When compiling our annual real estate trends article last year, we saw the year as a turning point in the market. The bottom of the cycle seemed to have been reached, and it should begin to swing upward as we moved into 2011. This seems to have proven to be true, at least for the re-sale market. The number of sales has increased and the number of listings on the market reduced. New product or development properties still seem to be working through this, but that’s natural after a downturn cycle in the market; recovery is led first by the re-sale market and then followed by new product as developers start building again.
Most realtors we talked to believe that we are over the worst but that it’s going to be a slow recovery, continuing well into next year. The Vallarta multiple listing service, Multi-List Vallarta, seems to confirm this with average inventory levels dropping slightly, from 1,100 to 1,000 re-sale property listings this past season, and with new property inventory (development projects) dropping slightly as well.
Below are trends we see currently taking place in regard to the local real estate market.
The trend I hear most often when talking to realtors about the local real estate market is that it’s no longer about price per square foot or square meter, as was the custom in years past. Today, buyers have in mind a price they can afford or a limit to what they are willing to invest, and they want to see what’s available at that price point. If they wanted two bedrooms but only one-bedroom units are available at that price, that’s what they’ll look at—just don’t try to get them to move out of their price comfort zone.
This has led to one-bedroom condominiums becoming popular again, whereas you couldn’t give them away in 2007. Back then, buyers wanted an extra bedroom or two for visiting friends, plus a TV room or an office, and they were willing to pay for it. Developers stopped including one-bedrooms in their inventory or drastically cut back on them, instead starting to build three-bedroom units—but no longer. They are popular once again, meeting the price comfort level for many. The most popular price range in 2010 was $100,000 to $200,000, and that’s not something a developer can provide except for one-bedroom units.
The same goes for maintenance or carrying costs for the property. Buyers also have a number in mind for what they can afford to pay monthly. And with one-bedrooms being about 60% the size of two-bedroom units, maintenance fees are 40% less, another very good reason to consider a one-bedroom unit.
It continues to be a buyer’s market, especially the higher you go in pricing. At the lower end of the market, realtors report that prices seem to have stabilized, especially below $400,000. The average difference between original list price and selling price has been 15%. Above the $400,000 level, it’s not so much that prices are dropping but that there is a lack of interest in this price range. The first quarter of this year saw quite a bit of activity in the million-dollar range, but with properties that were originally listed much higher selling at discounts of 35% to 50%. For properties above $1.5 million, there has been very little activity. For estate properties listed at over $2.5 million, a few have sold but for basically half of the original asking price. The market is adjusting, and that is healthy. Traditionally, during market downturns, Vallarta has not seen major drops in pricing. This is primarily because it’s still a cash market; there is not a lot of financing, which means little to no foreclosures.
Before we can expect any significant change in the market, uncertainty must decrease, especially with regard to the USA. Americans were the primary buyers of tourism real estate in Vallarta for years, ahead of Canadians and Mexicans, but that trend has been reversed. Americans are still uncertain about the strength and direction of their economy, the value of their homes and whether they have saved enough for retirement. Although the US stock market has recovered, US real estate has not.
As we mentioned last year, this uncertainty 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.
It’s been three years since the market first began to slow down, and it seems sellers now realize the market is not going to bounce back as quickly as they would like. So, those who need or want to sell have become a lot more realistic with their listing price. As one realtor put it, it’s gone from the “How high can you price it?” of 2003 - 2007 to “How low can you get it?” As mentioned above, the market has firmed up in the lower end, but it’s difficult to determine if a bottom has been reached for higher-end properties because of a lack of demand.
Five years ago, the tourism real estate market primarily was composed of American buyers, with some realtors estimating that sector as high as 75%. Today, after the downturn in the US economy and the rise in value against the dollar for both Canadian and Mexican currencies, it’s leveled out so that it’s evenly distributed between the three groups. In 2010 it was the Canadians and the national market that kept realtors in business. While Canadians are buying real estate in regions all along the bay, Mexicans prefer areas such as Nuevo Vallarta or the Hotel Zone high rises. They already have what many Canadians or Americans are looking for—the quaint villages with plazas and cobblestone streets—back home in or near Guadalajara or in the Bajio region; they want something that looks more like Miami.
