I went on a “buying tour” yesterday to Baja Mexico. We first stopped at the new Trump towers in Tijuana where they hadn’t yet broken ground. They were selling condos for around $700-$800 per sq ft. But they were on the coast with pretty ok views. The only problem was they were too close to TJ, which if you’ve been there you know, sucks.

The tour was operated by Beach Front Baja and I was impressed with the knowledge of the tour-guide, who was actually VP for the company. They make sure that they only recommended properties with clear title and developments that passed USA construction guidelines, not the weaker Mexican standards. (One of them being the installation of sprinklers and fire-retardant materials in high-rises).

Formerly foreigners couldn’t buy land within 100km of the border and 50km of the coast but the law does allow them to hold property on lease from a Mexican bank trust, which is similar to a land trust. So foreigners are buying up land and houses using this loophole, which costs under about $600/year to maintain.

Then went down to Porto Nuevo (or New Port Beach). We stopped by another new condo pre-construction development called “The Falls”. Substantially better views, only $200 sq ft. Even though the builder was local, he was pretty well-known, having been a prolific builder in Mazatlan and Cabo San Lucas. Unlike most builders who have a reputation for only building 80% of the work, he guarantees that the work won’t be delayed more than 3 months else you chose to get your deposit back with interest.

Since you’re paying 30% deposits on properties in Mexico, thats a pretty substantial investment. Unlike the USA, you can only get 70% financing so you’ll need somewhat deep pockets to buy down here.

Then we went down to “Las Ventanas”, a project of 38 single family residences right on the beach. Very high end custom homes, with lovely mosaic designs, top-of-the line fixtures and fancy ornamental fittings with patios that open right onto the beach. Really nice houses that you’d expect to see in New Port Beach, Orange County, not in Mexico! They were pretty pricey at $1.1 million but with a similar house costing $15 million in Del Mar, it might even be considered a steal at those prices.

In Mexico, you pay 2% transfer tax on the sale of a property, but the annual property tax is so low its a joke. Unlike the USA, its only a few hundred dollars. I’m guessing its probably based off the sq footage of the lot or constructed house and independent of the value of the house.

We also had lunch in the patio of one of the those homes and a lot of margaritas too!

After that we went to Ensenada and just east of there is Mexican Wine Country. 90% of Mexican’s wine is grown in that area. However, Mexico’s national wine consumption is less than San Diego’s so thats not saying much! Anyway we saw a vinyard, tasted some wine and then we called it a day.

An interesting fact I found out is that in Mexico, you pay your electricity bill at the local grocery store!

On the whole it was an enjoyable trip. I was pretty amazed by the amount of construction going on along the coast and impressed by the quality of some projects too.

I may not be buying anything in Mexico but it was definitely an interesting experience.

Related Readings:
1. Choose Mexico for Retirement, 9th: Information for Travel, Retirement, Investment, and Affordable Living

2. The Plain Truth about Living in Mexico: The Expatriate’s Guide to Moving, Retiring, or just hanging out

3. Cashing In on a Second Home in Mexico: How to Buy, Rent and Profit from Property South of the Border

Even though I’ve experienced phenomenal returns in real estate, I think its getting exceedingly difficult to invest in that asset class.

If you’re flipping houses and you have a good buying and selling system in place, then the story is different, but thats probably your full-time job. If you a part-time passive investors like me, then now might not be the best time to invest.

According to my own experiences, trying to refinance a loan has become a lot more difficult than it was 2 years ago. This tells me that the pool of potential buyers will in turn dry up as well. This is due to the tightening of lending standards as a result of the subprime meltdown. Common sense tells me that this is likely to get a lot worse over the next few years. As a result, buyers of investment homes now may not find it easy to sell the home in a few years.

According to real estate research consultant John Burns, many places in the US still might fall another 30%. Popular places to invest like Miami, Los Angeles, San Diego and Orlando need to drop another 28-40% to become affordable. When prices are rising, people tend to think they’re getting left out and so they tend to push prices way beyond fair value. On the flip side, when prices are dropping, people think they’ve gotten a raw deal and just want out at any price. This usually pushes prices far below what is a fair value. At the bottom of the cycle, you can usually buy property that will cashflow and provide excellent cash-on-cash returns.

