Intro to upcoming Vallarta Real Estate Trends article

Every Summer we feature a special Vallarta real estate issue in Vallarta Lifestyles. Below is the introduction that will be included. I’ll be posting the “Trends” as I seem them through the week.

How things can change in a short period of time. Vallarta’s real estate market has been hit on many sides this past year, making it difficult for the market to move ahead. Issues such as the global economic crisis or the swine flu scare are not actually “trends” in that they have, or are becoming long-term new directions in our marketplace, however, they are certainly facilitating new trends that for the most part, are new to this market.

It all began with the crisis that started in the USA and soon spread out to effect most of the world’s economies. It came late to Mexico, but when it did, especially in October of last year, the results were obvious and very apparent. It was like the tap had been turned off, especially for new product developers. After a slow summer, and hoping for better as the high season was approaching, well, it just didn’t happen. Sales were extremely slow as people battled with uncertainty of just how deep and severe the downturn would be.

In the Fall there was even discussions of a US economic depression, things were looking so bad. But that’s not talked about now. Now its more about “green shoots”, “V” or “W” or “L” shaped recoveries – the forecast now seems to be that, for the most part, the worst has been averted and now its just a matter of time – on how and when the market recovers.

From October until April there was a definite trend I’ll refer to as Risk vs. Uncertainty – a term I picked up from economist Frank Knight in an article featured in the New Yorker. People are used to dealing with risk. They face it in business situations, when they are considering what they should be doing with their investments. Its a part of life, with some people able to handle large risks better than others. Here is how Frank put it:

“Risk describes a situation where you have a sense of the range and likelihood of possible outcomes. Uncertainty describes a situation where it’s not even clear what might happen, let alone how likely the possible outcomes are. Uncertainty is always a part of business, but in a recession it dominates everything else: no one’s sure how long the downturn will last, how (shoppers) buyers will react, whether we’ll go back to the way things were before or see permanent changes in consumer behavior.”

Before we can expect any significant change in our current market the level of uncertainty must diminish. Unfortunately we seem to be living more and more in a world of uncertainty. Perhaps just getting used to living with it will be enough to reduce uncertainty and get the market back on track. And lately, either this is happening, or uncertainty has been reduced. It is at least a lot less than it was six months ago.

What has certainly been interesting is the mainstream media’s take on problems and issues faced in Mexico, primarily with regards to the swine flu scare and the “narco traficos”. Although both are/were serious issues, neither has really effected this region in any serious manner. There were very flew cases of the flu, but its impact managed to practically empty every hotel room in the region. Mexico’s response was a strong one, and praised around the world by major health organizations. The cost to the country, however, was severe as tourism is its 3rd largest industry. The drug wars between the drug cartels and with the army is also serious, but again, has not effected this region. No tourist or American/Canadian homeowner has in any way been effected by this. But the way both of these issues have been portrayed in the American media, has had very serious results. I hope this does not become a “trend”, which in some ways can be seen as Mexico-bashing. But as quickly as it can start, it can disappear. As soon as the elections ended in Iran and their problems started, Mexico was off the front page of mainstream media. Again, not to say these are not issues, but they certainly were and have been overblown. With that said, let’s take a look at what have been some of the trends that seem to be happening in Vallarta’s and the overall Mexican real estate market.

Vallarta Real Estate MLS celebrates 20 years of Service

This year marks twenty years that Multi-List Vallarta has been providing MLS (Multiple Listing Service) to the Puerto Vallarta region. We believe that makes it the longest running MLS in Mexico, and also the first. Its gone from being just a photo-copied book (well, actually we still offer that service), to being available online at multiple websites. There’s an member’s only section where Realtors can service their listings and generate reports. 

Multi-List Vallarta is different from other MLS services in that it is privately owned, rather than owned and operated by the local real estate association. When we first started (we as in two guys in an extra room in an apartment downtown) we approached AMPI, the local real estate chapter, and asked if we could provide them MLS service for Puerto Vallarta. They turned down the offer, stating that they wanted to do their own. Three years later they approached us about providing exclusive service for them as they hadn’t managed to get a system together for their organization. It meant that we had to then exclude clients that we had that we not AMPI members, but we did it (well, I did it – we were down to one guy in an extra room in an apartment – but now in the marina), believing that a strong real estate association would be good for the industry. It was done on a handshake, as it stands today, and although there’s been a number of ups and downs, the relationship remains a good one.  There is no real estate licensing in Mexico so the real estate associations have to take up policing their industry on their own. With a strong MLS, they can threaten expulsion from the MLS service for Realtors that provide bad service to their clients or other Realtors. And they have used that power, although infrequently.

Multi-List Vallarta is the only privately organized MLS in Mexico and I don’t believe there are many in the USA or Canada. Actually, there aren’t many MLS services in Mexico and those that do exist are weak. We’ve been asked numerous times to provide service for regions such as Cancun, Los Cabos and San Miguel de Allende, but preferred to concentrate on the Vallarta market. Actually, that’s not true, we did provide MLS service to the Los Cabos region in the early 90s, but found the distance difficult and handed it back to the board. They actually still are using the logo we designed, which is very similar to Vallarta’s.

Are there benefits to have a private MLS?

I believe there are. For one, it took a lot of time and dedication, especially in the early years, to get it up and running. You need someone who is willing to dedicate that time and profit it a good motive. Unless the real estate association is willing to hire and pay good people, it just won’t happen. It may look like there is money to be made for the association, which otherwise is going elsewhere, but if we didn’t subsidize our MLS service having staff that also produce our print publications and websites, it would not be profitable or worth doing. And there has also been the concern with the members of the service getting into the hands of a president or board who may abuse their access to the information. We don’t sell real estate and aren’t active in the market in anyway. Therefore we can remain impartial and objective.

