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Puerto Vallarta Real Estate Trends 2010 - 2011

Published Aug 1, 2010 - (Updated Nov 30, 2012)

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Featured in Vallarta Lifestyles Magazine, Summer/Fall 2010 issue.

Looking back, the year 2010 will most likely 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 that brought the real estate market to a virtual standstill during 2008-2009 (And yes, that was just a year ago! How quickly we forget!), the market saw increased activity this past season, people once again out looking and testing the market with offers.

Most realtors we talked to believe that we are over the worst but it’s 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 confirm this with inventory levels stabilizing at around 1,100 resale property listings this past season, while new property inventory (development projects) has actually been dropping.

Most activity has been in the $350,000 USD range, but there has been increased activity in other price ranges, especially 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 average sales prices of $358,000 in 2008, $330,000 in 2007 and $283,000 in 2006. At this stage, we are not certain whether it’s that condo prices are rising or that people are 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 aren’t enough sales to generate any useful statistics.

Below are some of the trends we perceived last year and have updated to reflect activity in today’s market.

Economic Uncertainty

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 whether 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 also by the fact that those who are looking 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 get what they want. In years past, people typically viewed 7 to 10 properties before they were ready to make an offer. Today, it’s 25 to 35 properties. As one broker put it, there’s a lot of “hand holding” as clients are taken through the purchasing process, much more than in previous years. If not, the deal can go sideways. Realtors are working harder than ever before!

Buyer’s Market

It continues to be a buyer’s market and will be so for the foreseeable future, in most cases. There’s plenty to see and time to shop around with no hurry to make decisions, and that’s exactly what prospects are doing. Lower offers are now common, the spread between list and sales price having moved from a traditional rate of 6 - 7 percent to well over 10 percent.

Developer Inventories Continue to Fall—Potential “Shadow Market”?

Vallarta started 2008 with about 7,250 new development property listings on the market, this figure obtained from the study we perform at the beginning of each year. This number included all units of a project, whether 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 might not be for some time, as developers scaled back on which phases would be built and when—or even cancelled, in some cases. 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 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 dropped to 3,500, again due to some sales but primarily because of scaled-back or cancelled projects.

Vallarta has been fortunate not to be left with any half-finished developments. 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 here in 2007, with 50 projects launched in just the one year. Fortunately, these developers either managed to finish the projects, scaled them back or decided not to move forward at that 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 now being delivered are for “speculative” or investment purchasers, rather than people who intend to live in them, and will, therefore, be coming back on the market. We should start to find about this potential “shadow market” this upcoming season.

Resale-Driven Rather Than Developer-Driven

2003 to 2008 were golden years for developers, units often selling as fast as they could be built. People liked the latest construction techniques, luxurious extras and wonderful amenities not usually found in the existing market. They also preferred a larger property, the average home and condo size increasing dramatically. And they 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 buyers want to see the finished product to be confident they will not be the only ones in the building, left wondering how maintenance fees will get paid. With existing product, what you see is what you get. So, today’s developer realizes that he may need to complete the project before he’ll see sales. The days of pre-selling when the units were still only available on floor plans are over, most likely for some time.

A final advantage the resale market offers is that an existing homeowner usually has more room to play with the asking price, the developer more locked into the price because of construction costs.

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 a buyer’s decision, developers are making changes to projects underway and 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 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 upfront 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 have 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 market for single-family dwellings, the majority of homebuyers preferring condominiums because of preconceived cost savings. When all costs are added up, this may not necessarily be the case, but there is something to be said for being able to just lock the condo door at the end of the season and not have to worry about it, at least not to the extent one would with a home.

Financing More Prevalent

The mortgage brokers are busy—or busier than they have been in years past. Since the finance market in Mexico was not involved with subprime or ALT mortgages, 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, cash not as readily available as in past years nor people willing to invest as much up front.

Additionally, Vallarta has been cleared of those who were here just to take advantage of a market lacking in home-financing opportunities. Five years ago, the town was inundated by companies and individuals wanting to tap into a potentially hot mortgage market—which never really materialized. Today, only a few brokers remain, and those that do have years of experience in the Mexican mortgage market, 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 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, we compared total developer inventory to the number of sales and assessed the results by region, finding that there were more sales compared to overall inventory the closer you were to Puerto Vallarta, for the most part. 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 concerns.

