Investing South of the Border
Let’s start out by assuming that you’re a pretty savvy investor; your 401k, IRA, or personal investments have kept up with the S&P 500 average during the past ten years and you’ve lost only about 35% of your life’s savings! Did you realize that the Mexican Exchange Traded Fund (EWW) which represents the Mexican stock market, even though it was annihilated during the current recession along with all other markets throughout the world (but is recovering rapidly), has advanced by 200% during the same time frame? In other words, $100 invested in the S&P 500 in 1999 would now be worth $65, whereas if it were invested in the Mexican EWW fund it would now be worth $300. Please refer to the ten year graph below in order to see the comparisons between these two areas of investment and perhaps you can speculate as to where might be the best market to place your next bet!
One of the most significant reasons for this steady and rapid growth in the Mexican stock market (Bolsa) must be attributed to the policies of the new governing party that has been in control since 2000. Mexico has been governed by a couple of pro-foreign investment Harvard alumni during most of the timeframe shown above and will continue under the same leadership for at least another three years. The PAN party, led first by President Fox and currently by President Calderon, has brought Mexico from a Third World Country to a Newly Industrialized Country standing in a matter of seven short years. Among their numerous accomplishments, they have cracked down on corruption, have promoted free market capitalism while maintaining a relatively firm peso/dollar relationship, and have elevated tourism to the top of their list of strategic objectives.
We have lived in Puerto Vallarta during the entire ten year period and have witnessed the changes and growth firsthand. As the economy has boomed, unemployment in Vallarta has been virtually eradicated while the population has doubled, prices for materials, labor, and land have tripled, and of course, real estate prices have also tripled.
Now, let’s compare this growth and real estate value appreciation in PV to what has been experienced in the US. The latest government released graph below from the Federal Housing Finance Agency (FHFA) shows that average housing prices in the US appreciated by nearly 70% from 1999 through 2006. Since then, the rate of appreciation has dropped precipitously until the fourth quarter of 2007 when values actually started depreciating. Throughout all of 2008 and the first quarter of 2009, prices have plummeted by about 10% and as you can see in the graph below, we can project prices to fall by another 5-10% before they once again start appreciating. In other words, the average investment in housing in the US made 10 years ago will have increased in value by 40-50% by the end of 2009. Even though housing values have recently been crushed, real estate has still way outperformed the stock market during the past ten years; hopefully, your real estate gains have more than offset your stock market losses!
With the US real estate market currently experiencing a serious recession, no real appreciation in housing values is expected for at least two more years. In summarizing, most Americans have enjoyed roughly a 40-50% gain in their property value over the past ten years and can expect the equity in their residence to be, at best, essentially dead money for the next couple of years.
When we compare the above data to what we’ve experienced in Vallarta, where real estate values have tripled during the past decade, we can only thank our lucky stars for letting us be among the first to participate in the ongoing land rush in Paradise! Fortunately for the about-to-retire baby boomers, it’s not too late.
Due to the extreme demand in second homes and retirement properties in resort destinations, Vallarta has witnessed an explosive ten year period of growth. So much so, that with the current global recession, the developers of the large condominium projects requiring long term planning, financing, and construction have been caught totally off guard. Once they committed, most of them (the reputable and fully capitalized ones!) felt it necessary to complete their projects regardless of sales. Consequently, with the recession driven reduction in demand and a supply of more than 7,000 units, prices for new condos are at a bargain basement level with some of the developers selling their surplus inventory at not much above their cost. This is truly a buyer’s market in PV for new condos however this supply/demand imbalance has had minimal effect on the value of existing condos.
The situation regarding the resale of existing homes and condos south of the border is entirely different than in the US. In Mexico, there are seldom any promotions or transfers requiring a housing upgrade or relocation, i.e., business related issues almost never require the sale of a resort property. Also, very seldom do owners decide to upgrade or downsize once they own a retirement property. More importantly, almost all real estate purchases in Mexico have been done on an all cash basis and therefore, regardless of the economy, there are no foreclosures on these fully owned properties. Mortgages became readily available in Mexico about five years ago however they require at least 20% down and substantial documentation proving one’s ability to pay. (Sorta like the good ol’ days in the US!) With this kind of financially solid buyer and this level of equity, there are virtually no foreclosures in Mexico. Although the rate of sales of existing properties has slowed to a snail’s pace, in the absence of foreclosures, prices of resale properties have held up fairly well; certainly not plummeting as in the US.
