Real Estate Market Update 2008

Realtors, developers, potential buyers and sellers, all are looking at the local real estate market these days. So far, there have been few signs of any considerable change in the market that would give them a better idea about how things may go in 2008, especially when considering what is currently happening north of the border. There is some reason to be concerned, but there seems to be more than enough reason to believe that Vallarta’s market will weather this better than many US markets. Let’s take a look at what Vallarta has going for it this year.

Outstanding Appreciation

Since 2003, prices for homes and condominiums for the Vallarta real estate market have risen steadily. This is not only a sign of a healthy market, it’s also something that real estate owners very much appreciate. In 2003, the average condominium was priced at $196,000 USD according to Multi-List Vallarta, the MLS service for the regional real estate associations. By 2007, that average price had risen to $351,000 USD. For homes, the increase has been even greater. The average home was priced at $256,000 in 2003, and in 2007 that had increased to $693,000, not a bad return over just five years.

Because of the lack of sales prices on properties going back to 2003 (sales have only been reported consistently by board members since 2005), we have used the “list” price of properties; homes didn’t actually sell for these prices. Using the actual “sold” prices available for 2007, the average condominium sold for $338,000 USD, which is only 4% off the list price. The average “sold” price for a house in 2007 was $631,000 USD, which is about 9% less than the listing price. And the average spread between list and sold for all properties in 2007 was 7%, up from 3.1% in 2006 and 4.6% in 2005. All in all, it adds up to five remarkable years.

Compared to the US market, which has seen housing prices fall throughout the year (except in primarily second-home markets), Vallarta’s market is very strong, with a substantial gain in appreciation for both homes and condominiums. And this only takes into consideration the re-sale market. New home and condominium sales have traditionally been selling at list price and at prices substantially above the re-sale market. People prefer the new product with the latest styles in design and architecture, as well as the most modern amenities, and are willing to pay more for it. So, if the development products were also included in these numbers, appreciation would be even higher, especially for condominiums.

It should also be noted that there was a very large spread between the lowest price sale in 2007 ($87,000 USD) and the highest price ($2,470,000 USD). There are still affordable homes and condominiums available in Vallarta. They may not be on the beach or have an ocean view, but they are here and they are selling.

US Real Estate Market Relevant to Local PV Market?

It’s not possible to view the Vallarta real estate market without taking into consideration what is happening to the north, across the border. For the most part, this is where the majority of our real estate purchasers originate. If their market or economy is healthy, most likely it will be the same in Mexico. As they say, “When the USA sneezes, Mexico (and Canada, for that matter) catches a cold.”

Well, the USA has caught something, caught up in a mortgage meltdown and a critical credit crunch, to borrow some of the more popular expressions being used to describe the US financial and real estate markets. As we all now know, too much money was lent out to too many people who really couldn’t afford mortgages in the first place, and now that interest rates are rising, with mortgages coming up for renewal and housing prices falling, the US real estate market is being tested like it hasn’t been in some years.

In a December 2007 report on Mexico by the International Monetary Fund, it was stated, “The recent troubles in the US mortgage market have raised questions about the possibility of a similar replay in Mexico — but there are significant differences between two markets. The fast pick-up in private mortgages in Mexico was preceded by several years of stagnation and is from a low level. Furthermore, RMBS (Residential Mortgaged Back Securities) remain a very small share of the domestic mortgage market in Mexico, with much lesser systemic implications. Finally, the complex securities currently generating volatility in the US markets, such as CDOs (Collateralized Debt Obligations), are practically non-existent in the Mexican financial sector.”

On even closer inspection, most of the trouble has been taking place in the first-home market, while the second-home market continues to do rather well in some areas of the USA. And the second-home market is what drives the Vallarta market. People are buying a second home or condominium somewhere warm, where prices and the cost of living are better. So, rather than get too concerned about the sub-prime mess, we should be looking at how markets in traditional second-home markets are doing.

