October 10, 2005 latimes.com : Business E-mail story   
Hot Housing Market Crosses the Border
By Evelyn Iritani, Times Staff Writer

         SAN JOSE DEL CABO, Mexico — Lured by 300-plus days of
sunshine and "good, fun waves," Greg Leach is tapping the 
equity from his three-bedroom Mountain View home to build a
vacation getaway near this small Mexican resort town.  
Leach, 52, who is splitting the estimated $100,000 investment
with a surfing buddy, could pocket a sizable profit if he wanted
to. Realtors estimate their house could fetch close to $400,000
in Baja's sizzling market, which has shot up at least 10% 
to 15% a year for the last two years.

 "Cabo has just exploded," said Leach, a building contractor.
Buyers have been snapping up homes here in the southern half 
of the Baja Peninsula, usually in all-cash deals. Like Leach,
most of the newcomers are Americans, many from California,
leveraging the equity in their increasingly valuable U.S. homes.
Their purchases reflect a change in global real estate ownership: 
People no longer have to be super-rich to invest in homes in 
foreign locales. In fact, some economists are starting to worry 
whether places like Baja California,London and Canada's British 
Columbia are part of a global housing bubble driven by the same
combustible mix that has fueled American home prices: 
low interest rates, flexible financing and sluggish stock
markets that have sent investors looking for better money-making
opportunities.

Official figures aren't kept on how many Americans are buying
residential real estate abroad or how many foreigners are investing
in the U.S. But a survey by the National Assn. of Realtors revealed
that 15% of home buyers in Florida last year were foreigners,
mostly from Europe and Latin America. Three-quarters of those 
buyers said the properties were vacation homes or investments.
Though a similar study hasn't been done in California, economists 
believe foreign buyers play a significant role in the state's 
housing market.

TD Bank economist Carl Gomez said Americans make up as much as 
10% of the home buyers in the British Columbia cities of Victoria
and Vancouver, which have experienced double-digit price increases
in recent years. Like most buyers of homes abroad, Mike Pariseau
wasn't seeking riches when he bought his first four-bedroom house 
in Victoria in 1996. He and his wife, who is Canadian, had been 
going there for vacations and grew tired of borrowing beds from 
family and friends. That home proved to be such a good investment
that they purchased a condominium last year where their daughter
is living while attending college.
 
Pariseau paid about $384,000 for his Canadian properties, tapping 
the equity in his Santa Barbara home, which has jumped in value
from $210,000 to $1.2 million in the two decades since he 
purchased it.  "As far as I'm concerned, real estate is the only
way to be," said Pariseau, a software consultant. "We've got some 
money in managed funds, but it doesn't even come close."

Although housing markets historically have been driven by local 
buyers and sellers, globalization — and the Internet — has made 
it easier for people in the fastest-growing markets to export  
their wealth. Some economists fear that if the U.S. economy hit
a rough patch, heavily indebted Americans would be forced to sell
their second homes or dump investment properties, triggering price
drops in the U.S. as well as in places such as Baja that depend 
heavily on American money.

Investment bank Morgan Stanley estimated this year that property 
prices in two-thirds of the world were either highly inflated 
or moving quickly in that direction. Morgan Stanley economist 
Andy Xie believes a global housing crash is a serious possibility.
"Either you have a big adjustment like a 20% or 30% decline, or
you have a big recession or you have a slow decline in property 
prices or several years of no growth," said Xie, who is based
in Hong Kong.

Some worried governments are trying to cool their housing 
markets in hopes of engineering a soft landing. The Chinese 
government has raised taxes and tightened lending in an effort
to tamp down prices that have doubled over the last two years
in markets such as Shanghai. After the British and Australian 
governments hiked interest rates, housing prices in those 
markets started to slow.

But even the threat of hurricanes, restrictions on foreign 
investment and soaring electricity and water bills haven't
damped America's enthusiasm for Baja. Greenbacks have
transformed this region into an American enclave, where
English is the lingua franca, the U.S.dollar is the currency
of choice and must-have accessories include a security guard,
an infinity pool and high-speed Internet access.

