As a contributing source to this article I would like to share this with everyone in REI. This is an in depth report on the Mexico Real Estate Market

2009 - 2010 MEXICO MARKET ANALYSIS
By: Raul O’Farrill and Wayne Corcoran, St. James Gate
Copyright protected 2009 – 2010 this article can not be reproduced without written approval of St. James Gate- Approval For Heidi Wosak Obtained
INTRODUCTION
Again this year St. James Gate Developing and Consulting in Mexico has prepared this important summary analysis of Mexico’s real estate related economic events in the context of the International markets we are influenced by for the year ending 2009 along with our projections and expectations for the 2010. This analysis has special focused on the Puerto Penasco (Rocky Point) Region.

The purpose of this market analysis is to provide to the real estate investors and tourism industry with strong facts and complete analysis to help them make better real estate investment and business decisions in 2010.

BACKGROUND
We feel proud to see that our economic projections for the past two years have been relatively accurate especially given the very difficult year for so many reasons. The behavior of the real estate markets were impacted by the effects of the global economic disaster, unemployment rates and political influences. In addition to the global economic influences, Puerto Penasco has faced unfair negative media covering relating to the Drug War in some border cities of Mexico which has not been a local issue but was communicated with a broad brush making it look like it is was. The media has also made the drug war look worse than the war in Iraq. The North American government strong reaction (maybe over reaction) to the Swain Flue Pandemic has caused multi-billion dollar losses to Tourism, Resort Sectors, and Retirement real estate markets in Mexico.

In a resort market so close to the US border it is difficult to determine the degree the Mexican factors will influence the marker or how strong the American and North American markets will influence. Historically the Puerto Penasco Market has been almost entirely driven by the Arizona and so a smaller degree the southern states. In 2008 we saw the beginning of a shift from the as the Mexican market started to increase while the foreign market was decreasing. Rocky Point was showing a clear tendency to diversify creating niches in the market. 2 years after our first projections we are happy to see that the factors considered for the analysis and projections were more than 85% accurate. Our awareness of the broader shifts in the market helped the forecasts to be as accurate as they were.

We have collected and analyzed data from 2009 as we complete our 2009-2010 Mexico Market Analysis Report. The factors have once again become broader and more dynamic making forecasting even more difficult. We are living in the middle of the biggest financial and real estate debacle the US has seen since the 30’s big depression, coupled with a new US government administration with big challenges like the high unemployment rate, health care reform, highest foreclosure rates ever, plus national security issues and a big potential conflict in the middle east to involve more nations to the war in that region of the world. These are the obvious issues facing the region but what makes this even more challenging is the US national debt that is not getting enough discussion as the US tries to spend its way out of this recession.

With the complexity of the US financial crisis impacting the international economy along with the international uncertainties with War on Terrorism, we have looked to reliable sources to complete our analysis. Our local market here is Puerto Peñasco is sophisticated as it is primarily a Resort and Retirement Market, a hybrid interdependent market with global economy influences from U.S., Canada, Mexico and Europe in that order. After evaluating 2009 results we concluded that is evident with the financial crisis and the bad media against Mexico in the USA, that Resort and Retirement real estate markets have been impacted by more than economic factors. In Puerto Penasco – Rocky Point the media reports on the USA – Mexico Border of Arizona, California, New Mexico and Texas region have had a negative impact on our local economy.

INFLUENCING FACTORS
Influencing factors and related facts have been researched from various sources listed in the reference section. As the biggest market influence for this study has been the US financial crisis for the past 3 years so we will start by describing hat took place in a fair amount of detail as we believe this needs to be understood to provide context for our report. Then we will talk about the US and Mexico national statistics, the Mexico influence in the Resort and Retirement real estate markets and the Border Regions and finally we will look at the local market in Puerto Peñasco.

US ENVIRONMENT
To understand the current market conditions we need to understand where some of the major causes and triggers started. In our 2008 / 2009 Market Analysis we discussed the triggers of the US Financial Crisis in detail so we provided only a summary here for this report. To see the detailed version along with a 42 minute video of the 2009 World Economic Forum – Latin American Plenary Session visit our website under the Economy and Market tab; http://www.stjamesgate.ws/Economy__Market/page_2193863.html.
The US economic crisis which became a world economic crisis has its initial trigger in 1977 and the story continues to unfold.

