Featured in Vallarta Lifestyles Magazine, Summer/Fall 2009 issue.

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

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

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 accustomed to dealing with risk; they face it in business situations, when they are considering what they should be doing with their investments. It’s a part of life, with some people able to handle large risks better than others. Uncertainty is something else. As Knight puts 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 decrease. Unfortunately, we seem to be living in a world of more and more uncertainty. Perhaps, just getting used to living with it will be enough to allow the market to get back on track. And lately, it seems as if either this is happening or uncertainty has been reduced. It is, at least, a lot better than it was six months ago.

Last fall, things were looking so bad that there was even talk of a US economic depression, but that’s not discussed now. Now it’s more about “green shoots” and “V-” or “W-” or “L-shaped” recoveries. The current forecast seems to be that the worst has been averted, for the most part, and now it’s just a matter of time.

What has been interesting is the mainstream media’s take on problems and issues in Mexico, primarily regarding the swine flu scare and the “narco traficos.” While both are/were serious issues, neither has directly affected our region in any serious manner. Mexico’s response to the flu was a strong one, praised around the world by major health organizations, but the cost to the country was high, tourism its third largest industry. Despite the fact there were very few cases here, the flu’s impact managed to empty practically every hotel room in the region. And although the wars against and among the drug cartels are serious, the situation has not affected this region. No tourist or American/Canadian homeowner has been affected by this in any way.

But the way both of these issues have been portrayed in the American media has had serious effects. Again, not to say these are not issues, but the situations certainly were overblown. I hope this does not become a “trend,” what 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. With that said, let’s take a look at some of the trends that seem to be happening in Vallarta’s real estate market.

Trend #1 – Buyer’s Market

It is definitely a buyer’s market. 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 price and sales prices having moved from a more traditional rate of 6 - 7 percent to more than 10 percent.

Trend #2 – Reduced Developer Inventories

We went into 2008 with about 7,250 properties on the market, that number obtained from a study we perform at the beginning of each year. This was after 50 new developments were introduced to the marketplace in 2007, and when we calculated the number of properties on the market, we used the total number of units a development was going to include, rather than what was actually available for sale.

Many developments release in phases, especially when units are not selling as well as they once were – often before they had even broken ground. We took that fact into consideration this time. We also saw that some projects that had never actually broken ground decided not to go ahead. We also saw some put a portion of their inventory to another use, introducing a hotel component. When we took all this into consideration, plus the sales that actually took place in 2008, we found that inventories were down to 4,200 units. Still high, but workable – and a lot better than some other places in Mexico.

Trend #3 – Developer-Driven to  Resale Driven

For the past five years, the market has been developer-driven, with people preferring new products that offered 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. With existing product, what you see is what you get. A final advantage the resale 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.

For purchasers considering new product – and there are many reasons to still consider it, as mentioned above, plus items such as warranties and less maintenance since it’s new – this is still a very good option. Just do your homework on the developer and the development. And a good realtor can help you with that.

Trend #4 – New Product going Forward

With price playing an increasingly important role in what a buyer can afford – because their net worth has been substantially reduced, less work or scarcity of credit – developers are already making changes, some to projects underway and some for future projects. Unit sizes are being reduced (back to the 1,500-sq-ft two-bedroom condo), extras dropped (did we really need two dishwashers in the kitchen?) and amenities scaled back (such as onsite 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.

Trend #5 – 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.

Trend #6 – 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 years in their home hideaway, many have found it a little too hidden and would 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.

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 got to Puerto Vallarta. As you moved away, to the north or south, sales dropped off when compared to the overall inventory available in the region. I think this also has to do with security, in part.

At the top of the list for sales-to-inventory was the Nuevo Vallarta/Flamingos area. With three golf courses, the bay’s longest beach, athletic clubs, shopping and good security, social networks have been built up that are attractive to new homebuyers. Today’s retiree is not passive. I have a friend who is 81, and he just took up golf. People want to be more involved in their communities, help out through non-profit organizations and keep physically and mentally active.

Trend #7 – Progressive Ownership

Although this isn’t a trend that has become readily apparent yet, some large developments that offer a wide range of real estate options are having success with it, and I believe it will become more prevalent. These projects are starting people off with what they can afford and will use, in either timeshare or fractional ownership. And then, as they need more (size, space or time), they bump them up, giving credit for the equity in their existing property. It’s done entirely in-house and works well, especially in a slow market environment; at least there are sales taking place in the form of upgrades. I’ve even heard of developers working the other way for their clients, allowing them to downgrade to something they need and can still afford (and keeping a sale together). I think this trend, allowing more flexibility within real estate purchasing, will give developers who can offer this an edge and help them retain clients.

At the beginning of this economic downturn, I thought the timeshare industry especially would suffer since it relies so heavily on financing, but it has actually held up rather well. I suspect people are being a little more realistic with their expectations and concluding that a couple of weeks is all they can use each year, so why own for the whole year? And if the ability to upgrade is there, it makes even more sense. Unfortunately, this type of program is limited to very large developments that can provide such a wide range of real estate options.

Trend #8 – Market Convergence

When demand was at its peak for secondary housing or real estate tourism in a warm climate, locations that would not usually be seen as potential candidates for prospective purchasers were brought into the market. Developments were being announced in places such as Nicaragua and Honduras. Panama, Costa Rica and Argentina became “hot” markets. Within Mexico, Loreto, which had remained a stagnant market for years, suddenly had multiple developments, one with more than 6,000 home sites.

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 in the community. Similarly, we see that people will be looking for something closer to their primary home, easier to reach and with a large community (consisting primarily of other second-homeowners) they can actively join. This is good for Mexico and the traditional real estate tourism markets ,such as Puerto Vallarta. It’s not so good for Honduras and Nicaragua, or even the Loretos out there – that 6,000-home development, the Loreto Bay Company, recently shutting down its operations.

Trend #9 – Canadian/National Market Rebound

When the market tanked last fall, there was a “flight to safety” into treasury bonds, and the Canadian dollar and Mexican peso lost substantial value against the US dollar. Since then, they have begun to recover, with the long-term trend being that this recovery will continue. Since real estate in Vallarta is based on US dollars, this will make real estate investing more attractive for both the Canadian and national markets.

Trend #10 – Recovery

This is a trend that has just recently begun, and it still may be a little early. But with talk of “green shoots” of economic recovery in the USA, it seems our market has bottomed out and will see more activity moving into the fall of this year and into 2010. What’s not so certain is what this recovery may look like. It will most likely follow what happens in the US economy, since that is where most buyers originate.

There are people who want to buy in Vallarta. Some are moving ahead, but more are sitting on the sidelines, waiting to see where the economy is going. They still want to have a second or retirement home here; they just need to be a little more comfortable with where they stand financially and where the economy may be going. It does seem that the economic downturn has bottomed out, that the swine flu is a thing of the past (at least for Mexico) and that the trend should be for a recovery in the local real estate market.

So there probably will be an uptick in activity in the fall, with people who have been sitting on the sidelines because of the uncertainty principle mentioned above coming out to once again look at real estate. It most likely will be slow, but slow can be good. It’s those violent upswings that can also bring drastic downswings.

Let me conclude by saying that the fundamentals for a strong real estate tourism market in Vallarta are still in place. Its proximity to US markets, pleasant winter climate, low cost of living, low property taxes, great amenities, 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. This downturn is temporary; the market will return as the American economy begins it recovery.