In Mexico, low-income homeowners watch their dreams crumble

When Jorge and María Arzave moved their family into a two-room house on the outskirts of Mexico City, they were elated. For the first time, they would own their own home, situated in a planned development that would feature new schools, health clinics, and the opportunity to add a second story.

But today, their dream home has a “high risk” sign posted over the front door, courtesy of a state civil protection agency. Inside, Mr. Arzave has highlighted with colored pencil the scores of long cracks snaking across the walls.

The house is barely 10 years old and it’s breaking apart. 

Leaning over a desk in his front room, Arvaze pulls up academic studies on his aging computer and launches into a litany about problems in the low-income neighborhood. The ground wasn’t suited for building and the house he bought in 2003 is sinking. The area has scarce water, overcrowded schools, no health clinics, and poor transportation to and from Mexico City, 90 minutes away. Outside, he points to an open-air landfill within walking distance. Developers had assured him it was closed and remediated before he bought the house, but the reality fell short of the promises, residents say.

Poor and faced with indifference by the government and developers, some have simply abandoned their homes. Arzave says he holds keys to the homes of five neighbors who have left the troubled development.

Mexico has one of the largest housing gaps in Latin America: More citizens need quality homes with access to infrastructure and services than currently exist. As more people move to urban areas in search of a middle class life, Mexico will need to build 8.5 million new homes over the next 12 years in order to meet demand, according to the Inter-American Development Bank.

So why, then, do so many homes in Mexico sit empty? 

A drive for affordable living

Twelve years ago, this seemed like an unlikely outcome. The government was on a campaign to construct more affordable homes, with an eye toward expanding home ownership, boosting social mobility, and stimulating the economy. As a result, millions of homes were built. Some 4.3 million mortgages were issued by the government-backed lender, Infonavit, and its partners between 2001 and 2011.

But there was a catch: Many of the homes bought with these loans were constructed on the fringe of urban areas and failed to meet minimum standards.

“The problem [in Mexico] is homes built far away from jobs and city centers,” says José Landa, the CEO of Montes de Mexico who spent 20 years working in the housing industry.

In some cases, transportation costs suddenly absorbed more of a family’s income than actual mortgage payments, Mr. Landa says. “What do people do? They leave and crunch in with relatives. They live with them and to heck with the home.”

Indeed, the number of vacant homes soared, going from 2.4 percent of housing in 2005 to nearly 14 percent in 2010, according to census data. Some 5 million homes were classified as abandoned across the country in 2010, according to the latest census, with many buyers wondering if continuing to pay for them was worth the pride of ownership. And some of the homebuilders that benefited from the low-income housing boom are now facing cancelled credit lines and lawsuits by their lenders.

‘Tough to abandon a house’

Along Arzave’s street, a neighbor has a different notice tacked to the door. It’s from Infonavit, warning of imminent repossession. The number of repossessed homes in Mexico more than doubled last year, reaching 43,853, according to Infonavit.

Overwhelmed by the mounting problems in the neighborhood – and an allergy his young son developed, which he attributes to the landfill – Franco Aldape abandoned the home two years ago and stopped paying his mortgage. He gave his keys to Arzave, who looks after the property.

“You have a lot of hopes, but these kinds of situations discourage you,” Mr. Aldape said in a telephone interview from the home he now rents in Leon, Guanajuato. “It’s very tough to abandon a house because you want to believe it is patrimony for your children. But unfortunately for all the problems in that area, where it’s not at all agreeable to live, we had to do it.”

The federal government’s affordable housing policy had, of course, stimulated construction and the migration of low-income families to more far-flung areas. But there were additional incentives. Mexico state, where Lomas de San Francisco de Tepojaco is located, for example, further promoted the developments known as “socially progressive habitable areas” via a 2002 law that allowed developers to move people into homes even before basic services were secured.

The sprawl grew, with some neighborhoods increasingly isolated from jobs, services, and amenities.

A ‘housing success story?’ 

Infonavit, created in 1972 and one of a handful of state-backed housing lenders, is arguably the most important player in Mexico’s housing finance system, says Paavo Monkkonen, assistant professor of urban planning at UCLA’s Luskin School of Public Affairs. Mexicans in the formal sector pay about 5 percent of their annual salary into the fund, and once an employee meets a minimum set of requirements – based on income level, contributions to the system, and family size – they become eligible for a mortgage that falls well below the market rate.

