Impact of US real estate slowdown on CR

[cougar91]

Hi Folks,

I am new to this forum and the reason that I am here is that back in Jan I took my first vacation to CR and was intrigued by all the opportunities which seem to present themselves in this part of the world.  So since I came back I have been researching and gathering information on CR real estate in the hope of buying one.

Lately you must have seen the US real estate troubles in the news, with most markets falling in prices and some cities outright crashing, like in Florida, Nevada and parts of California.  Since American investors represent such significant percentage of CR real estate buyers and I assume lots of these are selling real estate in the US to buy CR ones, I was wondering if anyone has seen any signs of any slow down in the CR market?  I know that CR market is more international but most markets are global now so I figure I ask around the more experienced hands.

Thank you.

[Ivo]

Thanx for your input Cougar91. Yes, we have lots of clients, especially from Florida wanting to move but not being able to sell their home. Many buyers do have enough money sitting in an IRA or already received their inheritance, so they don't have a problem. But we are also getting a lot of people just checking Costa Rica out for the future, when they retire in 5 years or so. We've always had that, especially those of us who specialize in the retirement market. But, as Costa Rica is hot, generally spoken we're not hurting. The market is changing though. More condos and townhomes in gated communities and less single family homes than for example 5 years ago.

[Russ]

This is a good question and one that I am sure is on the minds of a lot of people who are considering buying property here.  If you are looking at Costa Rica property as an investment, the question is will we continue to see good appreciation in the next 5-10 years or will the Costa Rica market slow down with the U.S. market. 

At the heart of the matter is the question of whether people who are buying or will buy property here in Costa Rica are the same demographic as those taking out sub-prime loans, 100% loans or interest only balloon notes. 

I read some interesting items lately about this issue:
Dana Blankhorn at A-clue.com wrote on The Falling Knife of Housing.  I gather from this article that the falling market is due to rash loans by the banks, that were made to bad credit risks, first time home buyers.  Also, people refinancing and counting on the value of their house to rise 10% to 20% per year over a five year period.

The BBC web site has some good articles on the sub-prime market and the US market in general.
This article Sub-prime firm sells $2.7bn loans  stated that "Sub-prime lenders provide money to clients with a poor credit history, and the current problems have been sparked by a rise in defaults and bad loans."  Also that the defaults were triggered by constantly rising interest rates over the last 4 years.

The BBC offers this Q&A: Sub-prime lending on the sub prime issue.

Our group had a meeting in March and we discussed the possibility of US real estate bubble bursting and what effect it might have on the Costa Rica market. In general our brokers believe that the markets are not too closely tied, most of our clients are people buying second homes or down sizing, so while they might not see appreciation on their U.S. properties in a slow market, they are not relying on that appreciation to buy property here.

In the current case it is clear that our clients are not fitting this profile from the BBC Q & A: "What is sub-prime lending? -  Put simply, it is loans to people who have patchy credit histories or cannot prove their incomes."

So it seems that Costa Rica will continue to be a good place to invest in real estate in the near future, since the growth here is driven by infrastructure development and strong demand in the areas that our group covers. 

[Stan]

Yes I am concerned about this also. On the plus side is CR is a small country and it is not just Americans but people from all over the world. Americans did not nickname this counrtry Little Switzerland. I wounder who did? No army. The loan market is opening 20 or even 30% down full doc loans. So just the credit worthy are getting loans. Look at the tax base for housing. Property taxes are killing Florida. Just think. You could live here with an SS check of $600 a month.. The people without health insurance should be pouring in. Ticos love the US dollar.
Stan

[frettless]

I can give you some insight into what is happening over here. I manage a branch of a major tile and stone distributor in Florida and happen to live in what The Financial Times calls the epicenter of the mortgage crisis in the US, Sarasota.

