Has Mexico’s relocation bargain bubble burst?

Recent posts on expat forums for expats residing in Mexico on social media (May 21, 2024) regarding the strength of the Mexican peso to the U.S. dollar (Currently MX$16.63 for one U.S. dollar at 5-21-2024 at 6PM Mexico City time) are currently inhabited by vastly more fallacies, deception, misconceptions, uninformed notions and outright falsehoods than accuracy and truth. Needless to say, Facebook and other social media sites, and the opinions expressed thereon, do not have reputations as reservoirs of truth one can confidently or solely or rely upon. For many of these commentators, the veracity of their posts are akin to elephants flying.

This is particularly true for expats residing in Mexico who relocated from the U.S. in the past 5 years. (The Mexican peso traded at 25.33 in March 2020 and earlier this week was at 16.79 on May 16, 2024). This translates to a loss of 33.7% in the purchasing power of the U.S. dollar in Mexico. This is a truly problematic reality – particularly for U.S. expat retirees residing in Mexico who are retired without employment in Mexico, those with a limited income, and those on a fixed income. Furthermore, those relying on the U.S. dollar to pay for rent (in MX pesos) for housing face a harsh reality. Translation: their rents have increased substantially since 2019!

Mexico’s attraction as a destination for U.S. retirees whose primary desire was/is to reduce their cost of living has changed substantially in a distinctly negative direction – a fact that is overlooked by the established industries dedicated to encouraging/attracting U.S. retirees to relocate to Mexico. This includes the purported experts on relocation to Mexico who populate YouTube. Those who post on social media that the bargain fiesta in Mexico endures as the haven for a substantially reduced cost of living are simply blowing hot air.

The primary reason expressed by U.S. retirees and prospective retirees considering relocation to Mexico is to stretch the purchasing power of their U.S. dollar due to a perceived lower cost of living in Mexico. Has Mexico lost its luster as a retirement destination for U.S. retirees and U.S. residents with limited incomes considering Mexico for retirement or relocation? Has Mexico’s bargain bubble burst for U.S. retirees based upon the current strength of the Mexican peso against the U.S. dollar? Has time run out on this bargain? The answer to this question is unequivocally ‘Yes’. This article explores this new reality.

A forex primer

First, let’s begin with a brief overview of currency valuation. Currencies across the globe fluctuate by the second (actually by milliseconds). Currency trading or foreign exchange trading – also known as Forex or FX – is the world’s most traded market. As an example, Forex trading in 2022 (globally) averaged over US$7.5 trillion each day. This is in comparison to trading volume on the U.S. stock markets which ranges over U.S. $550 billion per month or around 7% of the volume of the Forex market.

Banks, hedge funds, independent Forex trading firms, governments, central banks, sovereign wealth funds, brokerages, companies, financial service companies, investment funds, insurance companies – and individuals all participate in this market. Exchanging dollars for pesos? You just engaged in a Forex trade. Buying a product or service from another country via the internet – you just engaged in a Forex trade. Currency is always priced compared to another currency – this is what is referred to as the ‘exchange rate’. How many of currency ‘X’ do I receive for exchanging one of currency ‘Y.’ Forgive me but, it’s simply not that simple.

The supply and demand appetites of institutional sellers and buyers establish the pricing of currencies. As stated above, demand for specific currencies is influenced by a plethora of factors including, but certainly not limited to, interest rates, central bank policy, predictions for economic growth, economic and political instability, threats to national security, trade deficits, consumer confidence, national debt, fluctuations in national currency reserves, risk perceptions, extraordinary natural disasters, forward looking predictions of a country’s political environment, inflation, interest rates, recessionary influences, current account deficits, government debt, country solvency concerns, speculation, economic sanctions, etc.

Forex is extraordinarily complicated and should unequivocally be left to highly skilled financial professionals. Forex trading is uncommon among individual investors. Retail Forex trading (trading by so-called non-professionals) is estimated to account for 5.5% of the worldwide market. Most of the major, name brand, online brokers don’t offer Forex trading services. Studies indicate on average, 71% of retail or individual FX traders lost money.

For the average individual, engaging in Forex transactions as a personal investment strategy without professional guidance is, well – just plain stupid. You would have better odds in any casino to make money (and those odds are not good either – that’s why casinos make tons of money – the odds are against you – even though your brain, adrenal gland, and your grandma say otherwise). This industry involves massive flows of money with virtually every currency from most countries. Not every country has their own currency.