1977 - [The Community Reinvestment Act (or CRA, Pub.L. 95-128, title VIII, 91 Stat. 1147, 12 U.S.C. § 2901 et seq.) was passed by the 95th United States Congress and signed into law by President Jimmy Carter in 1977 as a result of national pressure to address the deteriorating conditions of American cities—particularly lower-income and minority neighborhoods. This act opened the door for the subprime market; it was a well intended act but became misused providing funding to those that could not afford the loans what became a common practice with the pass of time.
2001 - U.S. faced a severe recession and began cutting interest rates down to 1% - the financial services industry saw the opportunity to make a lot of money and went all in on real estate, unaware of related risks.

2004 & 2005 - The financial bonanza in real estate especially in some states like Arizona and California.

March 2006 - When Federal Reserve raised the interest to 5.25% it resulted in expensive money along with high inflation rate causing prices having run well out of their range of affordability those that could least afford to purchase homes (subprime borrowers) started to default in the U.S.

February 2007 0 HSBC issued the first major warning, writing down tens of billions in losses from their 2002 acquisition of U.S. subprime lender Household International

June 2007 - Two Bear Stearns hedge funds with exposure to the US housing market blew up it indicated the first sign the economy was in trouble.

Oct 2007 - Merrill Lynch was the first to report a large loss, at $5.5 billion

March 2008 - The Federal Government induced to JP Morgan to buy Bearn Steams the 5th Investment Bank in the US valuating its capital at zero value, avoiding its closing.

August 2008 - Paulson hired Morgan Stanley to assess the problem of the Federal Mortgage Agencies Fannie Mae and Freddie Mac representing 50% of the US mortgage market valuated at $12 B US in total, resulting in the takeover of the control of those agencies by the Federal Government and an injection of $200 B US to that sector.

December 2008 - Once the crisis hit panic mode, the US Economy was officially declared on “in recession” and in reviewing of the data they stated the effective start date to be on December 1st, 2007. The measure is normally two consecutive quarters of negative growth but with the high unemployment rates every single month after that date closing 6.7%, plus the biggest foreclosure rate in decades this time affecting working and middle classes the economic recession was declared.

In 2009with the economic crisis in full swing there events that created uncertainty and expectations in the investment markets of the US affecting the global economy, such as; President Obama first 100 days; the Health Care Reform Debate, US Home Land Security issues which included the increase of violence on the US – Mexico border and increased US – Mexico cooperation in the drug war started by President Calderon in 2007; the US – Mexico and Canada (NAFTA) relationship, the unresolved the Iraq war and the increase of troops for the Afghanistan War; a new president for the Federal Reserve, President Obama’s cabinet performance, G20 meetings and US role and responsible actions in each one of them; the January 2009 Davos World Economic Forum with Latin American leaders. These major events were the most important factors influencing 2009 a year of transition, expectations and defining the new economy. While these events unfolded over the full year they resulted in a result a slow flow of credit and investment worldwide, the beginning of the recovery.

The 2009 US major economic indicators showed an unemployment rate of 10.2%, twice as much as was projected; an Inflation Rate of 0.5% lower than projected (mainly because of price reductions to move inventories of manufacturers and retailers); the S&P index is projected to close around 10,093 points, new homes construction sector in the US grew 8.9% and new construction permits increased in 6.9% what are clear signs of an economic recovery - a small recovery but recovery anyway. Bursametrica projects 2010 to end with US unemployment rate of 8.9% representing unemployment absorption rate of only 1.2% in real terms, this make us believe that the US economy needs another boost to recover and show these healthy indicators by the end of 2010.

WAR AS AN ECONOMIC INDICATOR
War has always been known to drive economies for those that produce the supplies required to sustain the war and it often shrinks the unemployment rates in these economic areas. Yet like fighting financial crisis with new debt, war has its hidden cost that cause longer term issues. US debt in the world is the most important long term factor for a healthy economy. War does remain an economic indicator so we will discuss a few of these risks.

