The Baja norte real estate market entering 2007

By Jose Amate Perez
February 2007

“When the U.S. economy gets the sniffles, Mexico’s economy gets pneumonia”. This is an old cross border axiom that accurately describes today’s Real Estate market in the border area adjoining California. Tijuana, Rosarito, Ensenada, and San Felipe are feeling the ripple affect of a slower real estate market in California. Between 2003 and 2006 - low mortgage rates, inflated California real estate prices and cheap Baja ocean front, created a winning formula for accessing the American dream of a home on the beach. This combination of economic forces, created a Baja buying frenzy over these past three years.

As we move into 2007, California home owners have less home equity capital to invest due to real estate values “topping out” and refinancing rates becoming less competitive. The result is less money available to buy that vacation-retirement or investment home in Baja. Add to these conditions, a tripling or quadrupling of Real Estate prices in Baja (since 2003) and the slowdown scenario is complete.

The equity crunch has caused a much higher demand for mortgage money using Mexican property as collateral. U.S. lenders, including G.E. and GMAC, are marketing such loans. But unfortunately, rates are still high (in the 8 to 9% range) and the funding process very slow. If you include loan points and “foreign investor” closing costs, your purchase could cost you another 10% of the property’s sales price.

The Northern Sea of Cortez (San Felipe – Puerto Peñasco) is still a magnet for “snowbirds” from the Northeastern U.S. and Canada, with warmer air and water temperatures than the Pacific Ocean climes of Rosarito and Ensenada. As a result, the Sea of Cortez is less dependent on California buyers. This is especially true of Puerto Peñasco which is still booming. It has the advantage of being on the border with Arizona - the hottest real estate market in the United States with home prices still escalating in value.

OTHER FORCES AT WORK

The Tijuana region, including Rosarito just 20 minutes to the South, has received a lot of bad press involving drug violence and kidnappings. Rosarito has had two kidnappings of U.S. homeowners in the last six months. The recent military takeover of Tijuana and disarming of the police has inspired Rosarito leadership to seek the federal government’s protection from their local corrupt cops. The expressed need for imposing Marshall Law does not help sell Rosarito real estate.

Sleepy Ensenada, if you believe the local real estate buzz, is about to explode. Ensenada prides itself in being a family oriented, conservative community that has not yielded to the “anything goes” party atmosphere of Rosarito. Eighty miles South of the drug wars affecting TJ and Rosarito, it is still safe to walk the streets of Ensenada at night.

The problem for Ensenada has been a lack of inventory that interests U.S. buyers. Unlike other vacation/retirement destinations in Mexico, Ensenada’s history and economy has not made “gated communities” for foreign buyers a high priority. This situation has changed with an increasing demand from “serious” developers” attracted to the lower land prices of Ensenada. Developer interest has also been peaked by the past success of Rosarito and baby boomer pronouncements that they will travel the extra one hour to live in a quieter, family oriented community. Émigrés who seek “gated communities” in Ensenada will have their wishes answered with 2,500 units planned for construction this year.

In this slower Baja real estate market, we have fewer home buyers than last year but the demand from developers has not diminished. If anything - it has increased. In the past 12 months, our small consulting firm has established 10 new foreign owned Mexican corporations with the objective of developing over 2000 acres of property from Ensenada to San Felipe. Developers are more convinced than ever that the Baja market has huge sales potential.

Other obvious developer incentives are the high costs and legal complexities of developing in California. A residential subdivision can take three to ten years for approval in California and there is always the risk of rejection due to public resistance. The Baja approval process, assuring a developer’s proposed land use request, takes two months with no public review or hearings. Once the use permit “uso de suelo” is issued you can begin to create infrastructure and enjoy advance sales.

Financing and title insurance, by U.S. firms, are also providing more assurance to home buyers and developers, that Baja has a great real estate future for foreign buyers.