Mr. Siegan is the author of Land Use Without Zoning and many articles on the subject. He practiced law for 20 years in Chicago before moving in 1973 to La Jolla, California where he is professor of law at the University of San Diego Law School.
My tale this month is about a much abused species: people who buy and sell land, the so-called land speculators. The moral of my story is that persons earning money in private industry usually serve necessary and useful roles in the economy.
This is hardly the popular conception of land speculators. At some zoning hearings I have attended, confessed burglars, bombers and safe-crackers would have received more sympathetic consideration. Yet, the speculators were there performing as socially useful a purpose as anyone else present.
Currently that species is much in need of good cheer, for its business is terrible. With construction at one of the lowest levels in recent years, the market in land is unusually poor. While quotes on land prices appear to be escalating, buyers are scarce, and if there is a serious need to sell, prices have to be shaved sharply.
Keeping the land means paying real estate taxes and, for many, exceedingly high interest rates on purchase loans, often 20 to 25 percent and more, even for those obtained in better days. Credit crunches make nonsense of the notion that land speculation invariably brings huge profits.
But then, no business venture is free of risk. All businessmen seek to buy low and sell high, and they do not always succeed. This is as true of the shoe store owner as of the farmer, banker and builder. It is indeed difficult to determine the line where investment ends and speculation begins.
Land speculators, however, are thought to be different. Supposedly they are wealthy gamblers who exert no labor or effort on the land, and their presence operates only to raise prices. These assumptions are wrong, as I shall explain.
First, there are many people of middle income, and probably some of lower income, who buy for resale vacant lots and acreage. They also invest in groups or buy stock in corporations that purchase land. Considered a hedge against inflation, many have preferred this form of investment to stocks, bonds and savings deposits.
Farmers and people who inherit land automatically become land speculators as the prospect of development appears. Some surveys of speculators in other commodities have shown that housewives, retired persons and people in many occupations and professions are much involved in buying and selling futures.
Second, unlike those in other fields, speculators in land frequently act as middlemen, preparing it for sale to builders. They subdivide, rezone, clear title problems, install roads and utilities, each of which can be a lengthy and costly process. They buy large tracts and sell off smaller parcels.
Cities, towns and major developments have been created in this manner by speculators. Houston, Texas, for example, began as a land speculation in 1836 in a low-lying swamp area.
Builders do engage in the same activities, but it requires considerable capital and time seldom available to small and middle-sized concerns. Warehousing and processing land can be costly and burdensome to large builders as well. Consequently many, perhaps most, builders find it advantageous to pay the middleman’s mark-up rather than buy raw land at a lower price.
Third, land speculators provide a price floor for developable land. They create much larger markets than would exist if only builders purchased land, allowing farmers and other owners greater opportunities to convert their properties into cash.
In times such as the present, speculators make up a substantial part of whatever urban land market exists and prevent the bottom dropping out. By the same token, in better times, their eagerness to unload at a profit serves to hold prices down. Moreover, in readying it for construction purposes, speculators expand the supply of land available for immediate use, reducing the price below what it would otherwise be.
Thus, speculators tend to keep prices from rising too high or falling too low. The higher prices they create at one end of the process are likely to be more than offset by lower ones they cause at the other end. They add stability to the market and reduce price fluctuations, thereby lowering the risks of land ownership.
If the reader still condemns the land speculator, he should consider the only alternative: more government intervention and control. That action would further curtail but, due to constitutional property rights, could not eliminate speculation. The result would be less competition and even greater profits for those speculators who remain in the market.