I haven’t been posting for some time, been working on the real estate trends article for the upcoming issue of Vallarta Lifestyles. Here’s a pre-screening:
Looking back the year 2010 will mostly like be seen as a turning point for the Vallarta/Riviera Nayarit real estate market. After having survived the global economic crisis and the swine flu scare (yes, that was just a year ago, how quickly we forget), which basically brought the real estate market to a standstill during 2008-2009, this past season saw increased activity, people once again out looking and testing the market with offers.
The opinion of most realtors we talked to was that we were over the worst but its going to be a slow recovery with few signs of a strong recovery until 2012. The Vallarta multiple listing service, Multi-List Vallarta, seems to back this up with inventory levels stabilizing this past season with around 1,100 re-sale property listings while new-sale property inventory (development projects) has actually been dropping.
Most activity has been around the $350,000 but there has been increased activity in other price ranges, especially in the $600,000 to $1 million range. During the first half of 2010 the average sales price for a condominium was $320,000 USD (with the sales price increasing each month since the beginning of the year) compared to an average sales price of $358,000 in 2008, $330,000 in 2007 and $283,000 in 2006. At this stage we are not certain whether its condo prices that are rising or rather that people are now more willing to look at higher priced condos than they were a year or two ago. Most likely the latter. Unfortunately there has been so little activity for homes that there’s not enough sales to properly generate any useful statistics.
Below are some of the trends we perceived last year and have updated to reflect activity in today’s market.
Before we can expect any significant change in the market, uncertainty must decrease. People are still uncertain about the strength and direction of the economy, the value of their homes, and if they have saved enough for retirement. This is reflected in the local real estate market not only by a drop in the number of people looking at real estate, but those that are, are not rushing into anything or making quick decisions. They realize that properties are not selling briskly and they have time to look around to ensure they will get what they want. In years past it was common for people to view 7-10 properties before they were ready to make an offer. Today it’s now 25-35 properties. As one broker put it, there’s a lot of “hand-holding” going on as they are taken through the purchasing process, much more than in previous years. If not, the deal can go sideways. Realtors are working harder than every before!
It continues to a buyer’s market and will mostly be so for the foreseeable future. There’s plenty to see, time to shop around, and no hurry to make decisions in most cases. And that’s exactly what prospects are doing. Lower offers are now common, with the spread between list and sales price moved from a traditional rate of 6-7 percent to well over 10 percent.
Developer Inventories Continue to Fall – but Potential “Shadow Market”?
2008 started with about 7,250 new development property listings on the market, a number obtained from a study we perform at the beginning of each year. This included all units of a project, whether it was being phased in or not. As the market began to slow, it became clear that not all these units were actually on the market and may not be for some time as developers scaled back on which phases would be built and when, and in some cases, even cancelled. We also realized that some projects that had never actually broken ground had now decided not to proceed any further. We also saw some put a portion of their real estate inventory put to another use such as introducing a hotel component. When we took all this into consideration, plus the sales that actually took place in 2009, we found that revised inventories were down to 4,250 units. And at the beginning of 2010 when we performed the study again, inventory levels had continued to drop, down now to 3,500. Again, due to some sales but primarily because of scaled back or cancelled projects.
Vallarta has been fortunate to not be left with any developments unable to complete their projects or left half-finished. This certainly has not been the case for other places in Mexico, most notably the infamous “Trump Ocean Resort just south of Tijuana. New development peaked in 2007 with 50 projects launched in just the one year. Fortunately these developers either managed to finish the projects, scale them back, or decided not to move forward at this time. Few new projects were announced in 2008 and only a couple of small projects were introduced in 2009 therefore limiting the amount of inventory coming onto the market.
What we are not sure of at this time is how many of the units that are now just being delivered, are “speculative” or investment purchasers rather than people who intend to live in them, and how many of these therefore are going to be coming back on the market? We should start to find about this potential “Shadow Market” this upcoming season.
Re-sale Driven rather than Developer-Driven
2003 to 2008 were golden years for developers, often selling units as fast as they could build them. People liked the latest construction techniques, luxurious extras and wonderful amenities not usually found in the existing market. Buyers also preferred a larger property, as the average home and condo size increased dramatically. And in the past, purchasers were paying a premium of up to 20 percent over the price of a similar existing unit, just to have something new with the latest add-ons. People were so tied up in this that they would even upgrade to the “newer” project of a developer because it was “bigger and better.”
Well, in today’s market, bigger is not actually better, and if the extras and amenities are going to add to the overall cost and increase maintenance fees, some buyers are not as interested. There is also the concern about whether the developer will be able to deliver, not just on time but also everything that has been promised. Prospective purchasers want to see the finished product, to be confident that they will not be the only one’s in the building and wondering how maintenance fees will get paid. With existing product, what you see is what you get. A final advantage the re-sale market offers is that an existing homeowner usually has more room to play with his asking price. The developer is more locked into his price because of construction costs.