There’s no urgency in investing right now. Things are probably going to get a lot worse before they get any better. I feel for most people, sitting on the sidelines waiting for a few years is a good idea. As Warren Buffett says, patience is an investors biggest virtue. As loans become more difficult to get, rents should increase and prices will drop. This will compensate for any increase in interest rates that may occur (although I personally think that interest rates are going down before they start going up).

But that doesn’t mean you should write off real estate completely. Now is a good time to learn as much as you can so you hit the ground running when the opportunity presents itself. Also, you might find a stellar deal once in a while and if you’re well prepared, you can make a pretty penny. It may be more difficult to make money in a down market, but it doesn’t mean that its impossible!

I have personally lightened my real estate investments in favor of more commodity-based investments, but I haven’t completely gotten rid of everything.

I think keeping a few good real estate investments long term is a good way create wealth. But now is definitely not a good time to buy 95-100% financed properties that have no chance in hell of cashflowing with a 3 year adjustable mortgage in a place like San Diego or Miami!

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According to Hagerty’s article in the WSJ, Mortgage Woes Force Banks To Take Hits to Sell Homes,

An auction of nearly 100 foreclosed homes here Saturday showed that mortgage lenders are having to accept huge discounts in some cases to unload such properties.

A surge of foreclosures over the past year or so has left lenders struggling to sell a growing backlog of homes.

At the San Diego sale, houses and condos typically sold for about 30% below the previous sale or appraisal prices. In a few cases, the discounts were around 50%.

But Ramsey Su, a San Diego investor and former real-estate broker specializing in foreclosed properties, said prices were surprisingly low on some homes and the auction showed that “demand is not that strong.”

The soaring prices of the first half of the decade priced many people out of the market, and lenders’ recent tightening of standards has made it harder for others to get loans. A glut of condominiums also is weighing on the market. Peter Dennehy, a senior vice president at Sullivan Group Real Estate Advisors, a research firm here, estimates that at the current sales rate there are enough condos on the market to last about 29 months.

Unfortunately I was in El Centro for the weekend so I missed the auction that was held at the San Diego Convention Center. (But I did see premium gas selling for $3.99 in El Centro, sand dunes, and a gas station for sale with an estimated cash on cash return of 38% that my friend was buying).

I’ve been harping on and on for nearly 2 years how the market here is ripe for a correction. Finally, some real validation!

According to Bloomberg,Luxury Condo Developers are invading Downtown Detroit.

$1 million dollar penthouses and other luxury condos are going up alongside vacant skyscrappers in Downtown. Several ex-atheletes are joining in too.

Bob Bartlett is buying a million- dollar condominium atop a historic hotel in Detroit — the U.S. city with the highest unemployment rate, the worst violent-crime rate and thousands of abandoned houses.

It’s a city that outsiders underestimate, he says.

“It is a viable place to live, and I think investment in the city of Detroit is a smart move,” said Bartlett, a Michigan native who owns ReviewWorks, an insurance cost-containment company.

Bartlett is leaving the affluent suburb of Birmingham for a 3,900-square-foot (360-square-meter) penthouse in the downtown Book-Cadillac Hotel, renovated after sitting vacant and decaying for more than 20 years.

Only a handful of the 66 condos remain to be sold in the building, which also will house a 455-room Westin hotel. Nearby, more luxury condos and three casinos with hotels are under construction.

Bartlett represents a counterintuitive wave of investment in Detroit, where years of economic decline caused by racial divisions and a struggling auto industry eroded the population and left acres of homes selling for less than $10,000.

Thats great, but where are the jobs? Job growth and population growth fuel the demand side of the equation. Selling a few hundred over-priced condos doesn’t turn the city around. Neither does setting up gambling dens (or casinos as they’re now called!). The city needs real jobs.

For the past 20 years, the median salary and the population has been dropping every year. Doesn’t sound like a “tipping point” to me, even if you can buy homes for $10,000. But enough people believe that, someones definitely going to make some money!

The Wall Street Journal reports that not all places are experiencing a decline in home prices.

The housing news isn’t all grim. Even as prices sag nationwide, there are several cities in the country where home values are climbing smartly.

Portland, Ore., Boise, Idaho, Seattle, Salt Lake City, Houston, Austin, and Charlotte and Raleigh, N.C., are among the cities bucking the national trend. Homes’ appreciation there between the fourth quarters of 2005 and 2006 far exceeded the national average of 5.9%, according to the Office of Federal Housing Enterprise Oversight.

