will call county officials and ask for improved services—roads, bridges, and garbage. And new landowners will often tidy up brush piles, recover bare soil, get trees planted, install gates and chains on roads, remove broken-down buildings, remove trash, and keep an eye on their boundaries.

With rising land values, more traditional landowners, those who earn much of their living from the land, may grow scarce. The estate tax will play a hand here. Bare land is one of the most illiquid components of an estate, and as the older landowners pass away, their executors will find the new land boom produces unprecedented estate valuations. A decedent who earned a living from the land may not have a large, modern portfolio of other assets from which to pay the estate tax. The tax will force timber cutting, even more so than in the past, and it will get more and more difficult to cover the tax on astronomical land values by liquidating timber. This represents a buying opportunity for new owners.

New landowners may be warmer to governmental regulation of land use. Successful professional and business people usually live in subdivisions with covenants and zoning. It is common to view these restrictions as protecting and increasing home values, so such people will bring similar attitudes to the countryside. Owners motivated by recreational and amenity values are likely to want neighboring land to conform to their land-use ideals.

County governments impose much of the new regulation. Regulatory law almost always provides for agency enforcement. A landowner who sees violations on his neighbor's land need only call the proper local authorities, which are often quite responsive. From a landowner’s viewpoint, agency enforcement is more predictable and less expensive than the old common law alternatives of lawsuits in trespass or nuisance. Regulatory law with agency enforcement spreads the costs to taxpayers generally.

New owners are likely to have interests beyond timber production. They will hunt and fish, providing more opportunity for wildlife professionals. New owners may become interested in song birds, in developing particular ecosystems, in rare plants and animals, or perhaps in building a cabin to stay overnight near a pond or a favorite secluded area. In all of this, they will bring money and invest it in their land.

The forest industry faces interesting issues. If industry embraces more intensive forestry, and if they increasingly participate in international opportunities, it is natural to ask whether it is still prudent to maintain so large and sprawling a land base in the U.S.

It seems that firms in the forest industry would be wise in the long term to undertake a thoughtful program to sell off a significant share of their timberland, opting instead for intensive forestry in strategic areas near already permitted manufacturing facilities. To some extent this has been going on. But it may well increase. Growing local regulation, as mentioned above, provides an added incentive. Although it may not be wise to own timberland in one county only, and thereby become hostage to one government, the cost of keeping up with local regulations urges retrenchment in industrial land holdings.

Tax policy induces industry liquidation too. Corporate income from timber growing is taxed twice, at the corporate level and again as dividends. In both cases it is taxed at ordinary rates. Although individuals face an estate tax, they at least can get capital gains treatment on income from timber and land sales. And institutional investors for pension funds generally escape both income and estate taxation. This helps lubricate the sale of large blocks of timberland to pension funds.

Pension funds face other issues. They invest in timberland for timber growth, timber price appreciation, and hoped-for increases in land values, as well as reduced risk from portfolio diversification. As land values rise, existing owners clearly benefit, but prospective new entrants face a declining ratio of earnings to asset valuations, making forestry more speculative.

Although rising stock prices produce similar issues elsewhere in the economy, forestland may pose special problems. Large tracts need to be sold in retail units to take advantage of demand by individuals, which adds to the costs of liquidation. Further, if pension funds adopt intensive forestry to boost returns from timber growing, they may find such land harder to sell later to individuals who will likely want land with more diversity. And if they decide or are forced to sell quickly, perhaps to close out an account, the price may be yet lower. Finally, as local regulation grows more pervasive, as wood manufacturing comes under increasing environmental pressure, and as the industry grows overseas, markets in the South may grow to resemble those of the Lake States and Northeast. In those regions land values relative to timber growth have been higher for many years, and pension funds are not so heavily invested there.

Economic growth combined with existing policies seem to favor increasing pension fund ownership, at least in the short term, and increasing individual ownership in both the short and long term. These owners have one thing in common—money.

Money changes things. In past decades when landowners used their land for a living, their behavior and the character of their activities was relatively predictable. They were constrained for the most part by agricultural and forestry opportunities. Landowners with money have always been less constrained.