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 has moved from a more traditional rate of 6-7% to over 10%.
Trend #2 – Reduced Developer Inventories
We went into 2008 with about 7,250 properties on the market, a number obtained from a study we perform at the beginning of each year. This was after we saw 50 new developments introduced to the marketplace in 2007. However, in the past when we calculated on many properties were on the market, we took the total number of units that a development was going to consist of, rather than what was actually available for sale. Many developments release in phases, most certainly today when units are not selling as they once were, before they had even broken ground. We took that into consideration this time. We also saw that some projects, that never actually had broken ground, decided not to go ahead. We also saw some turn a portion of their inventory into 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 actual inventories were down to 4,200 units. Still high, but workable. And a lot better than some other places in Mexico.
Trend #3 – Shift from a “Developer-Driven” Market to a “Re-sale Driven” Market
For the past five years the market has been developer driven with people preferring the new products that offer the newest construction techniques, glitzy, luxurious extras, wonderful amenities that were not usually found in the existing market and larger in size as the average home and condo size increased dramatically. People were so tied up in this that they would 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, then some buyers are not as interested.
There is also the concern on 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. And in the past, purchasers were paying a premium of up to 20% over what a similar existing unit may be selling for, just to have something that’s new with the latest add-ons. 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 as its 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. A last advantage that the re-sale market has is that usually an existing homeowner has more room to play with on his asking price. The developer is more locked in to his price because of construction costs.
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.