In Europe, there are approximately twenty countries that use the euro. Other countries use the U.S. dollar as their currency because they cannot maintain a stable currency of their own). In North Korea, Forex is illegal. There are approximately 170 different currencies around the globe today. Currencies are traded “over the counter”, or OTC. All currencies traded in the Forex market have an assigned three letter code. The U.S. dollar (USD) and the European Union’s Euro (EUR) are examples. Most Forex trades are conducted by institutional traders who act on behalf of the major players in this market (as described above).

This is an industry that is notoriously under-regulated, while being described as “increasingly full of fraudsters and dishonest actors.” As an example, the country of Nigeria experienced a Forex loss in 2023 of 1.7 trillion Nigerian Naira (or about U.S.$1.2 billion dollars). Currency, unlike bananas, is not a commodity. Currency is a medium of exchange. However, an unskilled professional would likely have a better probability of trading bananas for profit on the commodity market via a commodity exchange – versus engaging in Forex trading without licensed, professional, trustworthy advice from an experienced Forex trading/investment advisor.

Thus, opinions on social media regarding why the Mexican peso is currently so strong against the U.S. dollar are overwhelmingly from individuals who have absolutely no experience whatsoever in Forex trading (other than paying their bills in Mexican pesos – as they reside in Mexico – relying on the exchange rate with the U.S. dollar), and no reliable wisdom regarding the myriad of variables that cause the strengthening or weakening of a particular currency at any moment in time.

Inflation has also hit the remittances to Mexico’s residents. The skyrocketing peso has eroded the purchasing power of households in Mexico who rely on remittances from abroad. The pesos strength means every dollar sent home to Mexico translated to fewer pesos to spend. Inflation and the current strength of the peso hurts lower income households in Mexico the most. This includes expats residing in Mexico who have sought a lower cost of living.

Okay, that’s enough of a Forex primer and some current economic data for the purposes of this piece.

The U.S. reality

Mexico is, has been, and remains, the unequivocal country of choice for U.S. retirees choosing to relocate abroad for this season of their lives. Honestly, there are no reliable statistics on the number of American citizens residing permanently in Mexico – for retirement or otherwise. The numbers range from between 1.5 and 4.5 million.

My wife and I relocated from the U.S. to retire in Queretaro, Mexico, in 2019. Queretaro is the third largest city in Mexico (Mexico City and Guadalajara are the two largest cities in Mexico by population). We made this decision after an extensive five year research endeavor using a vast array of reliable resources – including numerous trips to various locales in Mexico to scout out prospective retirement locations. We are “home” in Queretaro, Mexico. We are grateful guests in this marvelous city and nation. We are officially ‘residente permanente’ in Mexico. (We have official permanent resident immigration status in Mexico. This is NOT dual citizenship as we are not Mexican citizens and do not hold Mexican passports). We are not employed in Mexico. We are retired. My wife is an artist and I am a writer, journalist, and photographer.

Santiago de Queretaro (our city’s official name) has a broader city population of approximately 1.2 million residents. It is located in what is referred to as the central highlands of Mexico, colonial Mexico, and the Bajio region. (Our home in Queretaro is situated at 6,400 feet, or 1,952 meters, above sea level). We have four distinct seasons and live within a vibrant, growing region with fantastic people, services, friends, cultural diversity and vibrancy, efficient transportation services, international airport, good governance, superb emergency services (law enforcement, EMS and fire), and fantastic food choices. People are kind, compassionate, and helpful. It is safe and clean here.

This (the Bajio region) is a vast and diverse geographical region within what is referred to as the central Mexican plateau. This area includes a geographic region that begins northwest of Mexico City. It includes the Mexican states of Querétaro, Guanajuato, parts of Jalisco, Zacatecas Aguascalientes and specific areas of Michoacán and San Luis Potosí. We are a three hour drive north of Mexico city and a one hour drive south of San Miguel de Allende. Guadalajara is a five hour drive west of Queretaro.

In 2019, I recognized a phenomenon I referred to (in a book I authored and numerous published articles) as “The Mexodus” – an exodus of U.S. retirees flocking to Mexico as their full time (some part time) home. This is the baby boomer generation (baby boomers are considered those born between 1946 and 1964) in the U.S. seeking a new life experience and, for many, primarily looking to lower their cost of living yet maintain a comfortable lifestyle similar to the lifestyle they enjoyed in the U.S. They faced the reality they could no longer afford to maintain their lifestyle with their retirement financial resources.