Today’s developer realizes that he may need to complete the project before he’ll see sales. The day’s of pre-selling when the units are still only available on floor plans are over, most likely for some time.
For purchasers considering new product – because of warranties, less maintenance since it’s new, modern design and amenities – this is still a very good option. Just do your homework on the developer and the development.
New Product going Forward
With price playing an increasingly important role in what a buyer can afford, developers are making changes to projects underway and for future projects. Unit sizes are being reduced (back to the 1,500-sq-ft two-bedroom condo), extras dropped and amenities scaled back (such as on site restaurants, spas and concierge services). People are seriously questioning how many square feet they really need since it all comes with a cost, both up front and down the line in cleaning and maintenance fees. “Economical” and “efficient” have replaced over-sizing everything and luxurious extras. All those involved in the projects are having to rethink real estate design by offering smaller, more practical units and removing or reconsidering what may be considered luxurious and non-essential. Focus is on value, “frugality with less glitz”, as one developer put it.
This has also put a damper on the single family dwelling market, with the majority of homebuyers preferring condominiums because of the preconceived cost savings. When all costs are added up that may not necessarily be the case, but there is something to be said for just be able to lock the condo door at the end of the season and not have to worry about it, at least not to the extent that a home needs caring for.
Financing More Prevalent
The mortgage brokers are busy, or busier than they have been in years past. The finance market in Mexico was not involved with sub-prime or ALT mortgages, so financing is still available and is being requested much more frequently than in the past. Every realtor now works closely with a mortgage broker, or should, since cash is not as readily available as it was in past years or people are not willing to invest as much up front.
Added to this trend is that Vallarta has been cleared of those that were here just to take advantage of a market lacking in home finance opportunities. Five years ago the town was inundated by companies and individuals wanting to tap into a potential hot mortgage market but which never really materialized. Today, only a few brokers remain and those that do have years of experience in the Mexican mortgage market place as well as a number of deals completed – they’ve survived this downturn, have learned from it and the market is better for it.
Closer to Community and Being Involved
In the past, it was trendy for buyers to want something “away from it all,” with exclusivity and privacy. However, it seems that after a few years of this many have found it a little too hidden and prefer to be situated where there’s more activity, desiring community and the ability to get involved in social activities, especially as the amount of time they have available to stay here increases. People want to be close to where people congregate. To be able to walk in or to town, to the cafe, to engage, to feel they are participating.
In a study done earlier this year, where we compared total developer inventory to number of sales that have taken place and compared the results by region, we saw that, for the most part, there were more sales compared to overall inventory the closer you were to Puerto Vallarta. As you moved away, to less populated regions, sales dropped off when compared to the overall inventory available in the region. I think this also has to do with security concerns as well.
Canadian/National Market Strong – USA Market Weak
Many developers are resorting to “Fly-Buy” programs, (they fly people down to take a look at their product, offering special pricing for the trip and if they buy), as part of their marketing strategy, but for the most part they have stopped or scaled back programs originating in the USA and are concentrating now on Canada and Mexico. The Canadian dollar remains strong, the peso has been consistent against the US Dollar, and both countries did not suffer the significant drops in real estate values that have taken place in the USA. Realtors as well report that there has been an upswing in the number of Canadian and national buyers and this is reflected with visitors to the MLS public site of MLSVallarta.com – Canadian visitors now nearly equal the American counterparts whereas traditionally they have been about half.
Long-Term Developers Positive
Although there has been little or no new development taking place in the region, there has been interest by long-term development companies, who usually are looking 5-10 years down the line, in accumulating large parcels of land for large mega-developments for the near future. The two most apparent are with the company Rasaland, which has projects in process to the south in Costalegre and to the north just below Guayabitos. The other is C&C Capital, which has major projects planned for the north shore of the bay, called Nahui, and another near Guayabitos called Punta Raza. They are confident the market will come back, and when it does, they will be ready to take advantage of it.
Speculation is Gone, at least for Awhile
Speculation drove a large part of the market in years past. Today, real estate investment has to make sense and stand on its own merit with a potential upside gain considered a bonus and not necessarily as reason for buying. Single property Speculators are gone, and even to some degree the investors, except for some bottom feeders that every real estate agency report they are dealing with. There’s been a shift from people buying a “vacation” property to now buying a “retirement” property. People are looking for a place to not just vacation to, but plan to have it has their primary or secondary home in the near future.
With regards to investment buyers, Vallarta just doesn’t have the foreclosure or distress properties, at least not the extent that can be found in the USA. Properties were purchased primarily with cash, and unless the owner is overly extended back home, they do not need to sell at this time. This has traditionally been the case for Vallarta in other downturns in the market.
Renting now more Common
There are more people who in the past would not have rented, now entering the rental marketplace. Budgets are tighter and people are doing what they can to cover HOA and utility expenses. This is flooding what is already a saturated market. Short-term renters realize this and are bargaining, and obtaining good rates. Rates will most likely go down, but homeowners that wish to rent will need to offer not just better prices but better services and extras such as full maid service, a chef, and/or bundled extras such a golf rounds, massage service and restaurant coupons.