As in the USA, 2003 - 2007 saw the average size of homes increase substantially, including the building of “McMansions.” Vallarta was no exception, with some incredible homes built during this time, especially along the North Shore of Banderas Bay. Although few of these homes actually came on the market, when they did, they were testing the market between $10 and $15 million. Nothing ever sold for that. For the few that did sell most recently, it was at a serious discount.
At the current time, there is little interest in this part of the market. It involves a serious investment, which those who can do it don’t seem willing to do at this time. One architect I talked to recently, who specialized in this segment of the market, said it’s dead and he does not think it will be coming back for quite some time. He’s now designing condominiums projects, with a lot less amenities involved.
The market is particularly difficult for developers right now. They benefited greatly during the boom years, but now many find themselves with product that is not what people may be looking for, developed at costs that make it hard for them to adjust and be competitive. They find themselves competing with the re-sale market—which is seeing good activity—and, in some cases, with re-sales in their own projects.
Today, developers are carefully reconsidering the make-up of their inventory offerings, as mentioned previously, less three-bedroom units (if any) and more one-bedroom units. Amenities (gymnasiums, restaurants, oversized pools, concierge service) that in the past helped draw in many buyers are now looked upon as negatives. Buyers are looking at the cost to the HOA to provide these types of amenities and are saying it’s too much, they don’t need it. The indulgences of earlier days that created lineups of interested buyers are now scaring some away.
There currently isn’t much new development taking place. Existing developers who have phased in their projects are scaling back the size of units and reducing the number of bedrooms for future phases. While there were 100-unit-plus developments with only three-bedroom units in the past, you can now find projects with mostly one-bedroom units or seriously downsized two-bedroom units. New projects that are coming online tend to be smaller in overall size, along with the units themselves, and offer limited amenities, in order to be price competitive. Remember, it’s all about price points now.
Although there has been little or no new development taking place in the region, there continues to be interest from long-term development companies, which usually are looking 5 to 10 years down the line in accumulating large parcels of land for mega-developments. For the first time in some time, we have large development/investment companies making offers on large tracts of land suitable for real estate/tourism development. They are confident the market will come back, and when it does, they will be ready to take advantage of it.
We recently contacted every development we could that was open for business and came up with 136 projects. Of these 136 projects, we calculated that they have about 2,300 units actively listed for sale. This is down from a high of 7,200 in 2007.
However, what needs to be taken into consideration is a “shadow” market of dormant inventory. Since 2008 many developments have scaled back the size of their projects, with some cancelled, but many decided to only release product in phases. A good example would be Alamar. We originally included that this project had over 600 units for the market. However, they only released for three towers, and eventually even put the third tower on hold. This reduced the number of units they have on the market, but it doesn’t mean this product will not be released sometime in the future. There are still around 500 units that Alamar will decide to introduce to the market at some point.
We calculate that there are about 2,500 dormant units waiting on the sidelines. Fortunately, they do not directly affect our market at this time, but any new developer considering starting up a new project in the region should be aware of this inventory. Since much of it hasn’t been constructed yet, although the land most likely has been paid for, they have the flexibility of introducing product that is more relevant to the current market, such as smaller units with fewer amenities, at perhaps a better price.
In 2007, 53 new projects came onto the market, providing a total inventory of 5,400 units. In 2009 only 8 new projects entered the market, with just 200 units. In 2010 there were 9 new projects, providing over 400 units.
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 that 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 not only to vacation in but to have as their primary or secondary home in the near future. This is all good long term, but it doesn’t help sellers and developers who want sales now.
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. Since properties here were purchased primarily with cash, there is no need to sell at this time unless the owner is over-extended back home. This traditionally has been the case for Vallarta in other downturns in the market.
More owners are 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 services and restaurant coupons.
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 US media coverage of this—in our opinion, over-sensationalizing it—is affecting the real estate market.
