I’ve had a lot of clients looking for the bottom recently, and asking me when is the best time to buy… I heard it so many times I decided to write an article about it (follows) . Then this morning I read this article at Yahoo Finance and this tidbit, making me wonder if “the bottom” is upon us… time will tell. Meanwhile, here’s my thoughts:
Economic turmoil creates opportunity. Uncertainty in the stock markets has people looking for safer places to grow their savings. Traditionally, real estate has provided just such a safe haven for long term investment. Certain real estate markets in the US have been taking a pummeling and have been getting a lot of media attention. The fact is these are the same markets that were spiraling out of control in a gigantic bubble driven by speculation, irresponsible lending practices and irresponsible borrowing practices over the last few years. Now that bubble has burst and we are all dealing with the reality of a full blown worldwide recession. Many people have lost money in the stock markets, but in most cases they still have some money and they are looking for a place to put it. Recent events notwithstanding, real estate is still a solid investment; as one of my clients recently told me, “Buy Brick!”
As real estate brokers here in Puerto Vallarta we are witness to the fact that people do still have money and are interested in investing here in Mexico. Many of our clients are here looking, but they are not buying because they are waiting for the market to hit “bottom”, with the assumption the Puerto Vallarta market will behave similar to the US market. They are asking themselves “When is the best time to buy real estate in Puerto Vallarta?” As any experienced investor will tell you, the bottom is an elusive target. Here are a few factors to keep in mind:
Puerto Vallarta is a high equity market. Historically, mortgages in Vallarta have been expensive and difficult to come by. While financing has been available at reasonable rates for foreign buyers for a few years (and many foreign buyers leveraged assets at home to buy in Vallarta), the majority of properties in Vallarta are owned outright. While this is slowly changing, the majority of property owners are still well positioned to wait it out rather than needing to sell in the face of foreclosure. This means bank repos are quite rare also.
Holding costs in Mexico are negligible. Property taxes in the US and Canada are typically in the thousands of dollars a year, adding to the overall liability of holding a second property in financially challenging times. In Mexico, property taxes are counted in the hundreds of dollars per year for very high end properties. A modest home may well pay less than one hundred dollars per year.
The exchange rate to USD is extremely favorable. The US Dollar to Peso exchange rate (USD to MXP) is currently at its highest point since the peso was devalued in 1993. This gives the American buyer more buying power than ever. Given the relative strength of Mexican banks and the Mexican economy in general, there is little guarantee that the exchange rate will stay at its current levels.
Historically, Puerto Vallarta has weathered recessions well. In past recessions, Puerto Vallarta has had lower losses and recovered faster than other affected markets.
World stock markets continue to lose value. Those who have their assets in the stock market continue to lose value. The longer they wait to move to more stable investments, the more they will lose.
So what does all this mean? In general, sellers are not desperate to sell; most are prepared to wait it out and sell when conditions are more favorable. Low property taxes and fewer mortgages encourage that position. This is an enviable position to be in and indeed is the backbone of the Puerto Vallarta Market and one of the reasons why real estate investments have proven to be so stable here. That notwithstanding, there is a percentage who do need to sell their properties, either because they are mortgaged or otherwise leveraged, for health reasons, or just because they need the money back home at the moment. These properties are and will be available, providing a downward force on the market in spite of the market’s basic stability (in conjunction with the fact that most buyers are biding their time right now). These two forces mean there will be a correction in the market, but it’s unlikely that the bottom will fall out as it has in certain US markets. Prices indeed will go down (are going down, in fact) and will, by most expectations, hit bottom late this summer, when the Vallarta market is traditionally slowest. This brings to bear one last factor:
The window of opportunity is likely to be small. Everyone knows (or think they know) that the market will bottom in late summer. There is a huge amount of potential energy building as more and more investors decide to wait to invest. Once the bottom has been hit, or at least when the general consensus is that the bottom has been hit (remember, the bottom is an elusive target), investors will begin to release all that stored up energy and the market will start to move. Which way? The law of supply and demand says “UP!” This means that all the deals investors have been waiting for will start to disappear, either because someone beat them to it, or just because of the natural rise in the market. Some will find themselves in that window of opportunity, many will not.
This brings us back to the basic question: When is the best time to buy?
My answer is, “Buy now!”
But you’re waiting for the bottom?
I say, “Buy now, but make aggressive offers.” Most sellers are aware the value of their property is going to go down before it goes up again. An aggressive offer places the value ahead of the curve and many motivated sellers will take the offer rather than risk not selling the property. For the buyer, the advantages are three-fold: They lock in the favorable exchange rate sooner, they get the property at a price comparable to the bottom pricing we’ll probably be seeing in a few months, plus they get first pick on the properties available because they chose not to follow the crowd (crowds tend to drive markets in the direction opposite of what most crowd members actually want). Many sellers are getting nervous as we approach the end of the tourist (and therefore, real estate) season. An aggressive offer now might entertain more of the seller’s attention than it would have a few months ago. One additional bonus to this strategy is the buyer can get his money out of the stock market and into a stable investment that much sooner.
The next few months will see some solid real estate deals in Puerto Vallarta and surrounding areas. Will these be the best deals you can expect to find? No one knows for sure, but they will probably not be the worst deals that close before the smoke clears. Economic turmoil creates opportunity.
All this information is based on my experience in the market and the experiences of other real estate professionals in Puerto Vallarta and is very definitely my own opinion. Prospective investors are encouraged to take it all with a large grain of salt and make their investment decisions based on their own research and their own level of comfort.