FOR DECADES, MEXICO HAS BEEN A MARKET CRYING for housing. Builders' production has long been boxed in by an undercapitalized and sometimes dysfunctional banking system that has made home loans inaccessible for much of Mexico's population. As a result, demand for homes has chronically outpaced buyers' means of paying for them. And that demand won't subside any time soon, as housing and government officials estimate the country will need 23 million new homes by 2030 just to keep pace with a population that's expanding each year by more than two million people.

Mexico's housing industry, however, is showing new signs of vitality and hope. What has changed is the commitment Mexico's government and its financial institutions are making to clear away some of Mexico's many roadblocks to homeownership. Nearly 100 million Mexicans live in 24.7 million dwellings, and some experts believe that as many as 10 million would consider purchasing a house if they had access to financing and if more homes were available.

Mexico's President Vicente Fox recognizes housing's importance to Mexico's economy and has made housing formation one his administration's top priorities, setting a goal of constructing 750,000 homes in 100 cities by 2006. “Fox is like [U.S. President] Bush in that housing is keeping his economy afloat,” observed one American builder who is keeping an eye on Mexico's housing market but who asked not to be identified.

Native builders are already benefiting from some of the government's policy shifts—such as allowing mortgage interest to be tax deductible in 2002—that are stimulating new-home construction and sales. Fox's government is also banking on broader changes and market forces to lure capital that will help Mexico meet its housing objectives. Mexico's financial institutions are clearly responding.

Sociedad Hipotecaria Federal (SHF), a federal mortgage bank that functions like Fannie Mae, issued more than $700 million in inflation-indexed bonds in 2003. SHF also rolled out its first mortgage-backed security, valued at $142 million, that it offered in December through GMAC and Su Casita (one of Mexico's leading non-depository mortgage banks, known as Sofoles), which play a vital role in providing mortgages. At about the same time, Su Casita, which is 22 percent owned by Pulte Homes, and ARA, one of Mexico's leading builders, rolled out a new program to offer middle-income home buyers 25-year fixed-interest mortgages, the longest available in Mexico.

Meanwhile, INFONAVIT, a leading pension fund manager, expects to raise $400 million this year from three mortgage-backed securities offerings. “Demand for housing is infinite,” said Jaime Jose Del Rio Castillo, manager of institutional relations for INFONAVIT, which originated three-fifths of the 478,211 home mortgages issued in Mexico in 2003. Its strategy in 2004 is to provide even broader financing for entry-level buyers.

These and other factors are driving up new-home sales, which are expected to expand nearly 80 percent by 2008, to $25 billion, according Softec, a well-respected real estate consulting and market research firm based in Mexico City.

U.S. PRESENCE: Carlos Martens, left, and Homero Perez, both of HI Homes of El Paso, Texas, stand at one of the builder's active communities in Mexico. Reticent Response All that market activity, though, hasn't roused much interest from American home builders. With a handful of exceptions—most notably Pulte Homes—American builders have long dismissed Mexico as a potential expansion market. Their decision to stay on the sidelines is grounded in some hard realities: Two-fifths of Mexico's population lives below the country's poverty level; those that can afford homes say they want houses made from poured concrete or cinderblock, limiting the ability of U.S. builders to export their production expertise.

Then there's the issue of price: Starter homes in the $10,000 to $22,000 range—which account for about 75 percent of purchases—offer little profit incentive for U.S. builders large or small. In addition, credit concerns still leave too many Mexican buyers outside of the country's mortgage grid.

Cross-border incursions by American builders would also encounter stiff resistance from Mexico's 1,500 home builders—especially from dominant developers such as Grupo Sadasi, which plans to build 41,000 homes in five markets by 2006, including 10,000 units for middle-income buyers in Cancun. GEO, Mexico's largest builder, posted strong gains in closings, sales, and profits last year, and it projects that closings over the next two years would increase by 13 percent to 15 percent, according to spokesman Ricardo Maiselson.

The government's goal of assigning 750,000 home loans each year may also be broader in sweep than substance. Manuel Campos Spoor, Su Casita's CFO, notes that 100,000 loans would go toward home improvement projects and between 60,000 and 70,000 loans would be used to purchase existing homes.

