Recommendation #4: Strengthen private property rights

A well defined and legally enforceable system of private property rights is critical for the smooth functioning of markets, real estate or otherwise. A free real estate market is essential for determining what the highest and best social use of land is. Thus, a free market is critical for maximizing social welfare for all Michigan residents.

The real estate market allocates land uses efficiently by providing signals to buyers and sellers about the value and importance of land for different uses. For example, the average per acre value of farm real estate in Michigan was $1,470 in 1996.[117] Suppose a family of four that wanted to move out of the city was willing to pay a farmer $20,000[118] for one acre to build a modest 3-bedroom ranch house. The market value of that acre would be its market price — $20,000 (not $1,470). The market, through the price system, is "signaling" the farmer that someone else places a higher economic value on one acre of his land than the appraised value. The sale will only take place if 1) the farmer believes $20,000 is more valuable than holding on to his property and 2) the family believes $20,000 is less important than their desire to build a home on the property. If both are satisfied, the sale will take place. Both win; they experience gains through trade.

This win-win outcome, however, can only take place if property rights — the farmer’s right to own and sell his land and the family’s right to purchase the land — are respected and enforced. When property rights are enforced, the farmer has the protected right to sell or not sell his property to whomever he wishes — whether it is a family of four, a developer, or a land trust. The real estate market ensures that the land is put to its highest and best use by incorporating the interest of both buyers and sellers.

The essential role of property rights in real estate markets is recognized by one of the most important groups engaged in the urban sprawl debate: Michigan farmers. The Michigan Farm Bureau has a tradition of supporting markets and private property rights.[119] Farmers recognize that property rights are important for constitutional protections of civil liberties, but they also implicitly recognize their importance for facilitating market processes.[120]

Note the following statement from the Michigan Farm Bureau’s official policy statement on "takings," the process by which the government seizes private property for a public purpose:

We believe any action by government that diminishes an owner’s right to use their [sic] property constitutes a taking of that owner’s property. Therefore, government should provide due process and compensation to the exact degree that an owner’s right to use his property has been diminished by government action. Furthermore, we believe the only just basis for compensation in such cases is fair market value at its highest possible value and considering its potential, regardless of how it is currently utilized.[121]

The true value of land is its market potential, not its current use. In order for the full market potential of land to be realized, it must be available for sale. In other words, it must be subject to real estate markets that allow buyers and sellers to determine the value of land and its use.

Of course, the protection of property rights is particularly important to Michigan’s farmers and other owners of undeveloped property because their land’s potential use is an important source of wealth. Once zoning or other politically imposed restrictions are placed on land, its value and the owner’s wealth fall.[122]

While some farmers may desire this outcome, it comes at the price of restricting other farmers, distorting real estate markets, and compromising citizens’ freedom and welfare by restricting choices, increasing the cost of housing, and often forcing families to remain in lower quality housing.