The Real Estate Market

Trend for the Vallarta market over the past three years has been strong, continual growth that has been difficult for developers, realtors or buyers to keep up with. It seems that as fast as real estate can be put on the market it is sold, whether it's new or resale product. Demand continues to far exceed supply for nearly all home types and regions.

This demand has fueled development and construction up and down the coastline. And a very strong trend from last year continues: projects are selling a significant portion of their inventory during pre-construction.

New development is now such a major part of the market that it has made it increasingly difficult to establish exactly what the value of the overall market place is. Statistical information is available from the local MLS; however, its sales now are estimated to encompass only 15% of the entire market. Over the past four years, the number of properties in the MLS has failed to increase (and would actually have decreased) if it weren't for the large number of development properties coming online. This new product, however, is not part of the MLS and is currently not being tracked by any association or agency. The only way to know what is actually happening is by talking with developers individually to get an idea of what their sales have been and adding that to MLS sales. Doing so earlier this year for the Puerto Vallarta Real Estate Conference showed that overall sales for the Vallarta region, or Banderas Bay, seem to be close to $550 million USD for 2005, up from nearly $400 million USD in 2004.

What really shows how the marketplace is performing is that the first three top real estate offices we visited in May all stated that they had already surpassed their total sales volume for 2005, and they all had considered 2005 to be an exceptional year. And they did that with less sales, meaning the average sales prices had increased significantly.

Why the Strong Demand for Vallarta Real Estate?

There are many reasons for the strong demand, but here's an interesting one, expressed by Silvia Elias of PV Realty: For what a person pays in property taxes alone in California, you can pay the property taxes and nearly all the operating expenses of the home in Vallarta!

We keep referring back to 9/11 as a pivotal point for our market. It was a wake-up call for many who, up to that point, had been working very hard. The shock of this event made many decide that they need to get out and enjoy life more, and having a second home in a warm place seems to fit well. It would also be interesting to check whether there was any increase in the number of children born to affluent couples in their 30s and 40s. There sure seem to be a lot of children under the age of five at the beach club out at Punta Mita!

The Mexican economy continues to do well. The budget deficit has been reduced each of the past five years, and they project a balanced budget for this year with inflation below 4%. Economic growth is strong, and the peso has held its own against the US dollar. And lastly, the drive has been taken out of the real estate market to the north in many markets, so investors are looking elsewhere. Mexican real estate in resort destinations is proving to be their new investment grounds.

More Affluent Buyer

Many realtors have reported that their typical buyer profile is looking for a home investment higher than in previous years, regardless of what pricing may be at. A few years ago, the regular buyer profile was looking for a home/condo around $350,000 USD. Today, it's more like $500,000 USD, driven up first by a buyer who can afford more and, secondly, by increasing prices.

Enter “The Player” - The Serious Real Estate Investor

A few years ago, a serious real estate investor told Wayne Franklin of Tropicasa Realty that in order to have a serious real estate market you first have to double your prices, and then double your prices again. When the prices get that high because of demand, you start attracting a different type of buyer, a more affluent buyer who doesn't need financing and is used to paying high prices for their second or third homes. In Franklin's estimation, we have just passed the first double and are certainly now attracting a more affluent buyer. Along with these buyers, we are also attracting serious investors and developers. Real estate developers from primary markets in the USA, such as Phoenix, Las Vegas, southern California and Miami, are now seriously looking for real estate opportunities in Vallarta. As mentioned earlier, these people arrive having done their homework; they know what they want and they know how to develop. This is creating a much more sophisticated real estate marketplace for Vallarta, which has for many years been built by small-time developers. And on a national level, Vallarta is now attracting Mexico City developers who previously have built in Acapulco for the Federal District community. Acapulco's market is now considered overbuilt and just not as attractive a destination as it has been in years past.
A common phrase expressed by realtors is that Puerto Vallarta is now “on the map” as far a serious real estate investment globally. It is attracting investors from around the world who want to participate in the strong growth and potential of the marketplace.

Buyers are Younger

Although the Baby Boomer continues to drive the market, for the first time we heard realtors talking about the entry of “Generation X” buyers. A number of these buyers are kids of parents who already own here and are now getting places of their own. They grew up in Vallarta on vacations and are very familiar with the destination, the language and the culture. But they are also demanding. They are knowledgeable about the marketplace and want not just a home but a good investment. The property needs to make sense economically, whether that's through continued appreciation or rental income.

Financing: Still a Small Player in the Overall Market
Most realtors reported that financing is here but is not yet making a big impression on the market, for a number of reasons. One is that the process has still not been refined, so it can take a long time to put together. Meanwhile, both the buyer and the seller can become very impatient. Mortgage brokers, in most cases, are still rather green to the process and haven't yet had time to set up efficient procedures. Obtaining appraisals quickly is difficult, and some realtors mentioned mortgage companies coming back numerous times for more documentation, which they could have or should have asked for in the first place. It was also mentioned that the market has been flooded with numerous mortgage brokers trying to establish themselves, and not all have proven to be of the caliber that realtors would like or expect. It's assumed that, as the financial market matures, the more professional brokers will persevere and so will market efficiencies. Secondly, Vallarta is now attracting more affluent buyers, who often can afford the home they want without having to look for financing.