The Iraq War is not over yet and we are not sure when Iraq is able to manage its internal issues and the American involvement will terminate; Afghanistan US troops were increased in the second half of 2009 to fight Taliban and Al Quaeda; US Pakistan relations are worst than ever while the Pakistan – India relations are very strong; India was also a victim of terrorism this year in Mumbai by a Pakistani terror organization.

The US Christmas day terror attempt by a Nigerian Citizen affiliated with AL Quaeda activated the Home Land Security and a speech in Washington mentioning Yemen as part of the Terror Network. Iran is the most important threat in the Middle East not only because of its nuclear program, but for human rights violation and constant riots of the population against their government.

Considering the geographical location and the interest of the US and EU allies around the Persian Gulf like Saudi Arabia, United Arab Emirates, Kuwait, Oman, an the closeness and borders of such countries facing terror threats like India, Israel, and Turkey a war conflict looks very close and possible unless a dramatic effective diplomatic effort is launched in the first half of 2010.

A War can ignite the US, EU, China and India Economies due to their war manufacturing industries because these government expenses contribute to the steel, pharmaceutical, medical, car, aerospace, textile and technology industries. The economic contribution would include an immediate absorption of the unemployed in these Countries by those industries and their respective armed forces. But, we must consider the long term impact as the US cannot afford to increase its multi-trillion dollar debt and sustain any long term economic recovery for the benefit of any short-term gains.

Mexican economy will be impacted in a very favorable manner in 2010 as we are expecting a slow and steady US recovery because of the success of the financial policies implemented by President Obama and the confidence of investors to release large capital outlays generating a flow of new investments,

We must also remember that Mexico by a constitutional mandate can’t participate in any war unless is directly attacked in its territory by an enemy state. However in case of war the benefits for Mexico will be: increase of exports to the US and EU of manufactured goods and food, medications, textile and electronics, auto parts, aerospace parts in one hand, and Tourism will increase in an exponential manner because of the closeness with the US to drive or short flights, and safety as happened after 9/11. Real Estate Mexican Market for Resort and Retirement markets will receive also a big positive effect. We are not predicting war but are looking at the economic impact if that risk unfolds. Mexico will benefit from all measures that increase activity in the US economy and will not have the additional new debt other countries feel from war.

MEXICO’S ECONOMY AND ENVIRONMENT
Mexico is a sophisticated country, a member of the G 20 (Group of the 20 strongest and most influential economies in the world), ranked the 14h strongest economy in the world down from last year’s 12th position.

At the Washington’s G-20 Summit on November 15th 2008, President Felipe Calderón proposed to contain the financial crisis by adopting contra cyclical economic policies in a coordinated fashion, reforming national and international financial institutions and preventing the new era of protectionism. The proposal was adopted by G20 and the global indicators are recovering in general.

President Felipe Calderon went on to identify long periods of growth imbalances coupled with lax regulation and supervision as the primary causes of the international credit crisis. He went on to offer the G-20 four actions; first is to take measures to provide containment, the second was to adopt wide-reaching fiscal policies in an internationally coordinated fashion, third was to reform national and international financial systems and lastly to prevent resurgence of internal protectionism at any cost to promote confidence and prevent tariff increases that would cripple emerging economies. (Mexico statistically is not considered an emerging economy anymore).
Mexico for the past 17 years took solid preventive measures to capitalize banks, which averted a financial crisis and prevented the collapse of the world’s major corporations from affecting the Mexican system. In this respect, Calderón said, “Naturally, what some people call moving onto the Basle III stage, these preventive measures will be reviewed again, but the fact that there has not be a run on the financial system, the fact that credit has not come to an abrupt halt in Mexico, the fact that government has not had to intervene to use enormous sums of money to capitalize, as is being done in the United States, for example, means that these preventive measures had largely been implemented.”
The Drug War is in its 3rd year; President Calderon has been inflexible showing zero tolerance with the cartels. I 2009 the US media decided to take this event to the national news stage, exaggerating the size of the problem putting the Mexican and US Home Land Security at a higher risk. In a few Mexican Cities the drug war is exactly what happened in Chicago in the 30’s when the US decided to fight the Mob, gangs were fighting against each other for territory and survival while the government cut their weapon, ammunition, and cash supply in one side, and money laundry industry on the other. Mexico is has a peaceful, stable, government and institutions are untouched and are in total control of the Country, States and Cities. Mexico is not living a war situation like Iraq or Afghanistan as the Media reports.
Swine Flue created more damages to the Mexican Economy than the 7 first months of the US and Global Financial Crisis, the absence of tourism and the stop of labors in all the country to prevent a major pandemic caused billions in looses to the Country, what are reflected in the major economic indicators of Mexico in these days. However, the same indicators are showing clear signs of recovery giving confidence to Mexican investors like Carlos Slim’s Carso and Telmex as well as other big Mexican Multinational Corporations to invest and expand their Mexican operations.
Mexico is heavily influenced by the North American economy; you will find the President Obama, President Calderon, PM Harper: Joint Press Conference at the North American Leaders Conference in Guadalajara on August 10th 2009 very interesting and insightful. To view this video please visit our website at;

