Last week the Federal Reserve announced that they would raise key interest rates by an additional quarter-point, bringing the key interest rate to 5.25% to 5.5%. With the potential for further rate hikes this year on the horizon, let’s look at how these rising interest rates impact landowner affordability and what they may mean for buyers and sellers later in the year.
What is Happening with Federal Interest Rates in 2023?
Over the past 14 months, the Federal Reserve has raised interest rates by 5 percentage points, elevating the key interest rate to its highest point in over 20 years. The driving force behind these increases is the Fed’s goal of reducing inflation to around 2%. While these rate hikes have brought inflation down to around 3%, the Fed has indicated that there’s still work to be done in order to reach their 2% goal.
In a statement following the Fed’s most recent meeting, Fed Chair Jerome Powell indicated further rate hikes in September or November are still very much on the table, though that will be determined largely in part by the two inflation and job reports set to come out before the Fed’s next meeting in September.
How Do Rising Interest Rates Impact Land Buyers?
For land buyers, the impact of rising interest rates depends mostly on the type of land they’re looking to purchase. Farmland purchases remain relatively insulated from interest rate fluctuations due to the cash-based nature of these transactions. However, recreational land sales are more likely to be affected since these purchases are often financed through traditional loans.
During a recent episode of the National Land Podcast, Chief Economist from Farmer Mac Jackson Takach spoke to the overall impact of rising interest rates in 2023 on farmland values, stating, “I think as long as we can maintain a positive rate of movement in the food economy and the farm economy, I don’t expect negative impacts on land values. However, it’s all about generating a sustainable return. Can agriculture continue to generate a sustainable return in the face of higher interest rates? That’s what it’s going to come down to.”
As interest rates increase, so too does the cost of borrowing money which can result in higher monthly payments for buyers. As a result, many land buyers are forced to work with smaller budgets for their purchases. For example, a typical recreational buyer with a budget of roughly $500,000 is essentially working with a budget of around $400,000 due to the increased monthly payments brought about by high-interest rates.
For anyone looking to buy land this year, paying cash is the best way to avoid high-interest rates. It’s also important to keep in mind that the Fed has indicated that further rate hikes may be coming later in the year. For some buyers, it may be advantageous to finance and purchase a property at an affordable rate now before being priced out by higher rates in the future.
How Do Rising Interest Rates Impact Land Sellers?
High-interest rates have a significant impact on landowners and sellers as well. The increased borrowing costs leave potential buyers unable to finance their land purchases. As a result, there is a reduced number of qualified buyers in the market, which could prolong the time it takes to sell a property.
At the same time though, the current real estate market across the country is experiencing a massive lack of inventory, giving sellers more say in the sale of their property. With fewer properties available on the market, landowners may be able to command a higher price for their land than they would later in the year when listing competition increases. Waiting for rates to come down may result in more competition and could require you to make more concessions in the price or sale of your property.
Takach also spoke on measures to improve landowner affordability during times of high-interest rates, stating, “The one piece of advice I give to people during times of change is that now is the time to give yourself the most optionality and get prepared to make strategic decisions. During times of change when you’re pivoting from a good economy to a bad economy or vice versa, that’s the time to have a little bit of working capital. Having that optionality gives you an edge over your competitors.”
What Do High-Interest Rates Mean for Landowners in 2023?
There’s still much uncertainty in the market as to where interest rates will go in the latter half of the year, as well as what may be in store for the real estate sector as a whole. What we can be sure of right now is that we’re looking at a seller’s market where land values are still relatively strong, and landowners willing to list and sell their property may net a higher profit than later in the year.
The best thing anyone looking to buy or sell land in the second half of 2023 can do is to stay up-to-date with the latest industry news. If you’ve got more questions about how rising interest rates can impact landowner affordability, consult your local Land Professional.