Recently, five Colorado mountain resort counties set a combined record of $8.56 billion in real estate sales in 2007, counties with towns like Aspen, Vail and Breckenridge, according to a report compiled by the Land Title Guarantee Co. Last year, the combined sales in the same area totaled $7.41 billion. And in California, home prices declined across the board, except for Palm Springs, another very popular second-home market. If these markets are doing well, couldn’t the same be expected for Vallarta’s?

There are certainly some signs that the market is in a state of transition, moving from a seller’s to a buyer’s market. This has been expressed by a number of real estate agencies, brokers and developers. Talk on the street is that sales are somewhat down or keeping stable with last year. The problem with that is there are more products on the market compared to this time last year. So, if sales at real estate offices managed to at least equal last year, it would not be sufficient to satisfy sellers and developers because of our increased inventory. The Vallarta MLS showed sales volume was up 10%, but that the number of sales was down 10%, thereby canceling one another out. This was during a year where more new product was introduced to the market. At this time, it is unsure how that has affected developers, but it seems likely that sales could be down, at least for developments that don’t have a unique product or good pricing policies.

Up to most recently, we have seen most real estate development units sell as fast as they could be built, with a few projects even selling out before they broke ground. Well, those days may be over, at least temporarily. What we’ll most likely see now is developments that have a unique product and are reasonably priced continuing to sell well. Those that do not have something unique or are overpriced will not.

It is difficult to gather statistical information on the local real estate market, since there is no way of obtaining the sales numbers for the real estate developments, or new product. We know they are selling, we just don’t know how well, how many and how that compares to previous years. The MLS service for Vallarta only includes re-sale properties, and currently that is only about 15% of the total market. This has been a new-product-driven market for the past five years.

What the MLS does show us is that its inventory is increasing. In December, the total number of MLS listings was up 50% over the same month last year. This has been a gradual increase that began in October 2007. This increase is not necessarily due to a slowdown in the market. We have experienced an incredible period of growth, and for many years, the number of properties listed with the MLS has remained stable, with little or no increase. It would seem that any market that is increasing as Vallarta is should also see an increase in MLS inventory. The increase was delayed until 2007 because of such a strong demand for new real estate products, especially condominiums. Much of this increase is originating from new homes and condominiums bought new a few years ago that are now returning to the market, with people upgrading or selling (much of it has been upgrading) through the MLS service.

Mortgage Financing?

Mortgage financing has had a difficult time finding roots in Vallarta. It’s now been about five years since it was introduced, and to date mortgage financing is playing a small role in overall sales in our local real estate market. Over that period, though, the mortgage lenders and brokers have had the time to get the process working better. At first, they were plagued by long delays, as they tried to put all the necessary paperwork together as quickly as possible. Owners, who had offers on their homes subject to financing, thought their homes were sold, only to face long delays waiting for the financing to be approved. The realtor ended up dealing with their impatience.

On the other side, the purchaser, now back at home in the USA, sometimes became frustrated with how long it was taking, was no longer “in the picture” as they were when they were in Puerto Vallarta, lost interest and sometimes backed out of the deal. This all made realtors a little gun-shy of bringing up the idea of financing with a prospective purchaser. We’ve said for years that our market tends to be a “cash” market, but that’s not necessarily true. What many people did was just go back home and re-mortgage a property in order to obtain the funds needed for the purchase in Mexico. Well, with the way things are going back in the USA, those funds may not be quite as available as they once were. Fortunately, mortgage financing in Mexico has matured.

There was a wave of brokers that came to town a few years ago, some of them good, some of them not so good. The not-so-good, for the most part, have left town, leaving us with seasoned mortgage brokers who have a number of deals under their belts, so they now know how to streamline the process and get through approvals much quicker. Over this time, mortgage rates have also fallen, making financing in Mexico more attractive. Years ago, I remember writing that the availability of mortgage financing will make the market really take off. Well, financing never really came through, but the market took off regardless of that. Now, with the market starting to slow down (at least not the frenzied market we had, which in itself is healthy), mortgage financing is correctly positioned to assist buyers and realtors to continue to put sales together.