http://www.stjamesgate.ws/Mex_USA__Can/page_2300516.html.

BURSAMETRICA - PROJECTIONS FOR US AND MEXICO
The standard measures of a country economy include the GDP (Gross National Product) which measure the country’s production, inflation to help understand the impact on individual spending, other measures include the average value changes in the stock market value and the change in dollar / peso value, see the following chart. UNAVAILABLE IN THIS FORMAT... FOR MORE SEE. http://tinyurl.com/y9qm6s2
By the main measure of economic output the GDP Mexico shows it had a very tough year as the GDP was predicted to be 0 and was actually at -6.9% in comparison to the US that was predicted to be .6 and finished at -2.2%. Inflation in Mexico was predicted to be 3.9% and the actual was 0%

The Mexican Peso gained value against the US dollar in 2009 going from $13.70 to $12.50, pesos per USD as projected last December in our analysis. Unemployment in Mexico was predicted at 4.3 and was actually at 3.9 while the US was predicted at 6.9 was actually 10.2. , but not as in the USA, reserves of Banxico (Mexican Central Bank) reduced first half of 2009 compared with 2008 because of the Mexican Fed policy to support the value of the Pesos in that period, but in the other hand closed 2009 with its maximum historical value reaching more than $90 Billion USD against a very relaxed foreign debt..


Recovering from the financial crisis of 2009, Mexico’s 2010 GDP is expected to grow by 4.5% as a influenced by President Calderon’s economic plan to armor Mexico’s economy. We believe it is important to comment on how strong Mexico’s economy is because it is expected to grow in 2010 even in an international adverse environment as compared with the USA projected grow. Inflation relative to GDP is held under control meaning there is a solid platform for income growth in Mexico’s economy. The stock markets and Peso values also see the trend of Mexico holding its own during the low cycle in the US and benefiting from the US recovery in 2010, showing a tendency to devaluate Peso to make Mexican Exports more competitive, as well as Real Estate prices.

Second Home Real Estate Market around Mexico

Sales in new homes for the Resort and Retirement Market in Mexico have dropped as much as 80% (Market for Mexicans Buying in Mexico is very different) because of several factors:

1. Drug War Bad Publicity, affected every single Resort and Retirement destination in Mexico.

2. Swain Flue caused in few months looses only to the Tourism and Real Estate sectors of Mexico for more than 60% in average, plus other damages of similar magnitude to other sectors.

3. US Unemployment Rate and Financial bad situation which debilitated the purchase power of American and Canadian Buyers,

4. Re-sales prices at pennies for dollars what Developers can’t afford, and

5. We expect financing and re-financing of Mexico assets to be a factor during 2010, including a small amount of financing for non Mexicans.

In our last year report we said: “Mexico has prepared for a slow economy in 2009, however if the US economy does not start to improve by second quarter of 2009 those effects will be more severe for the Mexican economy and Mexico will join the rest of the affected countries by this situation and will require more international solutions”. In some way that is what happened in addition to the 5 points we already mentioned in the above paragraph.


