Second-home buying abroad slows down
Equity losses, not subprime woes, are to blameBy Tom Kelly, Wednesday, October 17, 2007.
CORAL GABLES, Fla. -- While the subprime market crisis is affecting credit markets around the world, baby boomers and retirees can still find funding for their second homes, especially in countries with a stable political environment and solid infrastructure.
According to experts gathered for the recent Latin America Real Estate Conference, the desire to seek vacation and second homes abroad has just begun, even though some potential buyers are stymied by the flat or dwindling values of their primary home.
Dr. Stephen Roulac, chief executive of Roulac Global Places, a San Rafael, Calif.-based consulting firm that advises senior management and investors in real estate affairs, told conference attendees that the trend of North Americans to acquire real estate in popular Latin America countries such as Mexico, Costa Rica and Panama has very little to do with the subprime issues in the United States.
"There's really no direct correlation at all," Roulac said. "Most of the people who can afford a second home outside the United States are either going to be paying cash or have a variety of places they can get funding. The subprime situation is not a factor for these people."
Phillip Fitzgerald, a principal at Los Angeles-based Paladin Realty, focuses on residential, resort and commercial projects in Latin America. He said he is concerned about the number of U.S. households seeing their property values decreased due to ballooning inventories in many markets.
"Suddenly, you have the family who wanted to buy a place south of the border looking at declining equity in their primary residence," Fitzgerald said. "Instead of perhaps borrowing against that equity to help them get started on a vacation home in Costa Rica, they are backing away and pulling in the reigns. After years of only positive appreciation, I'm seeing people go back to sitting on the fence when it comes to buying in Latin America."
A few Mexico developer representatives echoed Fitzgerald's opinion. They are concerned about the U.S. economy and are already seeing a slowdown in residential purchases in many of their targeted tourism areas. The consensus is that the situation will get worse before it gets better. However, it may be a good sign since many of these markets (Cabo San Lucas and Cancun) have become overheated.
The slowdown in equity and future buying could be countered by the largest wealth transfer in the nation's history -- reportedly between $41 trillion and $136 trillion over the next four decades, according to the Center of Wealth and Philanthropy at Boston College. Much of this cash will be left to the boomers from their parents.
Gary London, a real estate economist and consultant, said while the reports of an inventory glut in the Rosarito-Ensenada corridor south of San Diego are "spot-on," he believes that the oversupply will be absorbed by long-term investors and that "Mexico's fundamentals look strong for the next 20-25 years."
Latin America developers are targeting the 79 million baby boomers in North America -- the largest, healthiest and wealthiest group ever seen on the growth landscape. According to statistics compiled by the U.S. Census Bureau and Federal Reserve, this group controls 67 percent of the country's wealth, or $28 trillion, and households by someone in the 55-to-64 age group had a median net worth of $112,048 -- 15 times the $7,240 reported for the under-35 age group.
Much like the boomers' parents -- members of the Greatest Generation -- had targeted Florida, Palm Springs or Arizona, the boomers are clamoring for homes south of the border because of the different experience, affordable prices and the thrill of the exotic. In a nutshell, the lure is the beach, mountains, forests, colonial cities and a chance to step outside the second-home box.
Paul McBride, who leads Prima Panama, a consumer-oriented Web site marketing property and lifestyle in Panama, said other countries should take Mexico's lead and help developers with roads and services.
In many countries, developers face a problem when considering a real estate project since traditional funding for land acquisition and infrastructure is not commercially available. FONATUR, the Mexican government agency responsible for tourism-related development in Mexico, understands the challenge and makes the investment in infrastructure improvements in order to mitigate the cost of development. This provides an incentive for developers and kick-starts projects in targeted areas.
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