This is the second in a series of three articles evaluating the relationship between farm income, interest rates, and other factors and land values. The first article is available here.
During the COVID-19 pandemic, the Federal Reserve implemented its fourth round of quantitative easing, a monetary policy where the central bank purchases securities to increase the money supply and encourage lending and investment in the United States to stimulate economic activity. This resulted in historically low interest rates through 2020 and 2021. In mid-2022, the Federal Reserve shifted to quantitative tightening, the opposite of easing, introducing aggressive interest rate hikes to curb high inflation. Despite these hikes, land values continued to rise through 2022 and showed a modest increase in 2023.
Land values are fundamentally the present value of all expected future income streams derived from the land discounted by prevailing interest rates. When interest rates increase, the discount rate rises, leading to a decrease in the present value of future income streams and, consequently, a decline in land values. Conversely, lower interest rates reduce the discount rate, increasing the present value of future incomes and pushing up land values. Therefore, the low rates during the pandemic contributed to rising land values as the cost of borrowing was minimal and the discount rate applied to future incomes was low. However, it takes a few years for land values to fully reflect an interest rate change (Basha et al. 2021), making the expectations of interest rates all the more important. Inertia in the real estate market, where buyers and sellers often base their decisions on long-term expectations and past trends rather than immediate changes, can partly explain this phenomenon.
Land markets in Iowa have begun to experience a steady decline in values, with the Realtor Land Institute’s most recent report suggesting an approximately 3% decline in land values between September 2023 and March 2024 (Siefert and Vegter 2024). In contrast, the Iowa State University Land Value Survey showed an approximate 3% rise in statewide land values between November 2022 and November 2023 (Chandio 2023), indicating that declines in values have occurred more recently. Moreover, we expect similar decreases in the next few years, with a recovery in the land markets predicted for 2026 and beyond (see table 1 and figure 1). The observed and anticipated declines are closely related to changes in interest rates, which, after farm income, are the most important factor determining farmland values. Interest rates have been monitored and adjusted over the last few years under the Federal Reserve's quantitative easing policy.
| Iowa Overall | Northwest Iowa | Northeast Iowa | Southwest Iowa | Southeast Iowa | |
|---|---|---|---|---|---|
| Nov. 2024 | -2.14% | -1.92% | -2.23% | -2.84% | -1.72% |
| Nov. 2025 | -2.34% | -2.24% | -3.84% | -0.72% | -2.37% |
| Nov. 2026 | -0.19% | -0.14% | -2.39% | 2.45% | -0.26% |
| Nov. 2030 | 14.64% | 13.08% | 12.18% | 24.71% | 11.15% |
| Nov. 2040 | 34.86% | 35.50% | 27.62% | 42.84% | 34.91% |
Note: The figure shows a bar chart of participants’ expected change in land value in six months (green) and in 18 months (white), depicting an expectation of land values declining by less than 10% by most participants within this year and land values either declining or rising each by less than 10% by November 2025.
Source: Author’s calculations based on the 2024 96th Annual Iowa State University Soil Management Land Valuation Conference participants’ land value forecasts (Chandio 2024).
The Federal Reserve's dot plot, a chart that summarizes the projections of the Federal Open Market Committee (FOMC) members regarding future interest rates, offers insights into their expectations, which are critical in forecasting the direction of land markets. It is important to note that these projections are expectations and are subject to change, as we will observe when comparing different dot plots. Examining the dot plots from June 2021, June 2022, June 2023, December 2023, and March 2024 reveals significant shifts in these expectations (figure 2). The anticipated interest rates can help us determine the rough direction and magnitude of land values over the next few years.
Note: Each shaded circle indicates the value (rounded to the nearest 1/8 percentage point) of an individual participant’s judgment of the midpoint of the appropriate target range for the federal funds rate or the appropriate target level for the federal funds rate at the end of the specified calendar year or over the longer run.
Source: The Federal Open Market Committee participants’ assessments of appropriate monetary policy (FOMC 2024).
