Posted on June 29, 2011 by Pete Stewart
I just returned from a week’s vacation at the beach. Like many families, we took a little time to check out beach properties for sale. The first property we looked at was one that we toured 7 years ago, and it was listed for about same price today as it was in 2003. We figured that was not surprising given the state of the real estate market. We looked at a couple newer homes as well, one that was built in 2006 and another built in 2008. Of course, these homes, once listed for stratospheric prices, were now priced about the same as the first property. When I came home, I checked a file that I keep and was able to find the old listing of the first property (the one we looked at in 2003). The difference between the list price in 2003 and 2011 was actually 15% - representing a growth rate of about 2% per year. That seemed a little low in historic terms, but still, it made sense to me.
Then I started thinking about my recent experience of selling and buying a home in my local market in Charlotte, NC. In 2010 I sold a modest home in a stable subdivision, established in the mid 1990s. Despite the difficult economy, I was able to eke out a 3.3% per annum value increase. This percentage value increase is strangely close to the value increase of the beach house and to what most consider the long-term value growth rates in houses, about 4% +/- per year.
The same pricing trend is holding true for the new home we purchased. Deeply discounted off the “bubble price,” houses in the neighborhood have bounced back to levels that are slightly above 2003, when the subdivision was started. Seems like we have trend here. In fact, it seems to be another great example of the economic/financial theory: all pricing returns to trend line. This “return to trend line” theory is a very important concept in commodity pricing and has been applied to other pricing trends, although less vigorously.
What if we applied this theory to southern timberland? What would it mean? Can we use this theory to draw parallels? Let’s see.
Let’s take a few starting points and see, based on a 3.5% growth rate, where timberland should be priced based on our return to trend theory and see if it would be in the range of today’s selling prices, which fall in the $1,250 to $1,400 per acre range.
1977 – In 1977, the economy was characterized by high inflation and interest rates. The pension fund community had never heard of timberland investment, and pine sawtimber prices were about $15 per ton. The high inflation environment drove timberland prices to very high levels. Transactions at the "exorbitant" level of $500 per acre where not uncommon. Fast forward to 2011, and that $500 price level grown at 3.5% per annum would be $1610 per acre.
1990 – In 1990, the economy was desperately trying to pull out of a recession. Interest rates had moderated and sawtimber prices were at today’s levels. Inflation was near long term levels, but after a long recession and a poor housing market, timberland prices were very depressed. At this time, a lot of southern timberland traded for about $350 per acre. If we grow that forward at 3.5% per year, it would indicate that prices of southern timberland should be hovering around $720 per acre.
1995 – In 1995, the economy had recovered from the last recession and was (although we didn’t know it) at the start of the longest bull run in housing known to man. The spotted owl crisis in the Northwest pushed demand to the South. Timber prices were roughly 40 percent higher than they are today, and timberland was selling for about $700 per acre. Grown forward to 2011 at the 3.5% per annum rate, timberland would be at $1,214 per acre.
1998 – In 1998, the economy was in expansion mode; while interest rates and inflation remained under control, the investment community had discovered timberland and timber prices were at record highs. Timberland prices elevated to $1,000 per acre. Inflated at 3.5% annually, timberland would yield a price of $1,564 per acre.
2006 – In 2006, the timberland world has gone mad, a result of intense demand for quality commercial timberland tracts. Timberland is tulips, interest rates are low, and unlimited access to credit cause timberland values to skyrocket - $1,500 an acre is the “new normal.” Timber prices are waning, but still strong. On a trend line growth of 3.5% per year, indicative timberland prices should be around $1,780 per acre in 2011.
2011 – The economy is struggling; sawtimber prices are at 1990 levels. Housing starts are roughly half of what they were in 1990, and no turnaround is in sight. Credit is still cheap, but hard to get; inflation is low. Timberland prices are between $1,300 and $1,400 per acre.
Take our poll. Final results will be published on our blog, along with our take on where timberland prices are headed.[polldaddy poll=5166827]
Comments
07-05-2011
I understand the concept of trying to determine a trendline of timberland pricing.
However, “timberland” is a general term for a highly diverse asset. Some “timberland” is highly productive and grows a merchantable crop in 30 years or less. Other “timberland” is much lower in productivity and can take 60+ years to grow a merchantable crop. Based on a long look back at history, I think a 2% to 3.5% increase is realistic for fairly productive timberland.
Comments
07-05-2011
“... real sawlog price increased between 1870 and 1973 at an average annual rate of 2.12 percent.” (Manthy, Journal of Forestry, April 1977). What is the trend in real sawlog prices since 1973? Does timberland have value other than as a source of sawlogs?
Comments
07-07-2011
In the Mid South ( Mississippi- La. & Georgia) canopy abuse & fast expanding undergrowth of both exodic invasives & native non-lumber species is slowing grow out projections from 30 years to 45-55 years making terms for regrowth ROI very poor. In addition, selling “timberland” at prices described above is quite optimistic to say the least. Very small amounts of southern timberland can even in this downward trend be purchased for $700.00 per acre. High yield privately owned timberland is still steady, and we think it will recover to 2006 ( $1250.00) values within 18 months.
Comments
What Is Timberland Worth: F2M Market Watch Poll Re
07-18-2011
[...] few weeks ago, I posed the question, what is timberland worth? I spoke about my experience on a recent beach vacation and the depression in rental property [...]
Comments
08-08-2011
Pete, in my neck of the woods, land/acre and pine sawtimber?MBF Doyle have been approximately:
Land Year Pine Sawtimber
$1 1931 $1
$3 1941 $3
$15 1951 $15
$35 1961 $35
$100 1971 $100
$400 1981 $200
$300 1991 $300
$600 2001 $400
$1200 2011 $300
Answer to Jay; Yes, But ....
Comments
Timberland Mens Bromilly Boots Wheat Nubuck 8 UK R
06-06-2012
[...] blog.forest2market.com/2011/06/29/are-350-per-acre-timber… [...]
Comments
What is Timberland Worth? A Response from F2M Mark
07-17-2012
[...] blog.forest2market.com/2011/06/29/are-350-per-acre-timber… [...]