The 20-mile stretch of coastline between the towns of Cabo 
San Lucas and San Jose del Cabo is a string of luxury 
resorts and gated residential communities with private clubs
and designer golf courses. The luxury complex on Cabo San Lucas' 
Medano Beach sells six-week-a-year "fractional ownerships" in 
its two-bedroom ocean-view condominiums at prices starting 
at $136,000.

"It's really been a tremendous investment," said Brent Brown, 
a 46-year-old owner of a chain of Utah auto dealerships, who 
recently sold his home in Cabo San Lucas for $4.3 million, 
doubling his investment of two years earlier.

A British entrepreneur bought the seven-bedroom home, along 
with a second, $1.3-million home as a rental property, said 
Ted Downward,a Century 21 broker who handled the sales. 
Brown is using his profit to build a larger home nearby.

Bruce Greenberg, an international real estate consultant 
from Tucson,said he recently sold three investment homes
in Cabo for nice profits after growing tired of managing 
the properties from afar. He estimates that at least 100 
homes and lots have sold for more than $1 million in 
southern Baja in the last year.

Investing in Mexico carries risks. Real estate agents 
aren't regulated and there have been several cases
recently of people with millions of dollars in escrow 
funds that had not been deposited in legitimate accounts,
according to people involved in the real estate industry.

The Mexican constitution prohibits foreigners from owning 
land within 30 miles of the coastline or 60 miles of the 
border. But the country amended its laws to encourage
foreign investment after the passage of the North American
Free Trade Agreement in 1994. Now, foreigners can purchase 
property through a bank trust known as a fideicomiso, said
Mitch Creekmore, co-author of a new book called "Cashing 
In on a Second Home in Mexico" and a senior executive at 
Stewart Title, the leading provider of title insurance
in Baja.

Most deals in Mexico are cash or seller-financed because
until recently there were few institutions willing to lend
money to foreigners buying Mexican residential real estate. 
But a handful of U.S. firms, including First Capital Mortgage
and GE Capital, are starting to offer mortgages to Americans 
for Mexican properties.

Russ Schreier, a vice president at First Capital Mortgage in 
San Diego, said his firm recently closed its first mortgage 
on a Baja property.

Schreier, who has purchased property in Loreto Bay, a newly 
emerging resort area on the Gulf of California, predicts
the Baja market will become even more heated when mortgages 
are more easily available,given the demand from U.S. baby 
boomers for vacation and retirement properties.

Not everyone believes that a global housing bubble is looming. 
Tom Davidoff, a real estate expert at UC Berkeley, believes that 
most home buyers are long-term investors, not speculators, 
and are unlikely to resort to fire sales or default on their 
mortgages even if the economy slows.

"There are definitely some idiots who think there are a lot of
ten-dollar bills out there," he said. "But are those guys setting
prices, or are they a small part of the market just trying to 
get rich?"

James Fetgatter, chief executive of the Washington-based Assn. 
of Foreign Investors in Real Estate, argues that foreign investors 
can be a stabilizing force because they are usually wealthy 
individuals or large institutions that are less vulnerable to
price shocks in any one market.

In the 1990s, however, Japanese investors armed with a strong 
yen dumped billions of dollars into Manhattan penthouses, 
Los Angeles office towers and swanky U.S. golf courses. 
When Japan's real estate bubble popped, sending the Japanese 
economy into a decade-long recession, many investors were 
forced to liquidate those properties for huge losses.

The Baja peninsula had its own scare after the terrorist attacks
in 2001. Americans pulled back from traveling overseas and the
real estate market ground to a halt. Housing prices started
falling as anxious homeowners tried to bail out.

Chris Snell, 44, president of Snell Real Estate, which handles 
80% of southern Baja's luxury properties, bought out his nervous
partners. "I was in so deep I couldn't get out," he said.

His gamble paid off. Snell said his company had handled 
$270 million in sales since January, up from $120 million
for all of last year.

Snell isn't worried about a housing bubble here.
"When I go to Santa Barbara and I go to Napa and I see people
wanting to buy homes with zero percent down, that scares me," 
said the Realtor, who recently sold his own 3,200-square-foot
Baja home for more than $3 million. "That is a bubble I see that
can burst. When I see them coming to Cabo and buying homes with
all cash and they're involved in the deal, that doesn't scare me." 
         

Link to original article:
http://www.latimes.com/business/la-fi-globalhomes10oct10,0,
1207358.story?col