In June 2021, during the pandemic, the dot plot showed that rates were projected to remain low through 2021 and 2022, with only gradual increases anticipated in 2023 and longer-run rates stabilizing around 2.5% in 2024 and beyond. The low rates and continued expectations for low rates in the coming years supported the record-high land values. A year later, at the peak of inflation, the June 2022 projections indicated significant increases in projected rates for 2022 and 2023 compared to the previous year’s projections, with a peak of around 3.5% expected in 2023 and slight decreases in the longer run to stabilize around the same rate of about 2.5%. This suggested upcoming rate hikes, initiating concerns about future land value declines.
The shift from very low to higher projected interest rates indicates significant monetary tightening. However, despite facing downward pressure, farmland values have not yet fallen significantly. This is because the lagged effect of persistently low rates in the past couple of years still outweighed the initial effect of the recent rate increases. Moreover, future projections and realizations of interest rates will determine whether the negative effect of interest rate increases will result in a land value decline. If the interest rate increases are modest, subsequent rate cuts or other positive market factors may counter their lagged effects, stabilizing land values.
The Federal Reserve Bank’s December 2023 dot plot shows that most officials expected rate cuts in 2024, likely in the latter half of the year. As the lagged impact of previous hikes is realized, it can be offset with rate cuts, stabilizing the land markets. However, the March 2024 FOMC meeting’s dot plot indicates that experts expect interest rates to range from 4.5% to 5.5%, canceling expectations of significant rate cuts in 2024 (figure 3). With rates projected to remain high in the short term before declining, pressure on farmland values will likely persist. However, if the projected decline in interest rates materializes, it could stabilize or potentially increase farmland values as borrowing becomes more affordable and the discount rate on income decreases. Thus, while interest rate increases and other economic factors have built enough pressure for land values to start declining, the decline will likely continue, given an extended period of high interest rates continuing into 2025.
Note: Each shaded circle indicates the value (rounded to the nearest 1/8 percentage point) of an individual participant’s judgment of the midpoint of the appropriate target range for the federal funds rate or the appropriate target level for the federal funds rate at the end of the specified calendar year or over the longer run.
Source: The Federal Open Market Committee participants’ assessments of appropriate monetary policy (FOMC 2024).
Additionally, we cannot overlook the role of inflation expectations. Interest rate predictions or expectations in the dot plot correspond to inflation expectations in the next few years. The Federal Reserve's monetary policy aims to balance inflation control with economic growth, and their interest rate decisions are pivotal in this balancing act.
Conclusion
The relationship between land values and interest rates is complex, influenced by immediate and long-term expectations shaped by Federal Reserve policies. The dot plot remains a vital tool in predicting these trends, providing insight into how future rate expectations will shape land markets. As the effects of the 2022 hikes are fully realized, a clearer picture of land market dynamics will emerge. Monitoring Fed announcements and economic indicators will be crucial in anticipating market adjustments. Current trends suggest a period of adjustment, with potential stabilization and recovery as markets adapt to the new interest rate environment.
References
Basha, A., W. Zhang, and C. Hart. 2021. "The Impacts of Interest Rate Changes on US Midwest Farmland Values." Agricultural Finance Review 81(5):746-766. doi: 10.1108/AFR-11-2020-0163.
Chandio, R. 2023. “2023 Iowa State University Land Value Survey: Overview.” CARD working paper 23-WP 655, Iowa State University Extension and Outreach, Center for Agricultural and Rural Development. https://www.card.iastate.edu/farmland/isu-survey/2023/2023-ISU-Land-Value-Survey-Overview.pdf.
Chandio, R. 2024. “Participants’ Land Value Forecasts.” 2024 96th Annual Iowa State University Soil Management Land Valuation Conference, Iowa State University Extension and Outreach.
Federal Open Market Committee (FOMC)Meeting’s Projection Materials. 2024. Available at: https://www.federalreserve.gov/monetarypolicy/fomccalendars.htm, accessed June 3, 2024.
Siefert, E., and M. Vegter. 2024. “March 2024 Land Trends & Value Survey Press Release.” Spring Annual Meeting REALTORS® Land Institute – Iowa Chapter.
Suggested citation
Chandio, R. 2024. "Land Values, Interest Rates, and the Federal Reserve’s Expectations." Agricultural Policy Review, Spring 2024. Center for Agricultural and Rural Development, Iowa State University. https://agpolicyreview.card.iastate.edu/land-values-interest-rates-and-the-federal-reserves-expectations.