Buy land: They’re not making it anymore. That often repeated adage sounds like good financial advice.
But over the long run, it hasn’t been. Despite solid price increases over the last few years, land and homes have actually been disappointing investments. It’s worth considering why.
Let’s start by looking at the numbers. The best long-term data on land in the United States is for farmland, which is valuable in its own right and can also be considered a great reservoir that can be converted to housing and other purposes at opportune times.
Over the century from 1915 to 2015, though, the real value of American farmland (deflated by the Consumer Price Index) increased only 3.1 times, according to the Department of Agriculture. That comes to an average increase of only 1.1 percent a year — and with a growing population, that’s barely enough to keep per capita real land value unchanged.
According to my own data (relying on the S&P/Case-Shiller U.S. National Home Price Index, which I helped create), real home prices rose even more slowly over the same period — a total increase of 1.8 times, which comes to an average of only 0.6 percent a year.
What all that amounts to is that neither farmland nor housing has been a great place to invest money over the long term.
To put this in perspective, note that the real gross domestic product in the United States grew 15.5 times — or, on average, 3.2 percent a year — from 1929, the year official G.D.P. numbers began to be kept, to 2015. That’s a much higher growth rate than for real estate. But why?
For home prices, a good part of the answer comes from supply and demand. As prices rise, companies build more houses and the supply floods the market, keeping prices down.
The supply response to increasing demand may help explain why real home prices nationwide fell 35 percent from 2006 to 2012 (and even more in some cities). Investment in residential structures in the United States was at near-record levels as a percentage of G.D.P. just before the price declines. Prices have been rebounding since then — and so has construction of new houses.
But it is true they aren’t making land anymore. And, in fact, farmland prices have done better than home prices over the last century as well as in the worst years for housing, the years bracketing the recent financial crisis. Real farm property values actually rose 21 percent over the full financial crisis, that is, between 2006 and 2012. For farmland, there was only a small 3 percent drop in real price from 2008 to 2009, which was quickly reversed.
Don’t get too excited. They aren’t making land, but because of technological advances collectively called the Green Revolution, there has been something akin to a long-term supply increase. This 20th-century miracle in agricultural science greatly improved crop yields per acre. From the standpoint of farm output, there was no need for new land. This revolution involved the discovery by Fritz Haber of a cheap process to produce ammonia for fertilizer at the beginning of the century and the discovery of new high-yield strains of wheat by Norman E. Borlaug at midcentury. Both men won Nobel Prizes for their work. These innovations permitted multiplication of yields per acre and very likely saved hundreds of millions of lives from starvation worldwide.
The effects of this revolution are complicated. One might think that progress that improves yield per acre would put upward pressure on land prices. But that is not necessarily so, if it occurs globally and prevents food price increases that would otherwise earn farmers more revenue.
What’s more, the food revolution may be accelerating with changes like lab-produced milk from genetically modified yeast and lab-produced meat from stem cells, eliminating the need for livestock and their pasture. This could have deleterious effects on farmland prices.
Of course, underneath every home is a piece of land. Although that is typically only a bit of former farmland, it is often in an urban or suburban area, where a plot of land tends to cost much more than in the country.
Sometimes that little piece of land dominates the value of the home, particularly in dense urban areas. But if we are to understand long-term trends, we need to realize what land represents, even in Manhattan or Silicon Valley or any booming area. People in such places usually aren’t buying land for its own sake but for the myriad services that housing provides. A home is not just a place to sleep and store clothing and keepsakes. It can be a place that is convenient to a stimulating place of work, good schools and entertainment and, indeed, part of an entire human community.
These services have developed enormously over the last 100 years, changing the spatial and geographic dimensions of housing. There are vastly more highways and automobiles, telephones and various electronic connections, enabling people to leave center cities and still obtain the housing services they want. Thus, from a long-term perspective, these developments relieved a great deal of the upward pressure on home prices in cities.
Right now, there are some interesting developments in the supply of housing services that economize even further on urban land. We have recently seen interest in “micro-apartments,” which may be little more than 200 square feet but manage to squeeze in a kitchen, a bathroom and an entertainment center. For many people, this tiny space, with its proximity to like-minded people, interesting neighborhoods and restaurants, is preferable to living in a house in a far-flung suburb. Carrying this idea further, keepsakes can be kept in remote storage, maybe deliverable someday, on demand, with driverless cars. Already, rules are being changed in many cities, including New York, allowing the little apartments to be built and to accommodate many more people per acre of city land. These factors could lead to near-zero future demands on valuable urban land.
When you add all this together, the slow long-term pace of farmland and home price increases is not surprising. Nor would it be shocking if this trend continued for the next century, despite price surges over the last few years.
A more extreme outcome is also quite plausible. In a hundred years, we might even see much of our former farmland converted back to wildlife preserves. In fact, it’s far from inconceivable that the real price of land could be even lower than it is right now.