You Call This a Housing Bust?

We all know about the bust-up of the U.S. housing market. Defaults are up, credit is gone, the stock market is down, and we all feel poorer. And all of that means few want or can afford a new home.

As a result, the Case-Shiller Home Price Index is down more than 20% from its June 2006 high, and once-booming homebuilders such as NVR (NYSE: NVR  ) , Toll Brothers (NYSE: TOL  ) , and Pulte (NYSE: PHM  ) have seen their businesses, stock prices, and near-term prospects collapse.

Yes, well-capitalized U.S. homebuilders have the opportunity to buy land on the cheap and wait for a turnaround, but that turnaround is some time off. That, however, is not the case south of the border where -- for a few distinctive reasons -- Mexico's affordable-housing market looks to not only hold up, but continue growing at double-digit rates.

That's right ... double-digit rates
Before we get to the reasons why Mexican homebuilders stand a better chance than most, it's worth pointing out that because of Mexico's close economic ties to the U.S. (80% of the country's exports are sold here), widespread investor outlook for the Mexican economy is just a few shades north of dire. As a result, the country's stocks -- even its bluest blue chips -- have been pounded.

Coca-Cola (NYSE: KO  ) bottler, beer brewer, and convenience store operator FEMSA (NYSE: FMX  ) , for example, is down nearly 30% year to date. Leading fixed-line and cellular operators Telefonos de Mexico (NYSE: TMX  ) and America Movil are down 54% and 51%, respectively. And dominant homebuilder Homex (NYSE: HXM  ) , despite posting impressive third-quarter results, has declined an eye-popping 69% this year.

It was seeing that stock-price decline next to the third-quarter results -- which showed a 20% year-over-year revenue increase and healthy operating income growth -- that prompted me to start looking harder at Homex and its market opportunity.

Thus far, I've liked what I've found.

A public-sector priority
First, thanks to a number of government policies, demand for new homes in Mexico is likely to be steadier than it will here in the U.S. That's because encouraging homeownership is a priority for President Felipe Calderon's government, and his goal is to provide 6 million mortgages by 2012.

And he can back that up with action. The majority of mortgages in Mexico are issued by the government instead of private lenders (as is true in the U.S.). That's particularly true in the entry-level or affordable-home market, where Homex is dominant. And because government mortgage issuers are able to deduct payments directly from the paychecks of registered workers, they have been able to grow mortgage originations over the past five years while substantially decreasing exposure to nonperforming loans.

As a result, while U.S. banks have cut back on lending, the Calderon government plans to continue, and the country recently received a $1 billion loan from the World Bank to continue expanding its mortgage programs to encourage more entry-level homeownership.

Lots of pent-up demand
Second, there are several demographic factors behind the increasing demand for entry-level homes. The most significant is that 50% of Mexico's population is currently under the age of 24. That means that over the next 25 years, according to Mexican housing authority INFONAVIT, the number of Mexicans looking to buy a home will increase from 51 million to 72 million. That's in stark contrast to a U.S. population, which has seen growth flatten.

It's also possible that, as the U.S. economy slows and the Mexican government creates more jobs in Mexico through infrastructure projects, we may see many of the laborers who immigrated to the U.S. over the past decade return home with cash in their pockets -- and that could further spike demand for affordable housing.

Makes for significant opportunity
Put those facts together and it looks like builders of affordable housing in Mexico should continue to see steady demand. And while Homex has stumbled this year with entries into the middle market and vacation housing market, affordable housing continues to account for more than 90% of its revenue with INFONAVIT issuing more than 80% of those mortgages.

Given this significant government involvement, that's demand that shouldn't drop off even if the Mexican economy takes a turn for the worse. Further, Homex noted that it has acquired enough land to continue its growth trajectory and thus can cut back on land acquisitions, freeing up additional cash to repurchase shares and strengthen the balance sheet.

In all, Homex looks like a promising growth opportunity trading for just four times EBITDA.

But I'd like to make sure
That said, before investing I'd like to learn more about the Mexican housing industry, Homex, its competitive position, and the government programs that are vital to its performance. That's one of the reasons our Motley Fool Global Gains team is traveling to Mexico at the beginning of December.

But Homex isn't the only Mexican company that's been crushed in the recent downturn. We've scheduled meetings with a handful of companies that look equally -- if not more -- promising. The reason we travel so frequently at Global Gains -- having been around the world twice in the past 24 months -- is so we can gain an informational advantage over the rest of the market when it comes to emerging-market stocks.

If you'd like to get the notes from our meeting with Homex as well as all of our research from the upcoming research trip to Mexico, click here to join Global Gains free for 30 days. We believe the opportunity is too good to pass up.

Tim Hanson owns shares of FEMSA and America Movil. America Movil is a Motley Fool Global Gains recommendation. Coca-Cola is an Inside Value pick. The Fool's disclosure policy habla un poco espanol.


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Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On November 26, 2008, at 4:31 PM, RaulChapin wrote:

    My 2 cents.

    When dealing in Mexico, keep in mind:

    Whatever business is talked on the table, is rubish. So go ahead, enjoy a few tequilas with the office guys, then you will know what is really going on (Kind of our version of insider trading ;-) ). Sure that is also done in the USA, but it is way more common practice down south.

    The tide changes quickly, so make sure to monitor your investments much closer than you otherwise would, and i dont mean monitor the stuff filled in for the SEC but instead news of civil unrest, elections, etc.

    Just to give you an idea of the risk level. In Guatemala we always kept at least two bank accounts, just in case one bank goes under... this is before the USA bank debacle. (as now it might seem like obvious advice). For a quick taste of politics at work, I can personally guarantee you that the falling of BANCAFE and later BANCOMERCIO in Guatemala was a purely political move.

    Anyway, sure thing though, there is lots of money to be made, and the population in Mexico is not dwindling anytime soon. Just make sure to remember that this is high risk investment, and remind your readers... as some might get upset if there is a hickup along the way!

    Disclaimer: I am from Guatemala, with lots of Mexican family and am currently living in Canada... as it sounds like i would be making some of my posts up :)

  • Report this Comment On November 29, 2008, at 12:43 PM, edgardocervantes wrote:

    Remember that on top of affordable housing, the mexican government is spending 4.4 billion new dollars on infrastructure demands, in highways, oil and natural gas, and electrical generation.

    That demand will positively impact CEMEX (CX), with its 65% dominance of the home market.

    I disagree with your comment that Mexican inmigrants will be returning home en-masse. Don't expect to be more than 100-150 thousand a year.

    Threee noteworthy items in the mexican economy this year are:

    1) the decline in revenues from remitances (remesas) from mexican inmigrants in the US. Down 20% year over year...

    2) 40% of the government budget is financed by taxing PEMEX, the state oil conglomerate. The FY2009 budget was set with an estimate of $80 USD per barrel of Maya crude... which trades at 25% below Brent crude prices. Production for PEMEX's largest operation, Cantarell, is down 10% year over year. This means a 5% net reduction in the government revenue.

    2) This will impact an already deteriorating trade balance for a negative 10.5 billion USD for the first 3 quarters of 2008

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