As the internet bubble burst and terrorists attacked our nation on September 11, 2001, then Federal Reserve Chairman Alan Greenspan slashed interest rates to battle what turned out to be a relatively mild recession. To spur growth and reestablish confidence, he kept rates too low for too long and ushered in the mother of all investment bubbles.

With paltry bond yields and cheap, abundant financing available to just about anyone with a pulse, almost every American became a real estate mogul. “Liar loans” and 110 percent loan-to-value mortgages became the norm.

Between 2001 and 2006, the Case-Shiller National Home Price Index shot up from 116.4 to almost 191 and the sucker’s bet became the one against real estate (see graph below).



Source: Standard & Poor’s

By early 2008, though, confidence in what seemed to be a perpetually appreciating asset came crashing down, as what proved to be the Ponzi scheme financing the bubble collapsed. By 2009, not only could you not sell real estate in the US, you couldn’t even give it away.

Today, the Case-Shiller National Home Price Index value has settled to about 2003 levels, oddly enough where it probably would have been anyway had real estate appreciation held to its historical norm of slightly outpacing inflation.

The American real estate market is finally improving, as buyers return to the market. The Case-Shiller 20-City Home Price Index, a smaller sample group than the national index but reported monthly rather than quarterly, is up by 9.3 percent this past February alone. That’s the quickest monthly increase in nearly seven years and a good omen for the first quarter national reading.

But home ownership isn’t just an American dream.

As incomes have grown across Latin America along with the region’s booming economies, Brazil and Colombia are now considered some of the hottest real estate markets in the world.

In Rio de Janeiro, for example, prime office space has appreciated by more than 60 percent per square meter over the past few years and it is now the fourth-most expensive real estate market in the world. Nationally, Brazilian’s real estate debt has gone from about 25 percent of their incomes in 2008 to about 40 percent today.

In Colombia, sales of new houses and condominiums have been growing by about 20 percent annually over the past three years.

This rapid appreciation is raising concerns that a Latin American real estate bubble similar to what the US suffered might be forming. And to be fair, there are some troubling signs.

For instance, despite the fact that economic growth in Brazil has slowed and the government’s net revenues grew by just 3.3 percent in the first quarter, total federal spending has shot up by more than 11 percent. That’s largely due to the fact that the government has implemented a wide array of policies to help pull up incomes in the country and spread the wealth. These proactive measures have been a major driving force behind the country’s booming real estate market.

So far, there haven’t been any signs of cracks in the system. Loan defaults are still relatively rare in Brazil and banks such as Global Investment Strategist portfolio holding Banco Bradesco (NYSE: BBD) have actually been reducing their loan-loss provisions in recent quarters.

The news isn’t quite so cheery in Mexico, where home foreclosures in 2012 more than doubled from 2011, hitting a record 43,853.

Despite those troubles, the real estate markets in Latin America are radically different from the developed world.



As you can see from the chart above, the mortgage markets in the region are still largely nascent at best, so it’s not a case of overleveraged buyers or overexposed banks getting into trouble. Most mortgages in South America are also reminiscent of those in the US in the 1960s: 30 percent down on a 15-year term. Lending standards are also relatively tight with few, if any, liar loans being made.

At the same time, incomes are continuing to rise across the region, even as commodity prices remain relatively weak. That’s due to the fact that higher incomes have created a virtuous cycle, helping break the region’s historical linkage to commodities. With private consumption spending in Latin America outpacing other emerging market nations, Latin economies are becoming more self-contained.

Housing supply is tight, but government support for homeownership also remains high. For instance, thanks to the fact that Mexico’s demographics skew towards the young, it is estimated that there is a deficit of between 5 million and 6 million housing units based on family formation. The government is offering loan guarantees and liquidity to banks and other mortgage underwriters to help spur the market along.

The case is much the same in Brazil and Colombia.

So while there will certainly be some bumps in the road to more universal home ownership in Latin America, over the long-term there is a sound structural case to be made for Latin American homebuilders. Given the fact that there has been so much bad press about the region’s real estate and, yes, there have been some missteps on the part of individual companies, some homebuilders south of the border are actually solid value plays at the moment.

These picks are more aggressive ways to play the growing consumer class in the region and will entail a fair bit of volatility, but over the long haul they should produce solid profits.

Continue on to the Stock Spotlight for the best plays in Latin real estate.