Norman C. Wheeler and Associates of Bozeman and Missoula, Montana, have released their 2008 land survey relative to land values in western Montana. Since the 1980s, the firm has published annual studies related to changing land values throughout western Montana. Typically within the context of the report the firm is dealing with properties ocated west of a line which would be drawn between Billings and Great Falls, Montana. The firm also conducts research related to land values in eastern Montana.

The primary focus of this study over the last two years has been dedicated to an analysis of properties greater than 1,000 deeded acres which have sold within the market. These properties tend to reflect similar highest and best uses and are a reliable representative sample of the market. The data in this study does not include large timber or landscape purchases made by conservation groups of the government. These sales are representative of a different segment of the market and their sale values are generally based on appraisal, rather then open market conditions. They are not generally exposed to the open market.

Related to these sales in 2008 was the beginning phased purchase of over 300,000 deeded acres in the Swan Lake and Missoula area by the Nature Conservancy and The Trust for Public Lands from Plum Creek Timber. Reportedly the sale will be about 15% below the larger land values reported for 2008 survey herein and that price included timber values. Generally the large sales reported in the study herein are not influenced by commercial timber considerations. While many have timber resources, they are considered more valuable in place for recreation.

Norman C. Wheeler and Associates also conducts research and other studies related to annual appreciation rates for rural lands and various studies related to land values affecting smaller tracts and market trends related to primary Montana cities.

In 2008, the information shows that there has been a substantial decrease in the volume of land being sold throughout western Montana. Within the ranch market related to properties greater than 1,000 acres the market has shown approximately a 75% decline in volume since 2005. The years 2005 and 2006 form the highest or peak years within the market with nearly 250,000 acres and larger parcels trading in each of those years.

The following chart documents land values which have been exhibited on average within this market over the past six years. As indicated, values have risen rather rapidly since 2003 with the peak year being 2007. Since 2007, land values have only increased approximately 1.3%. The data is consistent and coincides with information provided by realtors, bankers and others who indicate that in general the higher amenity ranch market has continued to remain stable over the past 12 to 24 months. Since 2004 lands suggest 14.24% annual compound appreciation. Over the past 10 years the rate runs at about 13% annually for this sector of the market.

There is continued life in the ranch market with over $76,000,000 in sales in the last six months documented. That volume increases over $36,000,000 to a total of $113,000,000 in land sales for properties greater then 320 acres in the study area.

This information illustrates that the market remains fairly consistent over the past 12 to 24 months based on a lower volume of sales. Value declines widely discussed in the land arket are related to decreasing listing values as the market moves to correct over inflated listings.

A purchase at 20% to 40% below list at this time, is likely to be at actual market value says the studies author Clark Wheeler. Wheeler has found that rapid increases in listing prices associated with rural properties in 2005 and 2006 actually stalled the market, well before the financial impact of the 2008 crisis. In this period list prices soared as high as 50 to 100% above the actual market.

The average sale value of $1768 per acre referenced above is a land value and is reflective of values related to larger ranch or recreational properties in the primary Western Montana market. Average land values for the entire State, when Eastern Montana is accounted for; run at about $1100 per acre as reported by the USDA. The USDA pegs annual growth rates for all lands in Montana at nearly 28% a year over the past four years.

As land values grew rapidly in the western parts of the state, buyer demand shifted to the east for larger tracts, driving up land values there as well. In this area there was supply, and list values had not moved as rapidly. Areas of Eastern Montana jumped dramatically, but still were seen as good buys when compared to the western market, especially since many buyers are recreationally, rather then agriculturally oriented says Wheeler. Also sellers moving from Western Montana to Eastern Montana with 1031 proceeds drove values up.

Wheeler predicts that as list prices continue to decrease, the market will eventually comeinto balance as list prices approach market value. However based on past trends, once list values reach market value, the market will then be pushed down as buyers continue to anticipate discounts associated with purchase prices. As noted the discounts buyers are now gaining are from list value, not market value.

The current actions of the market create expectations that will be problematic if the market continues to lag in 2009 and 2010. Brokers indicate there are buyers for larger tracts but they are waiting. Some expect an initial run in 2009, with the market backing further off in late 2009 and 2010. There is no traction in the market at this time says Wheeler.

For sellers the current conditions are frustrating due to low sale volumes. Even lands priced at market may not sell. We have moved from a market that was brimming with buyers looking for a limited supply, to a market with limited buyers, but continued limited supply relate to larger land tracts.The market is not indicating a rush to sell as most out of state owners are holding and Montana ranch families are generally well entrenched. The existence of a large volume of listing does not truly indicate supply when many are substantially above market, a condition Wheeler refers to as “insincere listings”.

Wheeler suggests that a parable to understanding the larger land market can be derived bystudying lot sales which are associated with the Bozeman area. In reviewing 2008 MLSdata related to Area 2, that being the primary area surrounding Bozeman, lot sales havedecreased by approximately 75% since 2006. However, the average value associatedwith lots remains somewhat up or fairly stable since 2006.

Two factors are notable: There have only been 64 sales in 2008, however, there are over 600 lots actively listed; statistically there is a 10-year supply of lots on the market, recognizing that many lots have been removed from the market.