Security is a Concern
With the increase in violence in Mexico between rival drug cartels and the police and soldiers trying to suppress them, along with the coverage it has been receiving in the American press, its understandable that people are concerned about security. The violence has concentrated mostly along the border and around Mexico City and has not effected Americans or Canadians living down here, especially in this region of the country. No matter how safe it may be, however, there is no question that the US media coverage of this is certainly effecting the real estate market.
Potential Trends that could affect the Local Real Estate Market
Boomer Frugality Fatigue
Most of the real estate purchases made in Vallarta were by people in upper-income levels – those that can afford a second home. Recently this economic profile has provided a spending surge in the US. The reason? Well one reason given is that people are tired of being frugal – they are Boomers and Boomers like to buy things! Spending surged by 33% in May, showing that many upper-income consumers have the disposable income to increase their daily spending if they so desire. These consumers were holding back on spending prior previously in response to the length and depth of the recession, the financial crisis, and a general feeling of economic uncertainty.
This “frugality fatigue” means that people are simply tired of cutting back and want to go back to spending — maybe not as freely as they did prior to the recession, but at higher levels than they did last year, when frugality was commonplace. This could be because recently many economic observers have been talking about the financial crisis’ being over and an upturn now taking place. Or, they may simply have decided that it is finally time to take a long-delayed vacation, or perhaps even buy a new vacation home somewhere warm!
A recent Gallop pool concluded that “A sharp increase in upper-income Americans’ spending is terrific news for the U.S. economy. These Americans generally have the wherewithal to spend, and when they do so, they generate consumer demand across the economy. In turn, this produces what the U.S. economy needs the most: a sharp and sustained increase in private sector jobs.”
Will this frugality fatigue turn into potential property sales? The recent upturn in activity seems to show that it may.
This is a touchy subject, one that usually comes up more over dinner or a cocktail party rather than in conversations with real estate agents. But there seems to be a rising discontent with Americans, both from the left and the right, with regards to the direction of the American government. A study recently done by Pew Research stated that “by almost every conceivable measure Americans are less positive and more critical of government these days.” The survey finds “a perfect storm of conditions associated with distrust of government – a dismal economy, an unhappy public, bitter partisan-based backlash, and epic discontent with Congress and elected officials.”
Political Commentator Kevin Phillips, warns in his recent book Bad Money, that “an unprecedented number of citizens, fed up with failed politics and a souring economy, have already departed for other countries, with even larger numbers planning to do so soon.
Europe still draws many of these American emigrants, but even more have relocated in Canada and Mexico.
Exactly how many people are part of this trend is hard to say. Precise emigration figures have never been easy to come by in the United States.”
And from a recent article in Time Magazine:
“Elizabeth Grieco, chief of immigration statistics at the U.S. Census Bureau, puts it bluntly: “We don’t count U.S. citizens living abroad. But estimates made by organizations such as the Association of Americans Resident Overseas put the number of nongovernment-employed Americans living abroad anywhere between 4 million and 7 million, a range whose low-end is based loosely on the government’s trial count in 1999. Focusing on households rather than individuals (and excluding households in which any member has been sent overseas either by the government or private companies), a series of recent Zogby polls commissioned by New Global Initiatives, a consulting firm, yielded surprising results: 1.6 million U.S. households had already determined to relocate abroad; an additional 1.8 million households were seriously considering such a move, while 7.7 million more were “somewhat seriously” contemplating it. If the data collected in the seven polls conducted between 2005 and 2007 are fairly representative of the current decade, then, by a modest estimate, at least 3 million U.S. citizens a year are venturing abroad.
Does this mean some of these three million Americans could turn into homebuyers in Mexico? That remains to be seen. But its a point that continues to come up in the news and is worth following.
As the Boomers age, access to good health care will be increasingly more important. And so will be the price for the treatments. Mexico has become a strong alternative for Americans seeking health care because of the standards of service, close proximity to major US cities and cost. Most treatments are half of what they would be back home, as are the costs for medicines. According to the World Health Organization Mexican hospitals are similar in quality and care to those in the United States. Waiting times in Mexico are not a problem and are generally non-existent. And the climate can be very conducive to recovery.
Paul Crist, a local Vallarta hotel owner, has been a strong proponent of allowing Medicare costs to be covered in Mexico and lobbying efforts with congress are gaining ground. If successful, this would be a very big boon for Mexico, especially Vallarta with its large American expat community.
The fundamentals for a strong real estate tourism market in Vallarta continue to be in place. Its proximity to US markets, pleasant winter climate, low-cost of living, low property taxes, great amenities, the Mexican culture and the wide variety of real estate options available, all add up to an excellent opportunity for Americans, Canadians and Mexicans looking for a second or retirement home somewhere warm and inviting. There are certainly challenges, but that seems to be par for the course these days, wherever you may be.