By Sinclair and Ruiz Consulting | April, 2009

Real Estate has been at the forefront of the financial news for the past several months. The fact that the American Real Estate market is one of the main issues affecting the global economic crisis, created certain expectations toward recreational real estate market that did not quite materialize. The analysis of the 2008-2009 season in Mexico requires taking a deeper comparative look at real estate in the United States. Furthermore, it is important to focus on the recreational real estate market separately from the market for primary residence properties. In the following paragraphs we will discuss the similarities and differences of the market in the US and Mexico during 2008-2009.

EXPECTATIONS VS. REALITY

While conducting research for this article we encountered similarities in the comments made by realtors and developers across North America. All of our sources mentioned that there are potential buyers looking for recreational property, but most of them – especially Canadians- expect to find extremely low prices. We will begin the comparison of the American and Mexican markets by analysing the US, as this country was the point of origin of the situation being discussed.

US

Toward the end of February, we spoke with a realtor for the Palm Springs Area about the state of recreational real estate in California, and in particular the Palm Springs area. Palm Springs has been a popular recreation and retirement destination for high income adults from across the globe for over 50 years. The realtor informed us that throughout the season she met with several people wanting to take advantage of the market and expected to buy recreational property in the area for extremely low prices. She mentioned that it appeared the news covering the burst real estate bubble (California being one of the hardest hit states) was creating the expectation that buyers could get discounts of up to 50% off the asking price. However, she explained, in reality the general market reflected a price drop of approximately 20% in the area in question, and that many owners were not willing to sell for less.

Several reasons were offered for this:

Our source believes that although supply is significantly higher than in 2007, it began to drop during the first months of 2009, somewhat stabilizing prices. On one hand, owners not willing to reduce prices further chose to take their property off the market and lease it instead (as we personally observed in prime residential communities). On the other and, developers in the beginning stages of projects soon took their properties off the market due to lack of financing and/or expectations for a slow season and low prices. Both of these situations eased the pressure on the supply-side.

We found similar discrepancies between prices and buyers, expectations in other popular recreational real estate destinations in the US such as Hawaii and in Washington State. Yet it is important to clarify that, as seen in the news, real estate destined for use as a primary residence – in areas not considered for recreational use- have lost value more significantly throughout the United States. One of the main differences between the two types of property is that recreational property is often bought outright without financing by individuals of a higher income level, compared to the income level of young families or individuals who recently acquired their first home through financing.

Beyond the reduced value of most people’s investments, the situation described above has contributed to a slow-down in the recreational real estate market in the US; but the situation is inherently different from the market for primary residence property. That is, the market slowed less and prices remained more stable in key destinations and locations.

MEXICO

The expectation of finding bargain prices for recreational real estate property spread to Mexico as well. Similarly to what was explained above, prices were reduced less than expected by many potential buyers, due to the fact that many homes are owned outright. Some owners chose to lease their properties instead of selling them. Other owners who acquired 3rd or 4th homes decided to sell one or both in order to increase liquidity, but under no pressing rush to offer a 50% discount.

Another interesting fact for the season in Mexico is that, Mexicans were very active in the recreational real estate market. The Mexican economy has been quite strong for the past several years, increasing the purchasing power of many people. As the negative news on the economy became widespread, many Mexicans turned to real estate in order to place their cash in tangible assets. This trend is brought on by a legacy of devaluations, leading people to turn to tangible assets at the first signs of financial turmoil.

All of the above explanations led to a situation where the market in certain destinations – accessible to Mexicans and more reasonable for Americans and Canadians – performed better than others. The Mexican recreational market did slow down, but at a slower pace than many potential buyers may have been expected. Prices in popular destinations and premium locations have been slower to fall, but compromises regarding fluctuating exchange rates were known to take place, as well as other incentives.

CONCLUSION

The market is certainly not what it was in 2007, and potential buyers have more options and bargaining power than they did a year ago. The positive side for buyers is that along with better options and incentives offered by developments in their final stages, there are some new developments offering very competitive pre-sale prices.

It is unclear how the next high season will transpire, and with the uncertainty and instability of the world economy, any prediction is a shot in the dark. However there are certain points that can be taken into consideration. First, recreational real estate must be looked at differently real estate destined as primary residence. Secondly, it may be difficult to find properties in key destinations and prime locations at bargain prices. Third, it is possible that resale home prices may remain relatively stable in Mexico as many Americans and Canadians refrain from selling and instead choose to remain in Mexico for longer periods of time – or full time- to reduce their living expenses without greatly compromising lifestyle. Lastly, if considering investing in recreational and/or retirement property in the US or Mexico it is important to compare the cost associated with acquiring property relative to the use that will be given to the property. For example, whereas property taxes in Mexico are a few hundred dollars a year, in the US you may pay up to 2% of the value of the property yearly, as is the case in Florida.