I'll disagree that this is the epicenter, but it hit this market hard because we had a year over year price appreciation of 30% three years in a row. New housing starts were bordering on the ridiculous until the last part of 2006 and now nothing, absolutely  nothing is being built because of inventory that needs to be cleared out. This is up and down the Gulf Coast from St. Pete all the way to Naples. There are 15,000 Homes on the market in Collier County (Naples) and another 19,000 in Collier (FT. Myers). I was at a dinner with the President elect of the Sarasota Homebuilder's Assoc. this past Saturday and he does feels that we have bottomed out but things aren't going to pick up until 2010. The median price of a home in Sarasota County is around $270,000 down from over $330,000 a year and a half ago. A lot of this was fueled by speculation and it is getting painful for those who took adjustable rate and intrest only loans because they expected to flip their properties. They would like to re-finance to a fixed rate but if you are following the news, that is going to be difficult. This isn't even  necessarily sub prime. I'm talking about people with good credit scores and it's going to get uglier. It's not just the inflated pricing that was fueled by speculation. It's ridiculous property taxes and home insurance premiums that are major contributors to unaffordability and therefore a lack of sales.

Now let's look at the condo market. Buyers are walking away from 6 figure deposits because they don't want to close on what turned out to be overpriced condos. I see loads of projects on hold when I surf the Construction Journal website looking for leads for my sales rep Since my business is dependant on new construction  it's hurting me as well and i can probably tack a year or two on to my own re-location plans.
 
If you are in Florida you really do not want to sell right now unless you have to. Are there any parallels in Costa Rica? The last time i was in Jaco and saw the condos going up and saw their steep prices the scenario looked pretty similar to what i'm experiencing here right now.

[john1jr]

I have been thinking about your question for weeks before I share my experiences looking for property in CR. I have been a very successful Realtor over thirty years specializing in single family new construction and resales. First, don't believe certain sellers in the states is not affected by the supreme swindle. Every seller is affected. The most important buyer in any market is the first time home buyer. The government has always stimulated real estate market with programs for first time buyers. This represents one of many reason sub prime was created. When the first time buyer purchases one home up to 4 or more sales result from that one sale. Most normal Americans need the equity out of their old home to purchase a more expensive new or used homes. If the government stimulated the $1,000,000+ market we would see a small affect.

Where CR market is exactly the same as the Florida market is that not a single person within the CR real estate market thinks or says it can happen to them. Just like in my market 3 years ago. Well it has happened here in my market, many times over thirty years. Not a single salesperson thinks the West coast can ever be over built with the thousand upon thousand of new condo's being planned in the next few years. Everyone will tell you better buy now because this is a sure profit center. Demand is unlimited. Naples was the same way 5 years ago. My neighbor just sold their $580,000 condo in Fiddler's Creek for $410,000 with $50,000 furnishing and are thanking GOD it is sold. Thirty five were on the market in their small section.

For years they told me how much easy money they where making and I had better get on the wagon. I was wrong I just keep investing in Tieck mutual funds. I find the prices in Costa Rica rather high, but that is the market. I follow a lot of homes on the internet I like and many are still on the market or coming down in price. Each person will determine what is value is for them. To say the down turn in the US market with buyers not being able to get the equity out of their homes to purchase in CR or having less equity is not facing the truth. I have slowed my move because of decreasing prices. A $100,000+ plus loss of value of my present home still represents allot of money to my family. $100,000 here and a $100,000 there soon adds up.

The rule of first time buyers purchase will affect CR's market also. Just think how much more money every buyer from the USA would have to purchase in a home in CR if our real estate ressession would had never happen. How many more buyers would be entering the market to buy those THOUSANDS of cond's coming on the market without the recession? When a real estate agent says they are not affected by the USA market a light should go off in your head when you evaluate his or her knowledge of real estate. They spent a lot on marketing to us poorer American's who need the equity out of our present home to purchase a $300,000-$400,000 home in CR. It's not easy being poor to their standards.

Please don't pick on my writting abilities. I try to do my best for high school dropout. Be kind?