Canadian/National Markets Strong, US Market Weak

Many developers have instituted “Fly-Buy” programs as part of their marketing strategy (they fly people in to take a look at their product, offering special pricing for the trip and if they buy), but they have stopped or scaled back programs originating in the USA and now are concentrating 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. And realtors also report an upswing in the number of Canadian and national buyers, which is reflected by the increasing number of Canadian visitors to the MLS public site, MLSVallarta.com. There are now nearly as many Canadian visitors as Americans, whereas there were traditionally only about half as many.

Long-Term Developers Positive

Although there has been little or no new development taking place in the region, there has been interest from long-term development companies, who usually are looking 5 to 10 years down the line, in accumulating large parcels of land for 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, and 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 a While

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, any potential upside gain considered a bonus and not necessarily a reason for buying. Single-property speculators are gone—and even the investors, to some degree—except for some bottom feeders every real estate agency reports 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 in but to have as their primary or secondary home in the near future.

With regard to investment buyers, Vallarta just doesn’t have the foreclosure or distress properties to the extent that can be found in the USA. Properties here were purchased primarily with cash, so unless the owner is overextended back home, there is need to sell at this time. This traditionally has been the case for Vallarta in other downturns in the market.

Renting More Common

There are more owners entering the rental marketplace now. Budgets are tighter and owners who would not have rented in the past are doing what they can to cover HOA and utility expenses. This is flooding what is an already saturated market. Short-term renters realize this and are bargaining, obtaining good rates. While rates will most likely go down, homeowners who wish to rent will need to offer not only better prices but also better services and extras, such as full maid service, a chef and/or bundled extras such as golf rounds, massage service and restaurant coupons.

Security 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, it’s understandable that people are concerned about security. However, the violence is concentrated mostly along the border and around Mexico City and has not affected Americans or Canadians living here, especially in this region of the country. Yet, no matter how safe it may be, there is no question that the US media coverage of this is affecting 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 the upper-income levels, those who can afford a second home. Recently, this economic profile has provided a spending surge in the USA. The reason? One reason given is that people are tired of being frugal—they are Boomers and Boomers like to buy things! Spending surged by 33 percent in May, showing that many upper-income consumers have the disposable income to increase their daily spending if they so desire. These consumers previously were holding back on spending 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 many economic observers recently have suggested the financial crisis is over and an upturn is now taking place—or it could be they simply have decided it is finally time to take a long-delayed vacation or even buy a new vacation home somewhere warm!

A recent Gallop poll concluded, “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 increased property sales? The recent upturn in activity seems to show that it may.

American Discontent?

This is a touchy subject, one that comes up more frequently over dinner or at a cocktail party than in conversations with real estate agents, but there seems to be a rising discontent among Americans, both from the left and the right, regarding the direction of the American government. A study recently done by Pew Research stated, “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.”

In his recent book Bad Money, political commentator Kevin Phillips warns, “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.” While Europe still draws many of these American emigrants, even more have relocated in Canada and Mexico. Exactly how many is hard to say. Precise US emigration figures have never been easy to come by. As a recent article in Time magazine states, “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 organizations such as the Association of Americans Resident Overseas estimate the number of nongovernment-employed Americans living abroad as anywhere between 4 and 7 million, the low end loosely based on the government’s trial count in 1999. Focusing on households rather than individuals (excluding households with any member sent overseas by the government or private companies), a series of Zogby polls commissioned by consulting firm New Global Initiatives reported that 1.6 million US households had already decided to relocate abroad, 1.8 million were seriously considering such a move, and 7.7 million more were “somewhat seriously” contemplating it.

If the data collected in the seven polls conducted between 2005 and 2007 are representative of the current decade, at least 3 million US citizens a year are venturing abroad. Whether this means some of these 3 million Americans will turn into homebuyers in Mexico remains to be seen, but the trend is a recurring point in the news and worth following.

Medical Tourism

As the Boomers age, access to good health care will be increasingly important, as will its price. Mexico has become a strong alternative for Americans seeking health care because of the standards of service, proximity to major US cities and lower cost. According to the World Health Organization, Mexican hospitals are similar in quality and care to those in the USA, and waiting times in Mexico are generally non-existent. Most treatments cost half of what they would back home, as do medicines. And the climate can be very conducive to recovery.

Paul Crist, a Vallarta hotel owner, has been a strong proponent of allowing Medicare coverage of costs in Mexico, and lobbying efforts with Congress are gaining ground. If successful, this would be a big boon for Mexico, especially Vallarta with its large American expat community.

Conclusion

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.

We’d like to thank the many Vallarta and Riviera Nayarit real estate professionals who took time from their schedules to meet with us to talk about the local real estate market and share their perspectives.


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