Business, Real Estate, and Investing

Where are we in the San Miguel real estate market cycle?
By Jim Karger, June 29, 2007

Can the U.S. housing market get any worse? Take a look at last month’s numbers and you can answer the question yourself.

Inventory of previously owned homes for sale in May, 2007 topped a 15-year record; sales of existing homes fell another .3 percent, and average home prices suffered still another decline, this one 2.1 percent, says the National Association of Realtors.

Homes waiting to be sold in the US rose by 5 percent last month, and at the current sales rate it will take 9 months to use up the existing supply, representing the largest inventory of unsold homes since 1992 (coincidentally at the end of the last US housing bust.) Combined with homebuilders who have their own inventory problems with unsold new homes, and lenders pulling in their horns as the sub-prime crises deepens, predictions are that home prices will continue to fall in the U.S. over the next several months, perhaps longer. 

The question: Is any of this relevant to buyers and sellers of residential real estate in San Miguel?

Like most dynamics in Mexico, it depends on whom you talk to. Unfortunately, there are no official or some would contend, reliable, statistics on the sale of real estate in San Miguel, nor can one track the actual prices at which all homes actually sell.

What we do know, as a matter of history, is that the Mexican economy is highly dependent on our northern neighbor, hence the old economic adage, “When the US catches a cold, Mexico contracts pneumonia.” 

We also know inventories of unsold homes in San Miguel continue to rise, or at least that is what many observers believe if only because they see it. One need only look around their own neighborhood to see houses coming on the market every week, or so it seems. I just returned from several days away and found two homes on the same street in Guadiana plastered with various “for sale” signs by competing agents. They were not for sale when I left.

If, indeed, residential housing in San Miguel follows the US market, what we may be experiencing at this point in the market cycle is what is termed the “seller’s denial phase.” This is a period in which sellers refuse to admit that their homes are depreciating in value and thus they do not reduce the price. As inventory continue to pile up, what follows is known as the “seller’s capitulation phase,” the point at which sellers can no longer deny that prices are dropping and/or inventories are rising, at which time they finally reduce prices en masse. It is at this point that buyers are in control of the market and they remain in control until inventories recede to normal levels (due to price reductions that stimulate sales) at which time the process reverses. Then, buyers who have been in control want to continue to buy at lower and lower prices until they can no longer do so and go into the “buyer’s denial phase,” refusing to believe that prices have stabilized and may actually be rising. Buyers eventually “
capitulate” and pay higher prices, which causes more inventory to be built.

Then, the cycle begins anew. Like all markets, it is the natural order of things for buyers and sellers to take turns pushing the pendulum back and forth. The only ones in the game who are destined to lose are those who follow the herd—buying in a frenzy of buying and selling in a frenzy of selling. The winners are those who are patient—buyers and sellers who recognize the give and take of the market, who sell when everyone seems to be buying and buy when everyone seems to be selling. Regrettably, it is easy to say and difficult to do. 

Jim Karger is a resident of San Miguel de Allende and writes on “Business, Real Estate, and Investing” twice a month for Atención.