“The industry actually builds around 330,000 new units, and the next challenge is to reach half a million,” Campos explains. Buyers purchase about 60,000 new homes priced at $80,000 or higher, and those upscale customers are emerging as the industry's sweet spot. Pulte is among the builders developing higher-end products, and Campos acknowledges that the industry must do a better job of encouraging move-up purchases.

SPLASH OF STYLE: Homes at Grupo Sadasi's Las Americas community cost about 520,000 pesos ($47,300 U.S.). The 1,000-home community in Cancun is an example of lower middle-income product offered in Mexico. Few U.S. Pioneers Pulte, which has been building homes in Mexico since 1994, is one of the few American builders to venture seriously south of the border. It closed 6,900 homes there last year, roughly the same number as in 2002. Roger Cregg, Pulte's CFO, told analysts in January that the company isn't satisfied with the returns it's getting out of Mexico. “The funny thing about Mexico is that you can build a lot of homes, but closing them is the problem,” says Cregg. But given that country's potential, and all that Pulte has learned from operating there, the Bloomfield Hills, Mich.-based builder is being deliberate about its long-term strategy.

Habitat for Humanity International has also kept the faith in Mexico's housing market. Over the past 15 years, it has built 15,000 homes in 14 of that country's 32 states. In July, the Americus, Ga.-based organization will launch a program with the goal of building 8,000 affordable units by June 2007. And on Oct. 24-25, the Jimmy Carter Work Project, under Habitat's auspices, plans to start construction on 75 homes in Veracruz and Puebla each. The former U.S. president is expected to be among 4,000 volunteers participating in that event.

Habitat's mission to build affordable housing is being met in Mexico with 430- to 590-square-foot houses that include one, two, or three bedrooms, and kitchens, baths, plumbing, and electricity, but no HVAC systems. Its homes sell for $6,700, or slightly more than one-fourth the market-rate price of a similar-sized entry-level house—clearly not the kind of numbers that would entice for-profit builders from north of the border.

POSITIVE POSITION: Grupo GEO, Mexico's largest home builder, posted strong gains in closings, sales, and profits last year, and it projects that closings during the next two years will increase by 13 percent to 15 percent. A few other American builders have tried to crack this market, though with less success. KB Home and Centex Homes came and went in the 1990s, their expansion designs thwarted by knotty regulations, land-use restrictions, precarious economic conditions, and ultimately too few buyers. (Neither builder would comment for this article.)

The recent surge in housing in Mexico, however, hasn't gone unnoticed. Several U.S. builders quietly acknowledge that they are keeping a strategic eye on Mexico. “I don't think Mexico quite yet represents a fertile market [for U.S. builders], but it's inevitable,” stated an executive with one of America's 10 largest home builders, who asked that his name and his company not be identified.

“You still have a lack of people who can afford to buy a home, and there's not enough access to mortgage financing,” he said. “But you also have a market [in the U.S. where growth rates are] projected to be flat for the next 20 years.”

Cross-border alliance discussions are also cropping up. Tropicana Homes in El Paso, Texas, appeared to be a logical candidate for taking the plunge into Mexico's housing market. Its 1,100-square-foot homes cost between $65,000 and $69,000 and target minimum-wage couples with good credit. But when a potential partner approached Tropicana a year ago about building homes in Mexico, its owners turned the offer down flat. “I was scared to death,” admits Bobby Bowling, Tropicana's vice president. “Their system of governance just isn't secure enough for me.”

Unstable Terrain Indeed, there remain many issues besides financing that cast Mexico's housing potential as something of a mirage for U.S. builders. A new study that Harvard University's Joint Center for Housing Studies will publish this month chronicles how Mexico's land-use, construction planning, and mortgage funding policies still have a long way to go to facilitate new home construction. Nick Retsinas, the Joint Center's director, points out that cheap labor has allowed local builders to postpone making much-needed improvements in production efficiencies.

Retsinas adds that homeownership doesn't create wealth for Mexicans the way it does for Americans because “there are too few products to trade up to.”

Gene Towle, managing director of Softec, disputes that perception. Softec estimates that about one-third of the 3.2 million homes projected to be built in Mexico by 2010 will be valued at or above $35,000, which would make them move-up products.