Demand for High-End Condominiums

Condominiums are definitely becoming stylish and high end, sought after by an increasingly larger portion of buyers. They want the luxuries and space that usually come only with a home, but they enjoy being able to just lock up their home and leave. This is driving up demand and prices. The first condo sale over $1 million was just a couple of years ago and, just like when the four-minute mile was broken, now everyone's doing it. Million-dollar condos are becoming more common, with the $2 million barrier broken as well for a condominium this year. Three-bedroom condos with more than 3,000 square feet of living area (larger than many average homes) continue to gain in popularity. And not just in one region, but throughout the bay. Condos at Punta Mita basically start a $1 million USD. A project in Conchas Chinas, which involved demolishing an older oceanfront home and building six condominiums, saw the first initial sales go for $1.5 and $2.5 million USD. This price, which works out to nearly $500 per square foot, also reflects recent sales prices for similar properties on the north shore of the bay. In Amapas, which has been the condo-king area for a few years and is experiencing incredible development, condos that were selling last year for $300,000 USD on average have been pushed up to $450,000, with listing pricing reaching as high as $1.5 million. Condos are still available for as low as $300,000, but this is becoming increasingly rare.

Price-Comparison Shopping

All realtors spoke about working with more sophisticated buyers, who ask intelligent questions and know ahead of time what they want. They also are comparing pricing, not just locally but also with other national markets, such San Miguel de Allende, Cancun and, most commonly, Los Cabos. With regard to Los Cabos, prices in many cases are double those of Vallarta. On a recent “check out the market” visit to Los Cabos with a few Vallarta realtors, we saw firsthand the difference in pricing. At one high-end development we toured, an ocean-view (overlooking three rows of homes), three-bedroom penthouse condominium with 3,400 square feet was priced at $2.5 million USD. Similar condominiums, but on the beach at a similar development (Punta Mita), recently were selling for around $1.5 million. That is a substantial difference. Overwhelmingly, when asked what their buyers were choosing, realtors informed us that when they price compare to Cabo, PV wins nearly every time. And it's not just because of price. Vallarta just has more real estate variety, a larger community with more services, and the added value of being on the mainland and more accessible to the rest of Mexico.

Real Estate Bubble? Most Don't Think So
There has been a noticeable slowdown in many real estate markets in the USA, with much talk about a housing bubble. For the most part, this is affecting first-time home buyers who are finding themselves unable to afford a home now in their marketplace, or first-time home buyers who have purchased, but now feel the pressure of increasing interest rates and, in some cases, decreasing home values. The second-home buyer, however, continues to be a strong market in the USA, as Baby Boomers continue to look for a second home for family or retirement use.

Vallarta's market traditionally has been driven by the second- or even third-time home buyers; therefore, if there is a real estate bubble, it will most likely not be affected. This sentiment was shared by the majority of the realtors we talked to. Baby Boomers are continuing to retire, they are looking for second homes, and they have the money to make the purchase, in many situations, without financing.

One realtor expressed that their downturn has been our upturn. Serious investors, discouraged by high prices and overbuilding, have left US markets to look elsewhere. And they aren't looking just in Mexico; places such as Costa Rica, Belize and Honduras were also mentioned as places they are looking to invest.
Vallarta's market continues to be primarily a “cash” market, with financing still playing a very minor role. Having people pay cash and not finance means they own their homes outright, which further insulates us against any people “flipping” by putting very little down, hoping to sell for more down the line. Having to pay cash limits this type of activity.

Price Appreciation

Appreciation has been a strong trend for the past three years and quite consistent over the past 15. We are still below competitive markets like Hawaii and Los Cabos, so this trend should continue, especially for beachfront properties. The MLS shows that condominiums have appreciated by 14% and homes by 11% since 1999.

Local Business People Investing

The increase in real estate development has brought a surge of cash into the community. Local business owners who are part of the service industry are finding themselves with extra cash and, not wanting to miss out on what's happening in the real estate market, are building homes themselves in partnership with local contractors. This is most noticeable in Fluvial Vallarta, a large residential/commercial development located in front of the Holiday Inn and behind the Plaza Caracol shopping center, which has seen very strong growth since it began sales last year.

Conclusion

Vallarta's real estate market is very active, and all signs seem to indicate that this level of activity will continue. Prices are still lower than competing markets; buyers are buying as quickly as product comes on the market, so there's no oversupply; and the second-home market continues to be one of the most active markets in America.