There’s no single secret of these cities’ apparent success, but many of them missed the housing boom of the past five years. From 2001 to 2005, annual appreciation in these cities was between 2% and 5%, far slower than the 7% to 12% national average… Now, prices are playing catch-up.

These cities emerged from the last recession later than most of the country for various reasons… Now, their economies are strong and housing prices are still perceived as affordable, luring buyers into the market.

…The growth of Portland, Salt Lake City, Boise and Seattle can be attributed in part to an influx of former Californians and people opting out of slumping Las Vegas or Phoenix. The trend may have created smaller echo booms — especially in Boise and Salt Lake City.

All of this sounds good and makes sense. However, as usual some spokesperson for NAR (national association of realtors), Mr Yun predicts prices nationally will bottom out sometime this summer.

Yeah right!

Why does NAR always have to put a positive spin on everything. Why not just admit that people, brokers and lenders got carried away and home prices got ahead of themselves. And that they might not recover in California, Arizona and Florida for a few more years.

I wonder how Mr Yun even came to that conclusion. According to what I read, there is a record number of foreclosures occurring in California, a million adjustable-rate mortgages about to re-adjust upwards over the next 2-3 years and a tightening of lending standards which means less people will qualify to buy homes or even refinance their existing mortgages. Also builders have started offering huge discounts on new houses and a lot of upgrades in an effort to move their inventory.

Incidentally, according to John Burns Real Estate Consulting, NARs numbers are off and home sales are falling faster than reported.

I don’t think NAR is lying about the numbers, they just don’t what they’re talking about!

Seeking Alpha has a great summary of nearly all the current topics related to housing, mortgages and real estate.

Some of the interesting articles are:
Lacklustre housing market

Manhattan… apartment prices unchanged from a year ago. Philadelphia, PA: Demand for residential mortgages was nearly flat… consumers were shifting from variable-rate home-equity lines to fixed-rate home-equity loans… Cleveland, OH: Prices held, thanks to steady sales and new homes that were priced relatively higher than existing properties. Richmond,VA: House prices declined by 2-4%… condo prices were off 7-9%, compared to a year ago… Asheville, and Greenville, NC… Low- to middle-price houses were moving briskly… Atlanta, Georgia: Residential home sales and construction continued to decline in most areas, especially Florida with both new and existing home sales below year-ago levels in March…Chicago, IL: Residential construction continued to decline in most areas… The rise in mortgage applications was attributed to the growth in refinancing… St. Louis, MO: Home sales were unchanged in St. Louis, declined 6% in Memphis… Louisville home sales rose 4% and Little Rock’s were up 2%, y/o/y in February. Little Rock housing permits down 25%… Minneapolis, MN: Housing permits were down a whopping 54% in March, compared to March 2006… Kansas City, AK: Weak residential construction business… low- to mid-level priced homes sold relatively well, while more expensive, high-end listings languished. Prices unchanged [y/o/y]… Dallas, Texas: Dallas, Fort Worth and Austin are facing a glut of new homes… depressing prices and forcing builders to lay it on thick with incentives.

Hottest 10 Buyers Real Estate Markets Announced

In Albuquerque, New Mexico, housing is projected to appreciate 9.1% by the year’s end… Salt Lake City, Utah placed third… experiencing the beginning of a slow down in its housing markets after nearly a 20% increase in appreciation in 2006… Salt Lake [should appreciate through] the end of the year… New Orleans, Louisiana placed fourth, followed by Austin, Texas, Houston and Biloxi, Mississippi, which is experiencing unprecedented growth with a booming local economy in the wake of Hurricane Katrina.”

Bernanke Is Wrong on Inflation, Goldman, Merrill Say.

Chief economists at Goldman Sachs, Merrill Lynch and UBS say the worst housing slump in a decade may drive the U.S. economy into a recession and stifle consumer prices. [They] say the Fed will cut its target for overnight loans between banks at least three times this year… Central bank governors found no evidence that the housing market had affected the broader economy [at] their March policy meeting… Goldman, Merrill and UBS are among seven of the 21 so- called primary dealers, who trade directly with the Fed, forecasting that the central bank will cut its target rate from 5.25% to 4%

. If the Feds really cut the rates to 4% it’ll be a good time to lock in your mortgage to a fixed rate product.