Improving Real Estate Market?
Published May 23, 2013 - (Updated Aug 29, 2013)
Traditionally, the Puerto Vallarta real estate market has been heavily reliant on the US real estate market, with real estate sales to Americans making up nearly 60% of sales for real estate tourism up until just a few years ago. With the economic crisis of 2007, real estate prices of American homes crashed, beginning a five-year fall that only recently has begun to correct itself. Although Vallarta’s real estate market is showing signs that it is recovering, a full recovery requires US buyers. Sales to Americans made up just a third of the market last year, the other two thirds split between Canadian and national purchasers. The national market has become very important to Vallarta’s real estate market and will likely continue to be strong, as the Mexican economy is performing well. Having 60% of all sales going to Americans may not happen again; the Canadian and national markets are too strong. This even split between the three countries does mean that Vallarta’s market is more diversified, however, which is positive news moving forward.
Nonetheless, it does seem that sales to American homebuyers in Vallarta could see a significant upswing this year because of the recovering American real estate market. As many Americans are reaching retirement age, and with equity now improving in their principal residences, there will certainly be an increase in Baby Boomers looking south for a winter home. And Puerto Vallarta, for many reasons, is an excellent option for them. The following statistical graphs shown here are courtesy of Case-Shiller and CoreLogic, two well-respected real estate analysis firms in the USA, many courtesy of Calculated Risk.
Graph 1 shows how US home prices increased or decreased between 1988 and 2008. The increase in prices from 1996 to 2006 created enormous wealth (false wealth, as we’d find out) in the USA. In less than 10 years, many homes doubled in value, some even more than that. And many of those homeowners decided to cash in on this new wealth by mortgaging their homes and buying a condo in Puerto Vallarta. They were exciting times, but it was too good to last. Notice how long the climb was, but how rapid the fall. We don’t want to create one of these markets again.
Graph 2 shows how things peaked in 2007 when the supply of homes surpassed the number of home sales. By 2009 home sales had dropped by 40%, and home inventories had doubled, and it continued to get worse well into 2011. So now we know what happened, but what were we to do about it? For many, there wasn’t much to do but just buckle down and do their best to get through the worst economic downturn since the Great Depression.
But enough about the past. Today, the market seems to have begun the process of recovery. It most likely will not be like the 2003-2008 years—what rises steeply can come down even more steeply; look again at the preceding graphs—but 2013 should be a bottoming-out year, better than 2012 and leading into better times in 2014. At least, that’s my take and here’s my reasoning.
Primarily, it’s based on the recovery of the US housing industry; so much in the USA relies on the health of the housing industry. When it’s good, it provides equity for homeowners, which can be cashed out to by second homes in places like Puerto Vallarta. So we need to keep a close eye on how the US housing market is doing.
Graph 3, from Calculated Risk, shows US housing inventory by the month since 2004. As you can see, in 2005 inventory kept rising all year, a clear indication that the housing bubble was ending and housing sales were falling off. However, take a look at what it’s done since 2008; inventory levels have fallen to levels even below those in 2004. US housing inventory is at its lowest level since January 2001, and months-of-supply fell to 4.4, the lowest since May 2005, a very good sign.
Graph 4 shows US existing home sales since 2005, with the boom well underway. Today, sales are well below the bubble years of 2005 and 2006, but above 2008 through 2011. Another good sign and sales are trending upward.
Another good indicator is the many US homeowners who were “underwater” with their mortgages now moving into positive equity territory. Remember, this is the stuff that helps people buy condos in Puerto Vallarta. CoreLogic recently showed that 100,000 more borrowers reached a state of positive equity during the third quarter of 2012, adding to the more than 1.3 million borrowers who moved into positive equity through the second quarter of 2012.
This brings the total number of borrowers who moved from negative equity to positive equity to 1.4 million. Much of this is due to home prices increasing, secondly the paying down of mortgages.
To summarize the main points:
- US home inventories are dropping to levels not seen since 2004.
- Many US homeowners are moving from negative to positive equity in their homes.
- US existing home sales are up and continue to climb.
Overall, it appears the US economy is poised for more growth over the next few years. It hasn’t completely recovered, as there certainly are other economic challenges, but this is a good indicator of things to come. Vallarta’s market usually lags behind the USA, which means we still have some time before we see a solid recovery, but there is light at the end of the tunnel. However, as mentioned earlier, a strong national market, along with improved diversification, will have Puerto Vallarta well-positioned for an improving market this year.