Here Come the Canucks

For the last article we produced on real estate trends, in the Summer/Fall issue of “Vallarta Lifestyles,” we didn’t foresee the effect the strong Canadian dollar could have on the market. At one point back in November, the Canadian dollar, for a short period, actually was valued at $1.10 USD. Since then, it has fallen back, but remains close to parity. It was only a few years ago that the dollar was trading down at $0.67 USD. Also during this time, the Canadian real estate market has been very strong, especially in Vancouver and Toronto, allowing Canadians to build up equity in their primary residences. And the amount of wealth that has been created in Alberta because of the tar sands makes Canadians excellent potential second-home buyers in Mexico. At the time of this article, a barrel of oil was trading for more than $100 USD. Every time the price goes up, more and more of the Alberta tar sands becomes accessible to energy markets.

Since then, realtors have reported to us that they have seen an increase in interest from Canadians in buying real estate in Vallarta. And with the cold winter they have been having, that interest will most likely become even greater.

IMF Economic Review for Mexico

On December 3, 2007, the Executive Board of the International Monetary Fund (IMF) gave the following report regarding Mexico’s economy.

“The economic expansion has continued, albeit slowed by developments in the United States. Growth is projected to be close to 3 percent for 2008, with inflation closer to 4 percent. Mexican financial markets have weathered recent global financial volatility well. Commercial banks remain well capitalized, profitable and liquid, and nonperforming loans are still low. Executive directors commended the improvements in macroeconomic and financial policies that have helped Mexico to reduce significantly external and internal vulnerabilities over the years - with sustained low inflation, a declining public debt ratio, and a reduction in external debt to low levels.

“They also welcomed the recent reform breakthroughs, including on tax policy and public pensions, as essential, forward-looking steps to addressing longer-term challenges. Directors considered that Mexico’s near-term outlook remains solid. They observed that Mexican markets have weathered the recent global volatility well, owing to Mexico’s healthy fundamentals.

“Directors considered the independently floating exchange rate regime as appropriate and serving Mexico well, and the real effective exchange rate as broadly in line with fundamentals. They noted that this transparent regime has facilitated continuous and smooth adjustment to shocks, thus contributing to internal and external stability. Directors also noted that the level of international reserves appears adequate, and saw no immediate need for a change in the non-discretionary rule governing the accumulation of reserves. Directors welcomed the recent tax policy and public pension reforms as key to addressing long-term fiscal challenges.”
We doubt that the IMF report for the United States itself was as positive.

On a local level, Puerto Vallarta moved up a notch, from seventh to sixth position, in the Carlson Wagonlit Travel Associates’ 2008 Travel Trends Survey for favorite international destinations. The survey is based on responses from their travel experts about their clients’ travel requests for the current high season. The only other Mexican destination ahead of Vallarta was the Cancun/Riviera Maya region. Being popular as a travel destination can certainly help the local tourism real estate industry.

Conclusion

Taking all this into consideration: that we are primarily a second-home market, and up to this point there has been little financing available, so there will be no fall-out; that now more people will be available to afford a home here because of the ready availability of financing; that homes and condominiums continued to appreciate during 2007; and that new markets are opening up, or perhaps returning would be a better way of putting it, because Canadians were a strong market in the past, I think one could conclude that Vallarta is well positioned to weather any downturn in the US real estate market or economy rather well.

Mature Market

Softec, who have been delivering statistical information about real estate markets in Mexico since 1999, reported in early January that, once again, Puerto Vallarta was the top tourism real estate market in Mexico, with Riviera Nayarit placing in the top five. Vallarta is a mature real estate market. It has had years to develop the infrastructure, amenities, and seasoned developers and real estate agencies to provide a strong, well-established market for American second-home buyers. That’s a big advantage over other emerging markets, such as Puerto Peñasco or Loreto, or even Cancun, who may not weather a downturn as well as Puerto Vallarta if, indeed, the market does slow down.