A Horse is a Horse, of Course, of Course…Unless it Can Predict Land Prices

A Horse is a Horse, of Course, of Course…Unless it Can Predict Land Prices

This is by far my favorite article from the Tierra Grande Magazine to date! It came out in the July 2010 edition and I think it was added as a news article on my site, but I wanted to repost it on my blog to make sure you got a chance to read it.

I grew up in Georgia riding horses. I used to love horses as much as I love real estate now. So to see an article about my two favorite subjects was so amazing! I love living in Texas and found this article to be really cool. Read for yourself and see what you think…I would love to hear your feedback.

By Charles E. Gilliland and Abhijeet Gunadekar

As the nineteenth century drew to a close, Thorstein Veblen, and academic economist, observed the expansion of affluence in the maturing economy. He identified this burgeoning wealth as the root of expanding appetites for a host of luxury goods.

His book Theory of the Leisure Class posited that rising prosperity sparks a desire for “conspicuous consumption.” As individuals’ wealth grows they are able to enjoy the finer things. They acquire luxuries like racehorses, fine art and land to use for leisure activities. Flush with resources and anticipating continued economic expansion, they participate in spirited competition with other wealthy people who also enjoy the trappings of success.

When financial reversals occur, expenditures on luxury items are the first to be cut back. Clearly, hard times can send shock waves through the markets for luxury items and services.
When the financial meltdown struck in the 1980s, various asset prices declined on a broad front. Land investors watched helplessly as land prices dropped. Horse owners, too, saw average horse prices slide to startling lows.

These coincidental events suggest that weakened prices for horses, which are now primarily a luxury rather than working livestock, may presage drops in land prices or vice versa. Analysis of historical prices for horses at the fabled Keeneland September Yearling Sale suggests that price trends for these select thoroughbreds may indeed provide a guide to future Texas land prices.

The Keeneland yearling auction is the premier sale of prospective race horses in the world. During the annual sale, bidders from all corners of the globe flock to Lexington, Ky., in hope of acquiring a champion thoroughbred.

During the two-week sale, buyers spend hundreds of millions of dollars. In 2009, they expended $191,859,200 on 3,159 yearlings. This suggests that buyers possessed a sizable pool of discretionary funds to support the market.

Similarly, land buyers scour the Texas countryside in search of properties that offer trophy animals, scenic surroundings and recreational activities. City dwellers dedicate substantial resources to acquire rural “getaways.”

During prosperous times, their reservoir of discretionary cash expands. During tougher periods, it conversely contracts.

Because land sales are scattered throughout the countryside and are tracked over months or years, it is difficult to identify trends as they unfold. But the Keeneland September Yearling Sale occurs over two weeks each fall, providing an instant reading of the impact of economic conditions on amounts available to support discretionary purchases.

The trends reflected in time series for the size-adjusted price index for Texas Land and the average price at the September Keeneland Yearling auction from 1966 through 2009 display remarkably similar overall patterns. They rise steadily thorough the sixties and seventies and retreat in the mid-eighties. Both series rapidly increased during the past decade with the notable anomalous precipitous drop in thoroughbred prices following the 9-11 attacks, which occurred just prior to the 2001 Keeneland auction.

Calculating a correlation of thoroughbred prices versus land prices reveals a strong statistical relationship between these two series. They exhibit a positive correlation of .820, which means that the two tend to move in the same direction. The relationship becomes even stronger when horse prices are lagged, with a two-year lagged thoroughbred price posting a .916 correlation with current land prices. This suggests that current land price trends tend to track horse price trends registered two years ago.

Further statistical analysis confirms that the average yearling price is a consistent predictor of trends in Texas land prices. For example, the 2007 drop in average thoroughbred yearling prices foreshadowed the 2009 downturn in Texas land prices.

As the yearling auction average continued to slide, more challenges could well lie ahead for land markets.

This analysis does not suggest that horse auction prices cause changes in land prices. The strong relationship likely exists because both respond to general economic conditions and depend heavily on expanding wealth of participants in both markets. When that wealth is eroded as result of economic turmoil, buyers become cautious and curb their outlays.

Apprehension caused by political and economic uncertainty clearly impacts purchase decisions. People purchase less art, less land and fewer horses. That commonality of caution is the link between trends in demand for race horses and recreational land.

As land market participants look for signs of things to come, a quick check of the Keeneland September Yearling Sale prices may provide a clue.

Dr. Gilliland (c-gilliland@tamu.edu) is a research economist and Gunadekar is a research assistant with the Real Estate Center at Texas A&M University.

Shannon Register, Broker/Owner
A native of Columbus, Georgia, and a graduate of the University of Georgia, Shannon has lived in the Houston area since 2004. She holds over nine real estate Certifications and Designations. Shannon is the host of "Houston Real Estate Radio" on am700 KSEV in Houston.

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