Monday, August 25, 2008

Mexican Real Estate:

 

‘Virtual Baja California’ Begins to Get Uncomfortably Real

By Brian Flock

·   Market attrition begins to reduce inventory

 

A February 18, 2008 Mexidata.info column discussed the phenomenon of ‘Virtual Baja California’ and therein distinguished between complete, clean-title properties as contrasted to preconstruction projects (i.e. mostly dirt and air) that were continuing to appear along the coastline of northern Baja California, Mexico. The point was that by cutting away the virtual inventory of planned projects, the real baseline market of prices and a much more moderate sales pace would begin to appear. That prediction is now happening and a clearer Baja California market is starting to emerge, albeit quite moderated when compared to Baja California boom highs.

An article this month in the San Diego Business Journal explored the natural culling of this virtual inventory and noted that over one hundred preconstruction projects in northern Baja California had been whittled down to at most thirty – and I suspect that number may decrease further. The article stated that Baja California had caught “double pneumonia,” which sounds decidedly more serious than the “cold” that the Mexidata.info February column described six months earlier.

The so-called double pneumonia is part of the natural lifecycle of a market out of balance and is weeding out development projects that simply don’t have the staying power to deliver on their promises. “Survival of the fittest” comes to mind. For a development to survive in the current market requires deep pockets, realistic expectations for all involved and cautious spending in order to hang on in tight times. The boom-era model of two guys with a cell phone who rely on buyer deposits to finance construction of luxury resorts targeted at the US middle-class simply won’t cut it anymore.

That is not to say that double pneumonia is an enjoyable or pleasant thing; no, far from it. This infirmity has painful implications for everyone exposed to it. Past buyers who now want to sell, real estate agents, and developers are all facing a variety of very uncomfortable situations.

As a real estate columnist, I’ve noticed an increasing trend of previous Baja California buyers who are under pressure by a worsening economy in the United States. Many of these are quick to look for blame in their plight where they have made deposits on preconstruction projects that either vaporize or simply stall. The fact is that everyone must share responsibility in the situation. That includes buyers who, often driven by the allure of high investment returns, overextended themselves with leveraged debt (e.g. home equity loans) on risky projects in order to cash in on a Baja California boom that could never last forever.

Some of those buyers are now choosing to walk away from their deposits. Others are frustrated to find that they cannot recover the resale prices that they had expected. This is simple economics of a market and direct blame on one source will be impossible to find. The only real question for each investor is what action to take from today going forward. Meanwhile, savvy buyers are snapping up bargains on real prices that are about 20-25% lower than at the height of the local boom. Some are even getting attractive financing from individual sellers in a credit crunch market where the new buyers would find traditional financing unattainable or too expensive.

The United States’ and Baja California’s financing and housing crises are teaching investors to view real estate in a new way. It is no longer a given that real estate will go up no matter what, just as no stock on the New York Stock Exchange is a guaranteed to increase. Empirical evidence of this is the current state of Fannie Mae and Freddie Mac. Those stocks have dropped a full 93% and 95% respectively over the past year! The market has answered what it thinks of the risky real estate investments of those companies. Investors who bought these stocks a year ago thinking that the real estate market would continue to go up can now only groan and wait or bail out and take a huge loss in their investment portfolio.

There will be a distinct silver lining to this story for a new group of Baja California residents. This will involve baby boomer retirees and others ocean lovers who have wisely guarded their financial muscle and who have the motivation to snap up completed, coastal homes in Baja California at a fraction of their previous prices. For the most part these people will do so for the simple fact that they enjoy Baja California’s climate and proximity to the US.

This is what northern Baja California really needs right now: real people – long-term residents – who desire to integrate into the growing expatriate community and who want to live the real Baja California lifestyle, not the illusion of getting rich quick.

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Brian Flock, a contributor to http://www.mexidata.info, is a licensed California broker (01870163), as well as a degreed and certified broker in Mexico. He is a realtor and a member of both SDAR and AMPI Rosarito. Mr. Flock may be contacted at Flock Dream Homes (www.flockdreamhomes.com), brian@flockdreamhomes.com, or (619) 793-5224.