I guess the best test is just to look at other real estate markets in Mexico and see how efficient their systems are when operated by their real estate association.

Loreto Bay to shut down…

I’ve been working on my annual Real Estate Trends article for the next issue of Vallarta Lifestyles when I received the email alert about the Loreto Bay project. This was a very large project in Loreto that obtained a lot of coverage and from what I understand, sold a good number of homes. Wonder what’s happening to them? If anyone knows, please comment.

TSD Loreto Partners, S. en C. por A. de C.V. (the “Company”) regrets to inform its clients and stakeholders that, due to the challenging situation in the international real estate and financial markets, all operating and construction activities for Loreto Bay (the “Project”) will be suspended. 

To assist in securing new equity funding and a long-term suitable buyer for the Project the Company hired Cushman & Wakefield. Several potential buyers and investors have visited the Project over the last few months, yet in the context of the current economic crisis and credit shortage, the Project has been unable to secure a buyer or new investor.  

We regret to inform you that until new funds are secured, as of June 7th, 2009 all hospitality related operations will be suspended and as of June 8th, 2009 all construction related activities will be suspended. 

Please note that all homeowners with a home under construction, and all other homeowners will receive further information as it becomes available. More information about this can be found here and here.

Which helped me with Vallarta Real Estate Trend #8: Market Convergence

When demand was at its peak, for secondary housing or real estate tourism in a warm-climate location, it brought into the market locations that would most likely not be seen as potential candidates for prospective purchasers. Developments were being announced in places such as Nicaragua and Honduras. Panama, Costa Rica and Argentina became “hot” markets. Within Mexico, Loreto, which for years had remained a stagnant market, all of a sudden had multiple developments, one with more than 6,000 homesites. Well, as we’ve seen in our local market, the buyers (those that are still out there!) are looking for something closer to the center of activity of the community. In the same way, we see people will be looking for something that closer proximity to their primary home, easier to reach, and with a large community (consisting primarily of other second-homeowners) they can actively participate within. This is good for Mexico, and for the traditional real estate tourism markets such as Puerto Vallarta. Its not so good for Honduras and Nicaragua, even the the Loreto’s out there. That 2,000 home development, the Loreto Bay Company, that shut down operations this.

Buying “Pre-Sale” in Mexico; The Risks and Benefits

The following article by local Mexican attorney David Connell of Connell & Associates outlines well potential pitfalls but also the benefits that come with buying pre-sale real estate. With the current state of the world economy, there are more reasons to be concerned about pre-sale purchasing of real estate. Some markets have been relatively unscathed, while others have seen serious problems arise, areas such as in Las Vegas and Florida. What  really hurt these markets is the amount of credit availability, for both developers and purchasers, as well as “flipper” who never intends to live in the units purchased but just wants to make some money off of the developer’s initial low pricing. This is all fine in a healthy, up-swinging economy, but when it starts turning down, well, the results are all over the news.

 

A “pre-sale” purchase exists when a buyer enters into an agreement with a developer to purchase a unit that has not yet been built or finished. Inherently this type of purchase is risky. In Mexico over the last 10 years the real estate market has seen a major boom, especially in developed or developing costal areas. Between 1995 and 2005 prices skyrocketed and fueled an increased number of new projects, the majority of which were sold as “pre-sales”. The first of these projects brought great returns to the buyers, who often times purchased at a 30% discount off the finished sales price. Furthermore, many of these projects went up in value 20 or 30% per year prior to being delivered, which made the investment even more profitable. 

LA Times article about Mexico

The following article was recently featured in the Times, and its a good read. Mexico has been hit extremely hard over the past year, and this article explains well what has happened and what the consequences have been. Read the whole article here:

Your neighbor needs your help. Do you have it within you to lend a hand? Will you book yourself a week on the beach in Cabo or Puerto Vallarta, or explore Mexico City or one of the colonial cities in the heart of Mexico? You know, for the common good. 

This has been a banner decade for empathy tourism — many Americans flocking to New York after 9/11 and to New Orleans after Hurricane Katrina did so with a sense of public service. Mexico now needs a similar surge.

Our neighbor to the south is having an annus horribilis, as a British monarch might say. These were never going to be good times down there, with Mexico’s economy so intertwined with ours, but growing concern about war-on-drugs violence, the decline in oil prices and the advent of swine flu has further dented “brand Mexico.” Adding insult to injury, Washington earlier barred Mexican trucks from coming into the United States, a flagrant violation of the North American Free Trade Agreement, and, as of last week, Americans crossing over to Mexico were required to have a passport to reenter the country, a change expected to deepen the slump in border towns frequented by Americans.

I found this quite interesting:

Mexico traditionally ranks somewhere between Jordan and Argentina on the foreign policy establishment’s list of priorities. 

So Mexico shares a 2,000 mile border, is its 3rd

This was especially telling: Mexico has come a long ways since the 1995 “Tequila Crisis”. Its a shame that this has where it currently stands.

Mexico, for its part, has enacted prudent fiscal policies, shored up its foreign reserves and remained a faithful adherent to the free-trade gospel, continuing to open its economy to foreign goods and investment. The nation has also become a great deal more democratic in the last decade. Still, despite doing all the “right” things according to the Washington consensus, Mexico’s economy (and currency) has been harder hit by the Wall Street-triggered crisis than the United States’. No one said life was fair.