The other interesting factor is that the average list price associated with lots in Area 2 isnearly 100% higher than the average sale price associated with the 64 lots which sold in2008.

Wheeler says this is an important indication for markets which have the ability to withstand some of the downturn being experienced in 2008, i. e. the high amenity ranch market. Sellers who are capable of withstanding market changes continue to be sticky in their pricing and are unwilling to lower their expectations until the market forces them or they must sell.

If one study’s listings and sales of lots associated with Area 3, that being around Belgrade, a similar amount of volume decrease has occurred. Sales since 2006 have decreased over 80% with only 24 lots selling in this area over the past 12 months. There are 348 lots listed in this area as of year end, again over a 10-year supply of listings exists on a statistic basis.

However, in this market, the average list price falls 8% below the average sale price associated with the 24 lots sold in 2008. It appears here that list prices are leading the market.

What this indicates according to Wheeler is that in markets that are less capable of

withstanding financial distress, or in which sellers are more aggressive, the listings are

leading value and bringing values down on a more rapid basis.

The trends suggested by the Bozeman lots is reflective of the high end ranch market

while the Belgrade sales are more indicative of sales located in more outlying areas

which are experiencing changes in highest and best use.

Looking back, Wheeler has analyzed the firm’s sales data banks through the 1980s when the market in Montana lost upwards of 60% of its value related to rural land. The market at that time was more directed by agricultural use and Montana buyers. The 60% drop seen then was strongly affected by liquidations associated with financially distressed properties acquired by lenders. That market more closely parallels what is happening in housing markets in Florida and Las Vegas, Wheeler said, in which lenders are dumping properties. Wheeler notes that the housing markets here have had more end users. People buying houses here mostly intend to live in them and we did not see predatory mortgage practices occurring. House buyers are often working with their local banker and buyers looking to flip houses were limited.

Within the ranch market in Montana, there is very little leveraged property. Most properties being bought over the past 10 years have been cash transactions and properties which are owned by historic Montana families remain relatively strong with limited debt. As such, we do not expect to see a depression of the market as we saw in 1986 because we will not see a liquidation of properties. While we may see people wanting to sell property in Montana, typically these sellers are wealthier and they will tend to resist price decreases of a substantial degree.

The bottom line is that the primary land market may slip by 20% or 30% over the next two to three years but looking back to data trends from 1985 one would expect that the Montana market will rebound rapidly.

In the 1980s when values fell, it was approximately a 10-year cycle running from 1982 to 1992. Values fell from highs in 1982 to lows between 1985 and 1987. It took until 1992 for the overall land market to recover in general based on USDA information. The

Wheeler data indicates that in Montana values fell for only a two-year period in ’86 and ’87 and the Montana market regained its strength within three years by 1990. This was due to increasing influence of outside buyers buying larger properties in Montana, and this trend is expected to continue or increase in the next several years.

Wheeler says comparing the current market to the ‘80s, with 2005 and 2006 representing the high, we are approximately three years into a downward cycle which will continue for approximately two more years. That cycle would then begin to see substantial sales occurring as prices regain and push upward again.

It is important to remember that the primary information set forth is relative to land values related to parcels greater than 1,000 acres. When studying sales smaller than1,000 acres, there is considerable more volatility in the market.

Recent studies by rural banks associated with the Montana land market indicate that on average, sales of all lands greater than 40 acres are suggesting general losses running from 20% to 30% over the past 12 to 24 months. Data compiled by Wheeler and Associates related to smaller sales in individual counties within Montana indicates values are decreasing in this sector of the market, but it is a case by case basis. Average land values related to the smaller land market are comprised of a wider matrix of land types, and uses, than those related to the larger properties study.

In the smaller tract market river properties remain strong and stable. Tracts that were being bought to be subdivided and developed have lost substantial value as the highest and best use of many of these lands has moved from probable, to speculative at best.  Sales to document this trend have not occurred yet. As always, those in last, at the top of the cycle will also suffer, especially those who speculated on flipping properties in out lying area.

Wheeler predicts that we will see the redevelopment of a split market related to ranch properties. The more premium recreational properties will be selling at market and subject to stronger demand, while the more marginal or agriculturally influenced properties will reflect decreases within the market to attract sales. Some brokers feel prices related to what are considered less then premium properties, such as those lacking good recreational amenities and water, will fall back to 2004 and 2005 price levels. Often these were the properties that got an artificial boost due to limited supply and high demand as buyers wanting in where directed to less desirable areas, often by inexperienced agents.

To sum it up, Wheeler says it appears that the strong amenity ranch market for properties greater than 1,000 acres in size is more resistant to financial downturns and subject to demand will remain strong and upward in the next several years. Most likely it will continue to be an under supplied market at the top.

Outside of Bozeman and Belgrade lands moved from interim agricultural use to probable development use based on a demand curves showing hundreds of lot sales per year. Values jumped from $10,000 to $15,000 per acre, to upwards of $30,000 per acre for 160 to 320 acre farms.

With many new lots created and demand curves now showing a few dozen sales a year, the value of those lands will again be based on interim, rather then probable uses, and as such market values will drop back to the lower levels.