Vallarta’s “Cash” Market

The Vallarta real estate market has been referred to often as a “cash market” , in that people pay cash for properties rather than financing the purchase. Well, this isn’t actually true. In most cases, people re-financed a property back home, usually their primary residence, using a second mortgage or home equity loan, in order to make the purchase.

People began to take out “home equity” loans, to use some of the equity they had acquired from quickly rising home prices. This became known as MEW or “Mortgage Equity Withdrawal”. 

Problem was, prices had risen higher and faster than they ever had before historically. This wasn’t really “equity”, it would prove to be “artificial equity”. As home prices began to drop, this “equity” began to disappear.

The chart below shows the Case-Shiller USA Home Price Index and how it has performed over the years. It shows how much the average home price had increased over the previous year, based on a 20 major US city composite. Starting in 2003, home prices started increasing by more than 8% a year, actually peaking in 2005 at 20% increase. This showed amazing appreciation. I’ve colored in a portion of this to show the years, and the appreciation, that drove this market.

Shiller Price Index

Unfortunately, this couldn’t last, and when prices started to fall, they fell quickly. In 2008 prices for this index has dropped by nearly 20%. And its still dropping.

This next chart shows what a typical house would have appreciated by if it was in one of these markets. A home that was worth $400,000 in 2002 would have appreciated to $775,000, nearly double, in just five years.

sample-2

Many people decided to make use of this new found “equity” to purchase toys, and some, second homes in places like Puerto Vallarta. Interestingly, the median price of a condo in Vallarta in 2008 was just over $300,000, making it very affordable for people who saw their homes appreciate in the manner shown above. This, not cash, is what drove the Vallarta real estate market for the past five years. Unfortunately much of this “equity” has been lost, so people are back to having homes worth what they were in 2002, but with mortgages  larger than the new value of the home.

So the question now is, how will this effect the PV market? We know how its effected the market in the USA, with record foreclosures. It is still uncertain how this could effect Vallarta.

“This product was meant to help people do construction on their house, [and] do debt consolidation—not to take out every last dollar of equity in their home to finance a different kind of lifestyle. This is the reason that the US consumer is all spent out. They used debt and home equity—as opposed to Income gains—to finance an improving lifestyle. After the vacations are passed, the big screen TV and new cars become old, what are you left with?”

Charles Scharf, head of J.P. Morgan’s retail business on home equity loans.

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One Response to Vallarta’s “Cash” Market

  1. Clay Lacy says:

    From the WSJ 3/9/09:

    The crisis is captured in the plummeting peso, which has fallen more than 30% against the dollar in the past six months. Yet the feeble peso is only the most visible symptom of what ails the country. The real problem is that in the current global recession, Mexico as a destination for capital has lost most of the limited appeal it once had. And while public dismay offers an opportunity to reform longstanding inhibitions about foreign investment, the political class appears apathetic toward that possibility.

    Thus far the government’s response to the crisis is a stimulus spending package in the spirit of Mr. Obama and Keynes. But that plan, which will increase the fiscal deficit, is unlikely to pull Mexico out of the doldrums. It might even make things worse by raising concerns about backsliding to fiscal irresponsibility, which would add to peso pressure.

    The central bank has been using reserves to try to stem peso weakness, but the markets know that’s a losing game. Either capital outflows will be reversed or devaluation will continue, along with the pain it implies.

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