Local officials concede that Mexico's housing market is hamstrung by overregulation and serious shortages of land with water and sewer systems. Rafael Pirez, finance director for Mexico's National Housing Commission, known by the acronym CONAFOVI, which coordinates activities of all of the country's housing-related organizations, said that developed real estate for home building in population centers such as Mexico City and Guadalajara is practically used up. Habitat's projects in Veracruz and Puebla, in fact, will be built on developed land provided by GEO, Mexico's largest builder.

Far more stubborn problems revolve around purchasing costs and the availability of capital to create mortgage instruments that are flexible enough to include Mexico's poorer citizens. The U.S. Commercial Service of the Department of Commerce, citing Mexican government statistics, estimates that 63 percent of housing demand in Mexico comes from low-income and poor people with no credit. Government subsidies will be needed to help finance up to two-fifths of all the homes purchased in Mexico for the next several years, according to Pirez.

Gustavo Gutierrez, the national director of Habitat's operations in Mexico, said that even notaries' fees for mortgage titles can be as high as $3,000, an expense far beyond the financial grasp of most Mexican families, 45 percent of which earn less than $500 each month. “Unless we do something to change the laws and the inertia, I don't see much improvement for the poorer sector,” he said.

Crossing Borders Both Ways Any reform of Mexico's housing, banking, or mortgage financing laws would invariably be felt by American-based firms such as Citibank and Ford Motor Co., which are invested in Mexico's commercial banks and Sofoles, one of Mexico's leading non-depository mortgage banks.

Indeed, the economies of Mexico and the United States have become so intertwined that the border separating the two nations sometimes seems to disappear. In February, Mexico's largest mortgage company, Hipotecario Nacional, opened an office in New York City and said it would begin offering loans to the 1.5 million Mexicans living in the greater New York metropolitan region for their purchase of homes in Mexico.

Nacional's CEO, Victor Manuel Tequejo, told the Associated Press that other offices might open in California and Texas markets with sizable Mexican populations.

Another source of dollars and know-how, ironically, may come from pioneering Mexican builders, who are braving code regulations and environmental restrictions to build homes in the U.S.

Sadasi confirmed that it is expanding into the Los Angeles area, although its officials wouldn't provide details or timetables. HI Homes, a smaller builder based in El Paso, Texas, and whose founder Homero Perez worked for GIG, one of Mexico's largest developers, late last year started construction on a 140-home subdivision in its home-town. Carlos Martens, HI's COO, said that these stick-framed houses range from 1,100 to 1,400 square feet and sell for $65,000 to $85,000. The company also has developed affordable homes made with compressed adobe brick and prefab roofing that Martens says he believes are suitable for both Mexico and the U.S.

The success of Sadasi or HI would break a pattern of frustration that Mexican builders have experienced here. A joint venture between GIG and U.S. Homes, called Modern Building Systems, built 480 homes in Houston, Dallas, and San Antonio before it ended when Lennar acquired U.S. Homes in 2000. In the late 1990s, GEO and Beazer Homes teamed up to build low-income homes in El Paso but dissolved that partnership after a few years.

It remains to be seen whether builders in Mexico or the U.S. ever establish deep footholds in the other's country. But Ron Jones, who owns Sierra Custom Builders in New Mexico, is convinced that builders on both sides of the border could benefit from a healthy exchange of ideas about construction technologies and new products. Jones sits on the international oversight committee of the NAHB, which in October received a $397,899 grant from the Commerce Department to help fund “Access Mexico,” the NAHB's initiative to expand the export market in Mexico for U.S. builders and suppliers. The NAHB chipped in $800,000 for this three-year project, which Rita Feinberg, its international executive director, says will go toward organizing seminars and a three-day conference focusing on Mexico's housing market to be held Nov. 7-10 in Mexico City.

Feinberg says she thinks the trade group's initiative might even persuade a few U.S. builders to consider Mexico as part of their expansion efforts. “It's not as simple as driving a truck down there and starting to build. You need a solid partner. But we're here to say that the financing, the codes, the regulations, and the warranties are in place,” she said.