Prices for the Resort and Retirement Markets re-sales around Mexico dropped an average of 32.42% caused by a big increase in properties offered for sale along with the decrease of demand in 2009. This trend was also influenced by the fact that Americans needed to sell their 2nd Homes in Mexico to save their financial situation in the US or because they defaulted on their payments for the Mexican Properties. This created a smaller the absorption rate in general and an even greater gap in second homes destinations. The resale market in this particular segment of Mexico’s market has been severely impacted in 2009 but has shown to be stronger than we expected, a big surprise for us, because when we saw the number of real estate agents leaving the market and the number of new projects on hold or just not selling, we assumed the resale market were be showing a similar tendency but it wasn’t, it was good news to see how conservative the changes were in re-sales, even with the big magnitude of this global financial crisis.


Number of transactions increased in 18.82% against 2008 but volume of dollars decreased 32.42% in average depending of the city and particulars of each market location, showing in this way a reduction in prices as a natural market adjustment.


Absorption rate ( I repeat, ONLY for the International Market in Mexico for Resort and Retirement Markets for Non Mexicans ) for 2009 in average was -86.54% what is a clear indicator of more properties listed than sold in 2009 because of discussed factors in this report.


To asses this information we analyze the following destinations and retirement cities being the most representative sample for us: Playa del Carmen, Merida, Mayan Riviera, Mexico City, San Miguel de Allende, Acapulco, Zihuatanejo, Melaque, Puerto Vallarta, Punta Mita, Sayulita, Puerto Penasco and Los Cabos Corridor.

Puerto Peñasco (Rocky Point) Environment

The Rocky Point economy was affected in so many ways from the US and international markets the Mexico’s market we discussed earlier; and especially by the decrease in tourism activity as a result of the US media coverage of the Mexico’s Drugs War which was generalized falsely. Most of the media reports reference Mexico as in the whole and is not specific about who is fighting giving the wrong impression that civil population is being killed in the streets what is so far from the reality, creating a wrong image of the public safety in Mexico. In addition to the generalization some media reports named Puerto Peñasco as an unsafe place to visit, warning students and visitors to stay at home, these reports were false and very damaging. As every year we expect the same kind of negative news by February 2010 as is usual before every Spring Brake season, Actually National Geographic Channel already announced a TV series named The Border War.

New Condos and Houses sales fell down about 80% compared with 2006 and 2007, this created a dramatic shrink demand from the construction industry but fortunately the construction industry found new business with federal, state and city infrastructure construction like dams, highways, bridges, airports, water system, street pavements and housing priced below 100’s mainly for Mexican Employees or Workers.


New International Mar de Cortes Airport opened on 2009 in specific November 5th and is in operation with private flights (See report at http://www.boomersabroad.com/online-community/blogs/retirement-is-n...\\\%27Farrill). The Puerto Penasco Economy in 2010 will be bolstered as we receive International Charter Flights first half of 2010 and Commercial flights in the second half of the year. The air traffic will increase the natural drive to market of our region allowing people from other regions of the world a fast and easy access to Puerto Penasco in addition to the traditional traffic from Arizona and southern US states traditionally driving this market.
We expect more accurate media coverage about Mexico’s safety or less media coverage which is better than the negative press in 2010 after spring brake, especially as the US economy recovers and media outlets see less reason to keep people home to drive the US economy. We also expect the cleanup of the Mexican drug cartels by the Mexican Authorities to keep to their strong actions of 2007, 2008 and 2009 and be aided by stronger action and support from the US government. To win the war with the drug cartels the flow of drugs, weapons, and money must be controlled by both the US and Mexican government which they are committed to do.


With the Coastal Highway now connecting Puerto Penasco with San Diego, the drive is only 4.5 hours, every day more California people visit and buy property in Puerto Penasco and the Sonora Gold Coast region that goes from Puerto Lobos (connected now by the new coastal highway) to and to the Puerto Penasco new International Airport.

In 2009 prices became more affordable in general and as a direct result of a financial crisis in any market, bargains were present allowing home owners to release their debts with investors looking for great opportunities.

