Slowing U.S. Housing Market Impacts Mexico

Officials in Mexico worry that the softening U.S. housing market means Americans will start pouring less money into real estate south of the border.

Mexico’s official tourism agency says that foreign investment into Mexico is on track to hit $20 billion this year, up from $17.6 billion in 2005. But will this foreign vacation home boom end along with the U.S. housing market surge?

“We have some concerns about the slowing U.S. housing market but there are many other things working for us,” said John McCarthy, the agency director general, who was in Beverly Hills, Calif., last week to speak to U.S. investors. “Most of our buyers are baby boomers who have paid off in good part their initial mortgages and are coming into inheritance money.”

Real estate experts also say Mexico’s resort homes market might experience a smaller price shock because it is a new area of investment and the buyers tend to be higher-income and less likely to be desperate sellers forced into fire-sales.

“The cooling real estate market could take this from being a very, very positive trend to a mildly positive trend,” said Christopher Thornberg, an economist with Beacon Economics.

That’s good news for Janette and Harvey Craig, who paid $60,000 four years ago for a piece of beachfront property in Litibu, a small beach community about 30 miles north of Puerto Vallerta.

They expect the parcel, which is worth about $300,000 today, to become more valuable when the nearby resort — which will include hotels and condos, 910 homes and an 18-hole golf course — is completed in three years.

“It’s just going to push prices higher and higher,” said Janette, a part-owner of Garcia Realty in the nearby surfing town of Sayulita.

In the past, foreigners have been wary of investing in Mexico because of legal problems, ample corruption and red tape. But changes in Mexican laws have made it easier for foreigners to own property through bank trusts. Major U.S. companies have begun offering mortgages and title insurance.

Mexican officials dispute the notion that this tourism benefits only the wealthy developers and well-heeled travelers. The average incomes in the states of Quintana Roo and Baja California Sur, home to destinations like Cancun and Cabo San Lucas, are among the highest in the nation.

Tourism is the third largest generator of foreign exchange in Mexico, after oil and remittances from Mexicans living abroad.

FONATUR, the country’s tourism agency, identifies promising tourism areas, buys land, draws up a master plan and develops basic services like roads, sewage facilities and power plants. The government then sells the property to private developers.

It’s working. In just a few decades, the southern tip of the Baja Peninsula has become one of Mexico’s most exclusive getaways.

Once known for cheap time-share properties, the rugged coast between Cabo San Lucas and the sleepier San Jose del Cabo is lined with luxury resorts that charge as much as $1,000 a night for hotel rooms. Oceanfront estates sell for as much as $7 million. On weekends, it is not uncommon to see 100 private jets at the airport.

Yet despite the boon it has provided to the local economy, some in Mexico are expressing concern that the flow of Americans — priced out of vacation homes in places such as the Sunshine State due to higher Florida home loan rates and meteoric home price growth — is doing more harm than good.

Tourism officials are sensitive to criticism that this rapid development threatens the country’s most beautiful coastline and marine reserves and puts a strain on the rural communities that bear the brunt of the rising home prices, increased traffic and an influx of people looking for work.

These challenges have come into sharp focus along the east coast of Baja California Sur, which borders the Sea of Cortez (also called the Gulf of California), home to the largest marine park in Mexico. The Mexican government has already invested $200 million on roads, water treatment plants and other infrastructure.

As we’ve seen in Florida, the quest for sustainable development often puts builders and environmentalists at odds.

Rob Faris, an economist with the Harvard Institute for International Development, has praised developers’ efforts to limit the environmental footprint left some Mexican tourist spots, but worries about the impact such a large influx of people will have on southern Baja’s limited water supply, the marine park and the community of Loreto. Within two decades, the population of the sparsely populated region is expected to balloon from 15,000 to 120,000.