Herd Mentality as it Applies to Real Estate in Puerto Vallarta, Mexico

With the incredibly fine winter climate, proximity to the US and Canada, and the amenities offered, Puerto Vallarta, Mexico has long been recognized as a great resort destination as well as retirement haven for North Americans.

Beginning early in the 21st century, Vallarta, as with many other resort destinations, began an explosive period of growth. Developers from around the world flocked to Vallarta in order to cash in on the baby boomer retirement plans. Within a short period of time, most of the finest beach front and hillside properties were snatched up and planning began in earnest. Tower cranes were erected, dotting the skyline throughout the city, and construction workers from neighboring states rushed to the area for employment.

As soon as the above projects were announced, the developers threw up beautiful sales offices and prepared for the land rush. These nice, spacious, air conditioned offices typically had comfortable lounge areas with new furnishings, pretty magazines, sometimes piped in music and perhaps a few free margaritas. They were typically staffed with English speaking, well dressed, experienced, professional sales personnel. Most of these new offices had multiple sales cubicles with the capability of negotiating two or three contracts at a time; some even had counters where the buyers could get in line to wait their turn for such a unique opportunity to own a piece of Paradise. Granted, it never quite reached the point that it did in Florida, where they were holding lotteries and drawing lucky buyer numbers out of a hat!

During the first few years of the first decade of the new millennium, the North Americans were grabbing up the new condos at such a torrid pace that many of the construction projects were 30%, or more, sold out before they even broke ground. Pre-construction pricing of 10-20% off their suggested list price was frequently offered to owners of condos previously built by the developer. After all, these privileged speculators had earned the right to have the first chance to scoop up the most desirable condos at what seemed to be reasonable prices; few could afford to pass up such a no-brainer investment opportunity!

Meanwhile, as the tower cranes started whirling around and the thousands of construction workers, looking like a huge colony of ants, began their construction, the beautiful buildings started coming to reality. Money was flying in every direction and it seemed as though everyone that came to town had an extra half a million dollars to spare for their retirement dream residence. Of course, during those years, re-financing and second mortgages on North American real estate with highly inflated values was commonplace; the herd had a feeling of easy money and never ending wealth!

With the herd of somewhat naive buyers in town, the question was never whether or not they should buy a condo; it was which condo they should buy. They were virtually knocking down every real estate office door in town (approximately 80 in the area at its peak!); it was definitely a seller’s market. The developers would usually negotiate 5-10% off list price in order to give the buyer a sense of satisfaction that they had received a good deal, still leaving the developer with a substantial profit margin; everyone was happy as the good times rolled on!
By the middle of the decade, the local real estate market was humming on all cylinders and new projects were being announced almost daily. The Mexican Tourism Board announced plans for developing a new 20 mile stretch of beaches north of Vallarta and planning was underway for another 20,000 new condos. Obviously, as long as the stampede continued, they would continue building and prices would continue to escalate, resulting in a tripling of real estate values during a short 7 year period of time, i.e. the old rule of supply and demand was in full force; keep coming and we’ll keep building!

Well, as always happens, a global recession hit in 2008. However, this time it was much deeper than most had ever experienced, severely impacting the PV real estate market as the demand virtually disappeared overnight. Developers and speculators were left holding thousands of new unsold condos creating the greatest buyer’s market ever experienced in this part of the world, i.e. the supply (glut) of new condos far outnumbers the demand. Consequently, the developers and speculators were on their knees just trying to recover their costs, often discounting by 30% or more while many of those fancy real estate offices in PV were forced to close and those remaining open did so on shoestring budgets and reduced staffs.

During the very end of the first decade, the Swine Flu (so-called epidemic) hit the Mexican tourist destinations. As a note of interest, we were here the entire time while there was not a cruise boat in PV for three months and all restaurants and nightclubs had to close at 10:00 PM for fear that one could catch the Swine Flu after 10:00 PM…we never even saw a person cough during that three months and not a single case of Swine Flu was reported in PV! Anyway, by the beginning of the second decade of the new millennium, the real estate market had been devastated and was in a depression. The market saw very little, if any, recovery from 2010 to 2015; that period of depression created perfect conditions for a strong “Buyer´s Market”.

The herd mentality was again clearly demonstrated on a daily basis for about six years all over the Vallarta Area; however this time the buyers were all following each other in the opposite direction; postponing purchases until someday in the future when the economy would be more certain, i.e. until the coast would be clear. For at least six years, they passed up all kinds of golden opportunities to buy beautiful properties at below cost of construction prices. The masses seem to feel a sense of urgency to purchase when their peers are doing so and feel no sense of urgency to purchase when prices are at the lowest levels possible. During those years, it was absolutely amazing to see the herd of what appear to be intelligent, educated buyers walking away from once in a life time opportunities because there was no line up of buyers. It’s as though everyone’s afraid to be a contrarian; consequently, they eventually end up buying later at a higher price.

Buying into a given real estate market is essentially the same as buying into the stock market. Why does the herd always insist on buying high and selling low? The developers are never going to sell below their cost and the 2010-2015 prices were as low as they’ll ever be; bargain opportunities were everywhere; they were eventually recognized and scooped up by the savvy buyers and new construction started as soon the glut of supply started to wane and prices started escalating again. Now, we´re coming toward the end of the second decade of the new millennium and new construction is once again rampant with numerous new condominium buildings having rooftop common areas with palm trees and pools. The extreme amount of new construction indicates the “herd mentality” is now with the developers.

Due to the steady increase in supply, the escalating prices have been held somewhat in check. In order to minimize new construction prices, the properties are substantially smaller than what they were building ten years ago; consequently, prices are somewhat lower than they were ten years ago while prices per square foot are substantially higher!! The abundance of new construction has forced the resale prices to remain at relatively low levels. Still, nothing like the depression prices seen from 2009 to 2015. So, it´s safe to say that 2019 is a year when the supply and demand are pretty well balanced; there are still many resale properties at reasonable prices, but nothing is being given away! On the other hand, the number of new condominium developments appears to continue soaring and at this pace, a buyer´s market is bound to eventually return.

We thank our lucky stars for having bought a villa in PV 22 years ago (before it was the in-thing to do) and have seen it more than double in value. We´ve seen prices soar and we´ve seen them return back to reasonable levels. With the huge number of new condominiums currently under construction, all we need is a little more negative media coverage regarding “drug cartels” or “the wall” or “special tariffs” or something not yet imagined and the herd will stampede for the exits. Remember, the herd is usually wrong; that´s the time for all of you contrarians to step in….and….that time is coming. During the interim, pack your bags and come on down for a week of fun in the sun this winter and check out the beautiful new developments that await you in Puerto Vallarta.