US Economy Effect on Real Estate in Costa Rica

Perhaps the most common question I hear in recent months is: “how has the recent economic downturn in the U. S. impacted real estate in Costa Rica?”

As a broker of real estate in Costa Rica, I work with investors from all around the globe as they search for their property in Costa Rica. In working with these people I get to hear what their concerns are and watch how they respond as they learn and experience the Costa Rica real estate marketplace.

One of the San Buenas Golf Resort (SBGR) partners is Duane Halverson, retired COO from the well known dairy company “Land ‘O Lakes” in the United States. Duane and I have struck up a rather unlikely, synergistic relationship that has resulted in some pretty interesting dialogue: Duane being a long time, firmly anchored, North American business executive, entrusted with the financial well being of a large U. S. company (he also sits on the board of numerous other corporations there in the States), and me being a jungle tromping real estate agent in the wilds of Costa Rica.

Mr. Halverson sent me the summary below of a speech that he attended by Michael Ryan of New York city who is an economist who appears periodically on CNN. He spoke about the US and world economy. Following are some of his key points;

US ECONOMY

• We are in a housing led downturn
• The ” housing opening ” rate is the highest since World War Two. The high housing inventory and the long-term housing demand equation suggests further housing price declines . The prices of many homes will decline another 6-12% during the next 12 months.
• The commercial market situation is much better than the residual.
• The USA will have below normal growth for the next two years.
• The ” headline” inflation rate is elevated. The core rate, excluding food and energy is not. The single largest contributor to inflation is “wages and salaries. “
• The inflation rate and interest rates will remain relatively low for the next 6-12 months.
• The USA is still the world’s largest economy. However, due to the growth of other countries, especially India and China, the USA economy plays the lowest rate in the world economy since World War Two. This is good for world stability.
• The U. S. sub prime mortgages are $ 1. 2 trillion of the total mortgage market of $ 85 trillion. However, the impact has been felt by many people and numerous financial institutions.
• Exports account for but 12% of the USA GDP. Thus the USA must grow internally.
• Agri business, as a sector, should be good for the next several years (as the world economy grows the demand for protein increases).
• USA stock price earnings ratio is at a 20 year low. The key variable is what corporate earnings will be.
• Global growth will remain strong. In 2008 emerging market countries will account for 60% of global growth. Thus, large cap stocks should do well (large cap stocks tend to be global in nature).
• Regardless of who wins the presidential election, taxes will increase.

Below is my response to Duane.

Dear Duane,

I have been thinking about your letter summarizing Mr Ryan’s take on the economy, and putting it up against what I see going on here in Costa Rica. Frankly his analysis is more optimistic than what I had understood things to be.

It may be that Costa Rica real estate is in a rather strong position when considering the global economy. It’s like one of the pivotal points, albeit very small, of the earth’s ebbs and flows of economic well being.

To illustrate:
When I first got started in the art business in ’85, the Texans were our biggest source of clientele there in Aspen Colorado, USA. They would come a strollin’ in to the gallery with their handmade $12,000 Lucese alligator boots with the big hair trophy wife bedecked with furs and a rock on her finger that made it difficult for her to lift her hand to adjust her coiffure. Selling art to them was quite easy. All things “impressionism”, they would buy. . . then the oil market fell out. We Aspen art dealers were concerned about making a living with no Texans coming in. It was a dramatic toggle that cut the flow of our bread and butter clientele.

The art market is perhaps one of the most sensitive instruments for gauging the economic condition of the country. It is a non-essential (although some of my collector clients would argue with that statement), and it is a subjective, pleasure, sort of product. It has nothing to do really with sustenance and covering. At best it could be said to diversify one’s portfolio, but this would only happen after the 401k, IRA, real estate, and stocks were all in top shape.

Well, we hardly missed a beat back then as the economy moved around, doing its thing. It seems that the day the oil market went to pot, the stock market kicked into high gear with the whole junk bond shenanigans. Trash disposal became a hot ticket as the country became aware that the landfills were full and we were generating trash at record levels, and the yen was at all time highs. The Japanese paid $39,921,750 for oil on canvas by Van Gogh of some sunflowers in a pot.

It was then that I realized that I had picked a spot on the globe that benefited from a rather secure economy since whomever had the wherewithal, wherever they may be, would be the ones that would come to Aspen. As long as we didn’t get too awfully attached to any one group and miss their passing, we would happily welcome the next ones to come in.

Factors that hurt the art industry though, due to its sensitive nature, were things like, the Persian Gulf War. There was lots of money around, but people were depressed, and concerned. So they didn’t buy art. That was perhaps the longest stretch of low to no sales I experienced in the art business.

I write all that, to write this. I think that Costa Rica sits in a similar global position as Aspen did back then, for the same fundamental reasons. Additionally I think that Costa Rica real estate enjoys a lack of sensitivity that wasn’t present in the art market. Real estate will still make sense, and perhaps more so, in the presence of an emotional hit.

I think that you and I have spoken about how the buyers here have changed from 5 years ago when our land boom in the Dominical, Uvita, and Ojochal zone began. Back then we had a “take a number” situation going on in our Dominical office. This was an abundant source of leads for us. The crazy land boom in the States generated a huge stream of buyers for us here in Costa Rica’s southern zone. These buyers seemed to all have an upper budget limit of $100k and they all wanted ocean views. It was an interesting phenomenon. I recognized this happening and actually counted the number of under $100k ocean view lots that we had at the time, and counted down as they sold. I had one week when I sold five lots, and another 2 week period where I sold 6. The big topic here among the real estate agents was, “you got anything to sell”? Those were some pretty heady times.

These buyers had cash, simply due to something so mundane as housing their families. With a stroke of their mortgage broker’s pen, they had $100k in their pockets.

Things have changed. The real estate market in the US has gone flat or crashed, the dollar has devaluated globally, and this “Texan” like source of buyers, equity buyers, has dried up.

I don’t think that we missed a beat. This all coincided with some other factors going on around here in Costa Rica’s southern zone, and real estate is continuing on here with vigor, albeit it looks a lot different than the halcyon days of ancient history, 5 years ago.