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 27% from its June 2006 high, and companies with ties to the space, such as Home Depot
South of the border in Mexico, however, the 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.
Dominant cell-phone provider America Movil, for example, is down more than 50% since the beginning of 2008. Coca-Cola bottler, beer brewer, and convenience store operator FEMSA is down some 20% over the same time frame. And dominant homebuilder Homex, despite posting impressive third-quarter results and reasonable fourth-quarter results, has declined an eye-popping 60%.
It was seeing that stock-price decline next to operations that are holding up reasonably -- EBITDA was up 10% in Q4 and the company expects demand to increase 10% this year -- that prompted me to start looking harder at Homex and its market opportunity.
Thus far, I've mostly 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 be 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 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
But Homex isn't the only Mexican company that has been crushed in the recent downturn. That's why we traveled to Monterrey and Mexico City recently to meet with candidates for investment. Because we won't invest in any company at Motley Fool Global Gains until we know it and its market cold. Further clouding the situation are the violent currency moves that are creating exchange-rate losses and causing companies such as Gruma
Yes, it can be a complicated chore to invest abroad, but we believe the opportunities today more than compensate you for your time and effort. If you'd like to get the notes from our meetings in Mexico as well as all of our top international picks, click here to join Global Gains free for 30 days.
This article was first published Nov. 26, 2008. It has been updated.
Tim Hanson owns shares of FEMSA and America Movil. America Movil and CEMEX are Global Gains recommendations. Coca-Cola, Builders FirstSource, and Home Depot are Inside Value picks. CEMEX is also a Stock Advisor choice, and the Motley Fool owns shares. The Fool's disclosure policy habla un poco espanol.