In summarizing, those of us that have been fortunate enough to be invested in Mexico during the past decade have fared very well. Even though we’ve felt the impact of the financial downturn during the past couple of years, our Mexican stocks and Mexican properties have more than doubled in value while those in the US have lagged well behind.
As we look to the future, we see very promising growth in the Mexican Bolsa as well as in Mexican real estate sales. In fact, FONATUR, the Mexican Tourism Board is still forecasting explosive growth in the Nayarit Riviera area, just north of Puerto Vallarta, during the next decade; only time will tell. As they say, “past performance is no guarantee of future results”! Assuming the global economy eventually rebounds, it is a given that the millions of baby boomers, just starting to retire, will be heading south for the benefits that Mexico has to offer. When this stampede of boomers hit the beaches in Vallarta, real estate prices that have been essentially flat for a couple of years, will continue escalating.
Aside from the fact that we have seven months of perfect winter weather in PV from November through May, when the average temperature is 73*F with virtually no rain and blue skies, we have eight magnificent golf courses, hundreds of tennis courts, world class deep sea fishing, hundreds of fine restaurants, clean food and water, and 50,000 other gringos to play and party with, our portfolios of stock and real estate investments south of the border are “en fuego”!
If you’re recently retired or considering retirement in the near future and you’re the savvy investor that you think you are, you really ought to check out the investments that lie south of the border; enjoy your retirement to its ultimate, and put your dead money to work for you in beautiful Puerto Vallarta.
December 31, 2010 Addendum to Article dated August 1, 2009
By reviewing the graph below, you will readily see that during the time period of July 10, 2009 through the end of the year 2010, the S&P 500 has recovered an impressive 43% while the EWW (Exchange Traded Fund of Mexican stocks) has gained a whopping 80%. It should be known that the EWW share prices are in US Dollars, not Mexican Pesos.
We selected the starting point of July 10, 2009 for the above graph because that was the date that the original article, “Investing South of the Border” was written which presented the most current data as of that time.
The graph below is an extension of the graph in the original article with the same starting date of August, 1999 however the termination date has been extended from July 10, 2009 to December 31, 2010, i.e. an additional 18 months of data. You can see that if you had invested $100 in the S&P 500 in August, 1999, you’ve almost recovered all of your initial investment and must be thanking your lucky stars for doing so! On the other hand, if that $100 had been invested in the EWW basket of Mexican stocks in August, 1999, you’d now be holding in excess of $450. Yes, the 350% gain means exactly that, you gained $350 to add to your initial $100 investment, i.e. you have 4 ½ times as much money that you would have had if invested in the S&P 500’s.
We don’t mean to say “we told you so” however we did at least try to hint or insinuate where we were placing our next bet in the original article of 18 months ago; we just didn’t place enough money on the EWW bet!
For those of you that have held on to your S&P 500 portfolio for all of those years, God bless you; you haven’t made a dime but at least you’ve apparently not lost much either, i.e. you’ve just about recovered your entire investment! Well, maybe not quite all of it when you consider inflation. The inflation calculator below indicates that $100 in 1999 is now worth only $100/131.33 = $76. In other words, the $100 that you invested in the S&P 500 fund in 1999 that has gone nowhere in eleven years now has about $76 in purchasing power. On the other hand, the $100 originally invested in the EWW basket, which is today valued at $450 or $342 in terms of 1999 dollars, still has about 4 ½ times as much purchasing power as your investment in the S&P 500!
As 13 year residents of beautiful Puerto Vallarta, Mexico, it sure makes us wonder how so many millions of folks “North of the Border” can continue making the same investing mistakes year after year; of course, their investment gurus are probably all reading off the same play book and few are thinking “out of the box” or even considering Mexico as an investment opportunity. Consequently, the average investor continues to tread water, hoping not to lose too much of their hard earned money and with a little luck, perhaps someday make a little; they would probably have been better odds at rolling the dice in Las Vegas!
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