US rural land value bubbles

Abstract

Real estate bubbles have attracted much attention in the research literature following substantial growth in prices. Given the recent subprime mortgage crisis, this article is concerned with the related problem of possible bubbles in rural land values, given that at the margin urban real estate exerts pressure on rural land markets. Land is the most important financial asset for the agricultural economy, and income risk caused by farmland price volatility creates economic hardship for rural communities. Farmland valuation remains to a large extent a puzzle as it is only partially explained by fundamentals including inflation. This article tests the hypothesis of a price bubble in the real option value to future land development using land value data for all 48 contiguous US states and finds strong evidence that a short-run bubble has been active in recent years.