“It’s a good deal, especially in a country where interest rates are so high,” says Mr. Monkkonen. “But I think a lot of people got loans to buy a house they didn’t really want.”

Infonavit gained status during Mexico’s economic crisis of the 1990s when, hit by the peso crash of 1994, banks severely pulled back on lending. The government, and specifically Infonavit, stepped in to offer both mortgages and construction loans.

With their traditional loan options curtailed, private construction firms formed partnerships with Infonavit. Construction loans became linked to mortgages, and the partnerships helped ease the permit process for local and state building, as well as the acquisition of land. By 2004, these partnered builders made up a quarter of Mexico’s home-construction industry, according to a study by Monkkonen in 2011. The relationship provided the capital, supply, and demand for affordable housing.

“This is a housing success story, actually,” says Monkkonen. “Even when governments want to put money into housing finance, it’s hard to get developers to build houses that are affordable.”

Bolstered by the policies of the governments of Vicente Fox (2000-2006) and Felipe Calderón (2006-2012), mortgages issued by Infonavit ballooned. Their loans jumped from 70,000 a year in the 1980s to 205,000 in 2001. They more than doubled by 2006 and topped 500,000 in 2011, according to Infonavit.

A quality tradeoff

“Governments like to promote homeownership,” says Cesar Bouillon, a lead economist at the Inter-American Development Bank. “But there are pros and cons.”

Even though Latin America is poorer than many European countries and the United States, they have higher homeownership rates, says Mr. Bouillon. “But many of the houses that are owned aren’t very good quality … so it is kind of a tradeoff.”

There is an implicit belief in Latin America, and globally, that homeownership leads to social mobility, Bouillon says. “It hasn’t been proved empirically,” he says, noting that often times in Latin America renters are wealthier than homeowners, living in high quality homes or apartments in desirable locations.

The implosion has pushed some to seek legal recourse. Arzave wanted to fight back, and attorney Luis Tapia took on his case through a Mexico City-based human rights organization known as Centro Prodh.

“This case represents all Mexico’s housing problems in one single neighborhood,” Mr. Tapia says.

But Tapia says Arzave has nearly run out of affordable legal avenues to fight his case. (The Centro Prodh represents him pro bono; Arzave says the cost of a private lawyer is out of his reach.)

Regarding three of his four complaints, the National Human Rights Commission has determined that none of the authorities involved bear any responsibility for the neighborhood’s woes. That includes the state urban development commission, the civil protection agency, and the municipality.

Meanwhile, Mr. Aldape, who abandoned his home, is suing Infonavit. He wants the debt forgiven on his nine-year-old property due to the poor construction quality. He purchased the two-room home in 2003 for about $15,000.

A new 'vertical' direction

The new administration of President Enrique Peña Nieto has changed tack with its housing policy, moving away from single-family homes on the outskirts and toward building vertically and closer to urban amenities. Government subsidies and credit are directed toward “orderly and sustainable” urban development.

President Peña Nieto has promised to take action to improve existing neighborhoods in order to “secure decent housing” for Mexicans. He put a number on it: 320,000 unspecified “improvement actions” in urban and rural areas.

The policy promises better institutional coordination among Infonavit and state and local governments. Infonavit did not respond to repeated requests for an interview.

The new direction is expected to take effect in 2014. In the meantime, top Mexican homebuilders are suffering from the fallout of the old housing policy, combined with the lingering effects of the 2008 global economic downturn and the change in housing policy, announced in February. Two of the country’s leading homebuilders missed debt payments in April; credit has dried up.

Just this week, Mexico's development bank said it would work with local credit unions to offer about $150 million to small and medium homebuilders that were focused on Peña Nieto's new housing stance.

But that new approach does not address issues faced by those who purchased homes earlier. 

Back in Arzave's home, piles of documentation sit on his double bed, which takes up most of the front room. Despite the hurdles, he hasn't given up his fight, he says. He wants the government to move his family to a new home, one that isn't sinking.

“They told us they were giving us a life of dignity," he says. "The reality is another."