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You Call This a Housing Bust?

By Tim Hanson - Updated Nov 11, 2016 at 4:42PM

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Why one country may avoid a homebuilding apocalypse.

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 Meritage (NYSE:MTH), D.R. Horton (NYSE:DHI), and Centex (NYSE:CTX) 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 bottler, beer brewer, and convenience store operator Coca-Cola FEMSA (NYSE:KOF), for example, is down 12% year to date. Airport monopolies OMA (NASDAQ:OMAB) and ASUR (NYSE:ASR) are down 57% and 37%, respectively. And dominant homebuilder Homex, despite posting impressive third-quarter results, has declined an eye-popping 56% this year.

It was seeing that stock-price decline next to the third-quarter results -- which showed a 17% 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
But Homex isn't the only Mexican company that's been crushed in the recent downturn. That's why we traveled to Monterrey and Mexico City at the beginning of this month 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.

If you'd like to get the notes from our meetings in Mexico as well as our top picks for new money now, 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. OMA is a Motley Fool Global Gains recommendation. Coca-Cola is an Inside Value pick. Meritage Homes is a Stock Advisor selection. The Fool's disclosure policy habla un poco espanol.


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Stocks Mentioned

D.R. Horton, Inc. Stock Quote
D.R. Horton, Inc.
$78.42 (4.67%) $3.50
Meritage Homes Corporation Stock Quote
Meritage Homes Corporation
$87.18 (4.67%) $3.89
Coca-Cola FEMSA, S.A.B. de C.V. Stock Quote
Coca-Cola FEMSA, S.A.B. de C.V.
$60.16 (-0.10%) $0.06
Grupo Aeroportuario del Centro Norte, S.A.B. de C.V. Stock Quote
Grupo Aeroportuario del Centro Norte, S.A.B. de C.V.
$54.94 (0.81%) $0.44
Grupo Aeroportuario del Sureste, S. A. B. de C. V. Stock Quote
Grupo Aeroportuario del Sureste, S. A. B. de C. V.
$208.31 (1.76%) $3.61

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