[frettless]

 John,
I agree with some of what you saying about Florida and only Florida. If I were ready in every other aspect of my life to buy a house or Condo in CR and do my planned re-location the one thing that would stop me would be that I wouldn't want to sell my home right now. In 5 years it will be paid off and hopefully the market will come back by 2010.

 Having said that, the CR real estate market isn't only a US market. Given the fact that a lot of pricing is done in US $ and the Euro is at an all time high against the Greenback, I would think that the Europeans are going to keep things going in Costa Rica.   

[Russ]

Frettless and John, thank you for these great comments.  I think you bring up some good points and that is interesting to see how the sub prime scandal is affecting things on the ground there in Florida.

I agree 100% that when people are saying you have to get into something or you will lose out and also "guaranteeing" fantastic returns in very short time frames, then those are big warning flags.  A few years ago I picked up a copy of "Extraordinary Popular Delusions and the Madness of Crowds" by Charles Mackay.  This book was first published in 1841 and it is one of the best books I have ever read.  The first three chapters cover The Mississipi Scheme, The South-Sea Bubble and Tulipomania.

With all of the construction and development going on in some areas, and Jaco is a prime example, I think it is wise to be careful about what you are buying into.  On the one hand, the prices are really expensive for Costa Rica, but not so expensive compared to beachfront condos in the U.S., from examples I have seen.  And the market shows no signs of letting up so far.  But it is very true that it doesn't seem to show signs until it hits a wall!  But I still think that Costa Rica is attractive for many reasons and that the market will stay strong here.

Another factor that John brings up is financing. We are starting to see many more financing options and much better terms for both locals and foreigners.  Particularly the companies targeting the foreign market.  This may be tied in to the big banks moving into Central America.  In the last few months Scotiabank merged with Interfin, Citibank bought Banco Cuscatlan, and HSBC took over the Banex (formerly BanCrecen).  The point being is that if a U.S. person wants to buy a second home and could qualify for a loan in the U.S. from, for instance, Citibank.  I think its hard to believe that as time goes on the Citibank in Costa Rica would not also come through with mechanisms to allow that loan to take place here.  

But that is in the future, right now there are several new programs targeting foreign clients with foreign income.  Which as John says, will definitely help the market.  Now people don't have to re-finance their home there in order to pay cash here, they can finance the real property here directly.  

[Stan]

Like the Gentlemen said earlier in CR you can live on a $600 SS check and get free health insurance. Just because one sector of the US economy is in a slowdown how can you call it a recession? It is an oversupply of houses. I have seen houses go for $15K in CR. The average skilled CR worker gets $12.00 a day! I live in Racine, Wi. In between Milwaukee and Chicago there are over 2000 building lots for sale. Talk about oversupply? What else has dropped in price? Nothing!
There are plenty of good websites, including this one that can hook you up with all kinds of deals in Costa Rica. Do your research and reading and ask a lot of questions.  I am always looking for investors. I love Florida. Can someone let me know where there are some desperations sales in Florida?
We are going to be breaking ground soon at Bandera Beach near Parrita Come and take a look.
Stan

[frettless]

Stan,

You can try the Sarasota area. There are plenty of desperate sellers and the banks haven't caved just yet but some are willing do do a short sale.

I'll be in CR May 17 to get a first hand look at what's new.

Like the Gentlemen said earlier in CR you can live on a $600 SS check and get free health insurance. Just because one sector of the US economy is in a slowdown how can you call it a recession? It is an oversupply of houses. I have seen houses go for $15K in CR. The average skilled CR worker gets $12.00 a day! I live in Racine, Wi. In between Milwaukee and Chicago there are over 2000 building lots for sale. Talk about oversupply? What else has dropped in price? Nothing!
There are plenty of good websites, including this one that can hook you up with all kinds of deals in Costa Rica. Do your research and reading and ask alot of questions.  I love Florida. Can someone let me know where there are some desperations sales in Florida?
We are going to be breaking ground soon at Bandera Beach near Parrita Come and take a look.
Stan