Boom towns: home financing in Mexico is on the rise as interest rates fall--driving deals among banks, too.

For 30-year-old Mexican Noberto Villalobos, 2004 was a very good year. After saving up some money over the last four years, Villalobos noticed that the Mexican real-estate market was attractive enough for him to get a loan and buy his own apartment.

He wasn't alone. Since 2001, construction on new houses has taken off due in part to low interest rates. In 2003, annual mortgage rates hovered around 18%, while today they are down to 12%. "I knew I had to seize the moment and buy my apartment," says Villalobos. The economy has been gaining speed over the last four years. Mexico's gross domestic product has risen every year since 2001 due in large part to robust demand at home for goods and services. This year, the Mexican economy will grow between 3.5% and 4%, according to the Central Bank of Mexico, with the construction sector acting as a major driver behind output. After years of weak performance, the real-estate market began to emerge from its shell as access to credit improved. The country's banks almost closed their doors during the 1994 banking crisis, but today, they are back in business and eager to lend again. In 2003, private banks approved 15,571 mortgage loans. Last year, that figure jumped to 29,318, according to the Mexican Banking Association, which includes 80% of the country's banks. Add existing mortgages into the picture, and the total number of housing loans managed comes to 400,000, according to the association. There is still room to grow. Last year, housing loans accounted for 2% of total loans, still a fraction of the overall loan market; credit cards, for example, represent 65% of the banking sector's total loan portfolio.

"The middle class was ignored in terms of credit," says Jesus Valdes Aguilar, purchasing director at Pulte Homes Mexico, the Mexican subsidiary of the U.S. company of the same name, which controls 2% of the Mexican housing market. "There was no capital around for people to buy homes, and we weren't even able to finance construction, but now things have changed with better interest rates."

Last April, the Mexican government announced that before year's end, mortgage insurance would be available to encourage financial institutions to approve more housing loans on even better terms. The insurance aims to give banks the incentive to cut down-payment requirements to 10% from 20% of the total loan. Banks will also be able to buy and sell mortgage portfolios with one another in the open market. "Trading mortgages is going to generate more liquidity and make lending easier, and that leads to lower interest rates," says Guillermo Babatz, a director of Sociedad Hipotecaria Federal, a mortgage lender. The insurance policies will also help housing sales to close quicker since buyers will have to fork out less up front, Babatz says.

The timing of such measures could not have been better for the buyer. Statistics show that over the next few decades, the Mexican housing sector will continue to grow. A rising number of houses coupled with greater access to credit will force banks to become more competitive. By 2020, the number of homes in the country will rise to 41.4 million, way up from the current 28.4 million units, according to Softec, a consultancy. "The challenge will be to finance whatever the market needs," says Babatz. "Financial entities have now realized that this is a good business, and they are being aggressive to attract new clients."

According to the National Commission on Housing and Development, private and public financial institutions this year will dole out 600,000 loans and subsidies to people buying homes. Another 40,600 loans will be approved for remodeling. "The future all hinges on the availability of new homes," says Maxi Pelaez, the commission's chief statistician.

A bustling real-estate market has got construction companies up and going. Pulte Homes Mexico, which once focused mainly on building low-income housing, today caters to the middle class. In the past, 85% of what the company built consisted of low-income houses and 15% went to middleclass units. Today, three-quarters are low-income projects and a quarter goes up in wealthier neighborhoods, yet by 2008, the company expects those figures to hover at 50% apiece. Business has been growing at 15% a year for Puke Homes Mexico. By the end of 2004, the company had built 40,000 homes in Mexico.

Good news. More demand from middle-class and wealthy families for new homes is good news for construction companies not only because there's more work to go around. Bigger houses yield better margins. "The number of these types of projects has grown between 20% and 40% over the past few years," says Claudia Velazquez, head of research and marketing at Softec.

Pulte Homes is not the only foreign company drooling over the Mexican housing market. Earlier this year, Caja Madrid, a Spanish financial institution, bought 25% of Hipotecaria Su Casita, Mexico's second-largest mortgage provider. Big banks are in on the game. Spain's Banco Bilbao Vizcaya Argentaria (BBVA) last April opened a branch of its real-estate unit Anida in Mexico, the first outside of Spain. Anida will invest US$190 million in properties needed to build housing units across the country. "It makes sense [to invest in Mexico]. After Spain, Mexico is the focal point for us given we control 100% of BBVA Bancomer and Hipotecaria Nacional," says Julio Saenz, general director of Anida in Mexico.

Anida will develop its middle- and upper-class projects with local partners. "In the coming years the real estate sector will grow," says Saenz. "There is one key factor: the return of the overall banking sector to the mortgage market." Anida will focus on larger housing markets such as Mexico City, Guadalajara, Monterrey and Puebla as well as on the Yucatan peninsula near Cancun. Anida plans to begin work on eight projects during its first year and by 2007, the company plans to report healthy 25% margins. With its first partner, Parque Beforma, Anida will build $128 million in luxury homes in Mexico City. The company also wants to sign a deal with Sare, a Mexican real-estate company, to develop high-end projects in the Mexican capital.

Legal changes have further facilitated access to credit. In 2003, Infonavit, Mexico's state-owned, home-financing fund, began approving loans for people wanting to build middle-class homes. Prior to that, the fund dealt only with low-income housing projects. Today, qualified borrowers, which include those from the middle class, can tap the fund to buy the houses of their dreams. With the economy on the rise and lending rates remaining at attractive levels, more "sold" signs will hopefully continue to dot the front yards in neighborhoods across the country.

MARISOL RUEDA * MEXICO CITY