Real Estate Speculators in Puerto Vallarta, Mexico See Silver Lining
Thanks in part to the tech and housing bubbles, Americans have experienced an unusually strong growth in net worth during the past 15 years. The graph below depicts a typical stock market portfolio value growth of more than 200% during the first five years of this period followed by the bursting of the tech bubble and then returning to more than 200% followed by the bursting of the housing bubble and finally recovering to nearly a 150% gain.
The combination of stock portfolio growth, housing value appreciation, easy credit, and refinancing capabilities put most Americans of the Pre-Boomer and Boomer generations in a financially comfortable position and an optimistic mood for most of the past decade.
Having confidence in the economy and the feeling of financial strength, many of these about to retire people started planning for retirement and the thought of a second home on the beach or Sierra Madre hillside in sunny and beautiful Puerto Vallarta, Mexico seemed like a very logical and affordable plan.
In 2000, representing the Alliance for Change and the Mexican National Action Party (PAN), Vicente Fox, and then six years later, Felipe Calderon (both Harvard graduates), promoted strong foreign investment philosophies thereby creating an environment conducive to capital expenditures in Mexico.
With the retiring North Americans shopping for a beautiful place to retire and the Mexican government inviting them with open arms, conditions were ideal to ignite a ten year housing boom. Consequently, from 2000 to 2008, the demand for condos seemed to be insatiable and developers from all over Mexico, the US and Canada, and even Europe raced to Vallarta in order to cash in on the land rush.
The developers started buying up all of the remaining beachfront property and the available prime hillside lots and soon thereafter, they started planning their developments. By 2001-2002, construction of the first projects was underway. It seemed as though the supply just couldn't keep up with the demand as many of the projects were at least 30% sold out prior to breaking ground and were completely sold out well before the project was finished.
Due to the success of these initial projects, the developers immediately started planning future, substantially larger projects. By 2006, there were more than 100 developments (many mega-projects) in the planning stage and pre-construction sales were well underway. Many were multi-tower or multi-building complexes with hundreds of condos that were to be constructed in phases.
As soon as the design of a new project had been completed and attractive conceptual drawings had been prepared, the developers would set up a trailer or perhaps an office in one of their completed projects and start their pre-construction sales activities. Of course, the first "invitees" allowed to take advantage of the pre-pre-construction prices (slightly above the cost of construction) were those that had previously bought in one of the developer's completed projects. Immediately thereafter, the general public was offered pre-construction pricing and construction began.
It was not uncommon to sell at least 30% of the first phase of a project prior to breaking ground with many of these buyers being speculators having no intentions of ever taking possession of their units. After all, they had witnessed a 15% annual appreciation in condo values during the prior five years and realizing the project would take perhaps three years to complete, they could plan on "flipping" their unit upon completion of the project for a 50% gain. There seemed to be no risk of non-completion and the investment appeared to be a no-brainer!
There were hundreds, perhaps more than a thousand condos bought by speculators between 2006 and 2008; most of which have been completed however some, unfortunately, may never be completed. Most of the purchases in Mexico are all cash and therefore very few properties were mortgaged; those that were, were done so with a minimum of 20% down. A typical payment plan was 10% down and 30% every six months with a two year payment and construction schedule. By the time the first phase of many of these projects had been completed, the developer's list prices had increased by as much as 30% over the pre-construction prices representing a handsome profit to the developer.
As luck would have it, things didn't work out as planned for the developers or the speculators! With the global recession starting early in 2008 followed by the swine flu scare and then the Mexican border town drug cartel war, real estate sales in all of the fine Mexican resort destinations came to a virtual standstill. With the housing slump in full force, prices no longer continued to appreciate; in fact they began to weaken. By 2010, with thousands of new condos on the market (the supply now greatly exceeding the demand), many projects were put on hold postponing the future phases, a few projects were even abandoned with the first phase only partially finished, and new projects in the planning stage were shelved.
In order for the developers to sell off their remaining inventory of condos, they are now forced to reduce their prices; some have dropped them to pre-construction levels or just slightly above their cost of construction. The speculators that had assumed the pre-construction risks have now paid in full and have received their completed condos; in order for them to sell their units, they are now competing with the developers who are also trying to unload their inventories.
The above scenario seems to paint a pretty dark cloud for the speculators and therefore you might ask, where's the silver lining? Well, for one thing, it's quite clear that we've reached a bottom when the developers are just trying to recoup their expenses. Also, because so few speculators have mortgages, there are virtually no foreclosures and for the most part, they are not financially forced to sell. Consequently, neither the developers nor the speculators are going to sell at a loss and prices appear to have bottomed at 2006-2007 levels or 30-40% off their highs of 2008. At these price levels and without the risk of non-completion, the savvy investors and retiring Boomers are slowly absorbing the inventory of new condos in Vallarta.
The other silver lining can be found if you consider what those speculators could have done with their cash in January 2007 if they had not invested it in a Mexican resort condo that has gained them nothing during the past three years. By reviewing the graph below, you'll see that if they had invested their money in an S&P 500 stock portfolio, they would have lost about 23% during the same period of time. Alternatively, they could have bought a condo in Florida, California, Arizona, or Nevada where foreclosures are abundant and lost as much or more. Most speculators have a tough time accepting things in this light but it's a fact of life; by breaking even, they're better off than they would have been otherwise!
Finally, what does this mean to us? Well, it's a buyer's market in PV that we've never before witnessed and will probably not see again in the future. There are currently hundreds, if not thousands of incredible finished condos available on the market at rock bottom prices. For those about to retire that still have some cash and are interested in a second residence where the winter weather is perfect, the scenery majestic, and the fun galore, it would be foolish not to at least consider the favorable circumstances that currently exist south of the border. Not only do they provide a silver lining for the speculators, but more importantly, they represent a golden opportunity for the real estate buyers in Puerto Vallarta, Mexico.
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