2009 Real Estate Indicators for Puerto Peñasco

The Big losers in 2009 were Commercial properties because of the lack of tourism to the region. Sandy Beach, El Mirador, Las Conchas, in Town and Cholla Bay in that order were the big winners in the number of units sold. Sandy Beach, Las Conchas and Cholla Bay in that order were the winner in total dollar value of sales in USD Millions and Playa Miramar ($850K), Las Conchas ($396K) and Cholla Bay ($166k) had the highest average sale price.

For 2010 as we did in 2009 we are expecting a higher volume of lots sold because their prices had been adjusted, and more and more investors and buyers in 2009 will be looking for speculative land to resale in the future, to construct or develop in the other hand. However in 2009 we did not see the increase in land purchases as more investors bought the bargain price re-sales properties.

The Lots that sold showed a tendency to be bought now by investors and developers who are expecting a market recovery in the near future, this is an excellent indicator.

We have seen more Ocean View Homes, Town Houses and gated communities selling because they are offered at very attractive prices, more housing for locals in town, we expect more re-sales and new developments of this kind for 2010 which will include more diversification including active adult communities and retirement communities in the Rocky Point area.

Events that will have a positive influence for Rocky Point region growth are:


1. Coastal Highway that connects southern California with Rocky Point, The gold Coast with Puerto Lobos now that it is in operation and more people become aware of the reduced time to travel from California.


2. International Commercial airport was inaugurated by President Calderon on November 5th, 2009 and will start taking on charter and commercial flights.


3. Rocky Point was approved as a home port for cruise ships which is predicted to start in 4 years from now but will add to speculative investing.


4. Some Developments designed as residential are planned to be converted in hotels in some cases to satisfy expected the demand of travelers to be generated by the last three influences.


5. We will see an increase of marketing and promotions to visit this tourist area support the capital expansion of airlines and highway infrastructure along with the investments in the active adult communities.


With some developments being converted to hotels and with very few new condo projects we expect to see real estate inventory starting to come into balance between offer and demand, which has been extremely oversaturated.



We believe that the following factors will key for the US and Mexican Real Estate Market’s recovery starting in 2010:


1) Cheap Mortgages or Seller Financing

2) Lower real estate prices as the buyer’s market will continue

3) Fewer housing starts

4) Obama Economic Policies

5) Increase of Tourism to the Country

6) Baby Boomer Retirement increasing



These factors will help the markets recover more quickly than some experts are suggesting, however; confidence of the financial institutions and the general public in the action taken to slow and reverse the financial crisis will play a big role in the length of time it takes to recover.


With these positive factors in 2010 we will see new development in the resort and retirement destinations, and border regions like the Sonora Gold Coast that runs from Puerto Lobos to Puerto Penasco as developers and investors look to growth areas that provide privacy, security and better prices than the developed areas Rocky Point can in some cases.

CONCLUSIONS and RECOMMENDATIONS
The Puerto Peñasco real estate market will remain a buyer’s market during 2010 with inventories continuing to shrink during the year, prices will keep adjusting but not in a dramatic way as they did in 2009, some destinations in Mexico will experience more price reductions in 2010 where prices were over valuated but not much more than its current levels. Money can be made in a buyer’s market by those investors who are savvy enough to do their homework, use experts to help them make wise decisions.


Financing for buyers and developers will continue to be difficult to get through financial institutions as there supply will be limited and they will be looking to mange risks better in 2010. Those that have cash or can get financing will be the investors who can take advantage of this buyer’s market. Stewart Title has opened a new division to find financing to American and Canadian Buyers for Mexican properties by Mexican and International Banks, no doubt this is great news.


As we had state several times, the beauty of Mexico is that this place was built on seller/ developer / owner financing which will again play a significant role in 2010 as sellers are motivated to be flexible to sell their real estate holdings.

We expect to see some innovation in providing financing to make purchases in this market such as funneling self-directed retirement funds like 401s into this market with the help of real estate, financial and legal experts who can help sellers meet the strict requirements and help buyer reduce their investment risks.


SOURCES
Bursametrica based in Mexico City who provided data and macroeconomics information for this study,

Mexican Presidencial Office / Presidencia de la Republica

Puerto Penasco AMPI / MLS

Century 21 Sun & Sand

MexicoLuxuryProperties.Com

CONTACT INFORMATION raul@stjamesgate.ws

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