Coming out of this past recession, Americans have lowered their level of expectations considerably. The over-exuberance—the rush to use credit, feeling richer than perhaps they actually were—is mostly over. In its place comes a more realistic prospective homebuyer, who realizes that big is not always better and that they can actually get by with a lot less in regard to their home size and still have a great second-home-in-Vallarta experience. As mentioned earlier, buyers are now coming to the market with a price they are comfortable investing, along with how much they can afford for monthly living expenses such as HOA fees and all that goes with owning a home. They realize they don’t really need the extra bedroom, especially when they see the difference in both purchase price and maintenance fees. They see the extras at condo projects, such as gyms or concierge services, not as nice amenities but as unneeded extra carrying costs. The Baby Boomers, who continue to be a large part of second-home buyers in the region, still want a second home somewhere warm during the winter; however, their expectations of what they need are more in line with what they can afford or should be investing.
An interesting trend that has come out of this is that people are looking at what are traditionally non-tourist-type properties, not social housing but a step above. These usually are gated communities of townhouses, which can provide a home of a decent size at a very affordable price, usually under $150,000. The most popular region for this is in and around Nuevo Vallarta and Flamingos.
Whenever a real estate market slows down or is on the downward side of a cycle, the region experiences a lull in development, along with those things related to it. Roadways are no longer actively trafficked by flatbed, container or dump trucks dispersing dust everywhere and creating heavy wear and tear on the road system, and utility services are no longer overly stressed. For most of the past decade, Vallarta seemed to be in a continual state of construction development; it never stopped. It was like living in a never-ending construction job site.
When there’s this much development taking place, the government has difficulty keeping up and providing proper infrastructure. Well, they have plenty of time to catch up now, and that’s exactly what they are doing. Although the Vallarta municipality certainly doesn’t have much in the way of financial resources, the mayor seems to have done a good job of obtaining funds on the state and federal levels to undertake major city works.
Currently, the Malecon is being extensively renovated; funding has been found to renovate at least half of the South Shore highway, along with a badly needed sidewalk; the main tunnel on the Libramiento is being widened to provide four-lane traffic; and the highway to Punta Mita is being redirected, straightened and widened between La Cruz and Pontoquitos. There are also a number of smaller projects going on all around bay. In downtown Puerto Vallarta, a number of new viewpoints have been renovated on the hillside behind town, along with sidewalks being rebuilt in a charming manner. This is all good. When the market cycle turns back up, Banderas Bay will be ready.
One realtor had an interesting take on a trend he believes is currently evolving. When 9/11 happened, it was thought that it would certainly slow down activity in the local real estate market, but it didn’t. As a matter of fact, it helped fuel the largest real estate boom Vallarta has seen. Americans were shocked, not just by the horrendous event itself but also by the wake-up call for some that it could have been them. This got some thinking that they weren’t getting any younger and should be working less instead of more, spending more quality time with family, traveling more and, perhaps, buying that condo they’d been thinking about down in Puerto Vallarta. The economic downturn that followed only elevated this sentiment.
This takes us to the Baby Boomers. They didn’t disappear, but their long-awaited retirement was unfortunately delayed for some. Now that the economy seemingly is getting back on track—the US stock market up to nearly pre-crisis level—many have recovered any losses they incurred and can more seriously consider retirement or at least take further steps in that direction, like buying a condo in Puerto Vallarta.
The realtor’s take is that a pent-up demand is being created. Some people have called off buying, but many have just delayed it for awhile for reasons given earlier, but they still intend to buy. And each year brings even more who are holding off. But at some point, the moment is going to seem right for these buyers, and there will be a flood of them looking to buy real estate—perhaps not a tsunami, but something significant.
Additionally, in today’s financial markets it’s difficult to find good places to put your money. So some are thinking, Why not invest in a home in a warm place—where I can at least physically enjoy it—at prices that are looking quite good these days? He concludes that the recent uptick in activity he has seen is because the “demand” is now starting to come into the marketplace. We’ll be keeping an eye on this particular trend!