Trust me - if you’re tracking the US housing bubble you’ll want to read this. 

In the winter of 2001 my wife Jeanine and I took our annual trips over Thanksgiving and Christmas down to Los Barriles, Baja California.  For those of you lacking Google Earth, Los Barriles is located south of La Paz and north of Cabo San Lucas.  It is on the Sea of Cortez and is frequented during the colder winter months up north by both Canandians and Americans the latter of which are mostly west coasters.  In the summer months the town reverts back to the locals and a small contingent of white folk who remain year round.

I’ve been going down to Los Barriles to windsurf and kitesurf for over fifteen years.  The town is nestled on Bahia Las Palmas, the bay of palms, and is world renowned for its sport fishing.  During our 2001 Thanksgiving trip we decided to buy a little piece of paradise in Los Barriles in the form of a 1,600 square metre lot with expansive two hundred degree ocean views laid out in front of us and incredible mountain vistas to our rear.  The lot was perched on a ridge about ten lots up from the beach down below.  The lot was considered Lote Uno in this particular subdivision, which basically means it was the spot on which the developer stood and said “This is it.  This is the gem from which the others will follow.”  It just means its the coolest lot. 

We were the second closing in the subdivision and could not have been happier when we came back down over Christmas to sign the final papers.  Now we were land owners down in Baja.  I want to emphasize that we were not speculators.  Our plan was to build a home where we could spend our winters and maybe pick up some rental income along the way.  The town was growing.  Half a dozen other subdivisions were being prepared for sale.  There is great infrastructure in Los Barriles including good water, phone systems, and DSL internet already wired to our lot line. 

Then we started talking to builders.  There were a couple of gringo builders in town and a handful of mexicans.  Since my spanish was not conducive to using a mexican builder we opted to use an American guy that was referred to us.  Now here’s where the story starts to get interesting.  We took our time developing plans for the home, tossing ideas back and forth via email during 2002 and going into 2003.  We actually had a final set of plans drawn up and then waited for the construction bid during the spring/summer of ‘03.  All during this time we had been discussing numbers with the builder.  We’d been very specific about keeping the construction costs below $100 per square foot.  We knew it was a realistic number to work with and we figured a 1,500 square foot place would run us $150,000 to $200,000 with changes and cost overruns.  But things aren’t always what they seem in Mex.

We were shocked when the bid came in at over $300,000.  We literally thought there was a mistake.  I quickly got in touch with my friend who had referred me this builder and then the builder himself.  They both informed me that construction costs in the area had gone up.  Really?  You’re not kidding.  Anyway, I started making phone calls to the real estate agent who had helped us buy the lot and to everyone else I knew who either owned land or was involved in real estate down there.  An interesting picture began to develop.

It seems that when we bought our lot we were the first in a wave of Americans to buy in an outright land frenzy in Los Barriles.  But the frenzy was not just in Los Barriles.  It was in Cabo San Lucas, San Jose Del Cabo, La Paz, La Ventena, all of which straddled the east cape and Sea of Cortez.  Now, we knew there was a lot of buying going on down there.  We also knew that this activity was good for the value of our property.  However, we did not foresee that almost overnight builders would go from needing business to turning it away.  If you couldn’t afford what they were charging, you were screwed.  Some builders would even put one guy’s unfinished construction job on the back burner to go start another higher paying one.  It was an absolute free for all.

By nature I ask a lot of questions.  I try to pay attention to what’s going on around me.  What was going on down in Los Barriles was obvious.  Virtually everyone caught up in the frenzy was older than Jeanine and I.  They were baby-boomers.  Flush with cash from home equity loans or inherited wealth or from the sale of bubble-driven real estate back home.  My observation points mostly to home equity borrowing as the fuel to the frenzy down in Los Barriles.  Jeanine and I were among the youngest couple who’d bought in this wave.  Mostly everyone else was a boomer. 

Odd thing about boomers - they acted like they ruled the world down there.  Their demeanor toward spending and trying to out-do the other guy was tangible - you could feel it in the air.  I’m not being cynical either - you can ask anyone who will give you an honest answer down there and they’ll tell you the same thing.  Boomers perception of themselves and their wealth was off the chart.

In 2004 Jeanine and I decided to sell our lot.  We more than doubled our money.  We sold to a boomer couple who were absolute assholes.  I kid you not these people looked down their noses at everyone.  I was more than happy to stick it to this guy when I sold.  I didn’t budge one peso off of my sales price - and I was over market.  Ironically over two and half years later they still have not broken ground on the ‘estate’ he claimed he’d was going to finish inside of one year.  I’m guessing that popping almost half a million dollars in construction costs was more than he could handle - you’d never know by the guy’s attitude though. 

The reason I’m ripping into this guy is because he epitomized the attitude of Americans who’d come down there flush with real estate equity and completely oblivious to the frenzy going on around them.  The same attitude that drove the market up here - ‘oh real estate will ALWAYS appreciate in value’ was the same attitude that drove it down there.  But guess what - the bubble popped down in Baja also.  Their sales dropped dramatically by late 2005 and by 2006 sales were a literal trickle and prices were plummetting.  Construction projects got halted.  Everybody was selling and nobody was buying.  I guess home equity loans only go so far.  There are of course exceptions.  Quite a few retirees have ample liquid cash to do whatever they want down in Los Barriles.  But they too paid a premium over the last few years to buy a bit of paradise.

My friends are now all asking me how I saw this whole subprime crisis and foreclosure event and impending housing crash before it all happened.  I can honestly tell them I saw it coming as early as 2003 when I got my construction bid for my place in Los Barriles.  Ironically, this was about the same time I went to work at New Century where I witnessed the madness going on in subprime lending.  You’ve got to wonder that something is up when people could buy million dollar homes with no money down.  Or when someone could pull out three hundred grand to build a home down in Baja when their income did not necessarily justify the additional debt. 

For more information on my mortgage company click on the following link - mortgage site.