According to Senior Living Magazine, an estimated 10,000 baby boomers will achieve retirement age each day between now and 2030. Other primary motivations to relocate to Mexico include seeking a better climate, more affordable healthcare, a desire to experience an immersive cultural adventure, meeting new people while developing new relationships, escaping the political rancor in the U.S., and acceptable travel proximity to friends and family in the states.

U.S. retirees floating on myths to Mexico

What has changed between 2019 and 2024 for the magnet that Mexico had become for U.S. retirees? As study after study indicates, U.S. baby boomers are ill-prepared financially for retirement. Rewired Magazine states; this “lack of financial preparedness” has become the primary cause of anxiety among boomers in the U.S., thus, the supply of U.S. retirees facing this challenging reality has increased their angst dramatically, due primarily to inflation and the seemingly unabated rise in the cost of living in the U.S. during the past five years.

According to Forbes, 79% of Americans agree that the US.. faces a retirement savings crisis, an increase from 67% in 2020. A quote from Forbes in April 2024 captures the essence of the current American retirement illustrates the current retirement conundrum:

“When it comes to retirement, the data indicate that Americans’ worries indeed are justified. The reality is that retirement security is out of reach for far too many Americans. Most Americans, particularly middle-class workers, are falling far short when it comes to saving enough money for a financially secure retirement. According to the National Retirement Risk Index, half of U.S. households will not be able to maintain their standard of living when they retire – even if they were to work until age 65 and annuitize all their financial assets.” Why?

Numerous sources indicate the following:

• Retirement savings plans are no longer universally available in the U.S. Nearly half of private sector employees in the U.S. ages 18 to 64, or 57 million Americans, do not have the option to save for retirement with their current employers.

• The U.S. remote workforce has increased dramatically post Covid. It seems digital nomads are everywhere today and saving for retirement is an afterthought.

• U.S. healthcare costs continue to rise. Retiree’s healthcare needs increase with age. Unanticipated healthcare needs cause the aging population in the U.S. to search for alternatives that are more cost effective. Mexico is an attractive solution many give serious consideration.

• According to the American Association of Retired Persons (AARP), 70% of Americans over 50 say they are very concerned about prices rising faster than their income. About 25% have no retirement savings whatsoever. Everyday expenses and housing costs, including rent and mortgage payments, are the biggest reasons people are unable to save for retirement. Many near-term prospective U.S. retirees have leveraged their equity in their homes to cover costs associated with healthcare, education costs for children and grandchildren, helping the same with student loan debt, individual financial crises, increasing insurance costs, and dealing with the inflationary environment. Translation: they have burned up the equity they had in their home, and the savings they had forecast for retirement. Now, they have a first and second mortgage and little equity when they sell because they cannot live where they currently are as they don’t have the retirement income stream to maintain the lifestyle and debt service that the lifestyle they have been accustomed to requires. Thus, they seek a solution that affords a lower cost of living.

• Home values rose significantly in the U.S. during the pandemic when interest rates for a 30-year mortgage were 3% or less. These low rates dramatically increased the pool of eligible buyers. This increased the demand for a limited supply of homes that sent prices skyward. Redfin states: “The median U.S. home sale price hit the highest level on record in April 2024, jumping 6.2% from the year prior to $433,558.” On May 21, 2024, the interest rate for a 30-year mortgage in the U.S. has skyrocketed to 7.04 % – more than double than 2020. This reduces the eligible pool of buyers. This impacts retirees prospects for selling their home at the price they anticipated as a source of retirement income.

• It remains more cost effective to rent than to buy in the U.S., with the monthly cost of owning a home almost double that of renting in 21 metropolitan U.S. areas. Even rents have surged by 30% during the past decade while wages rose by about 20%. The cost of housing in the U.S. is outpacing the resources of prospective U.S. retirees – many of whom are on fixed incomes.

• Social Security provides the main source of income for more than 50% of U.S. retirees today. With a limited or fixed income, U.S. retirees are anxiously searching for ways to lower their cost of living. Relocation to Mexico for retirement remains a legitimate, serious consideration for many.

What has changed in Mexico since 2019?

The answer is if you do not see or hear alternative narratives on the purported bargain bubble of relocating to Mexico, you are likely to be misled. Here are some facts:

• The strength of the Mexican peso to the U.S. dollar at May 21, 2024, versus December 2020 has diminished the purchasing power of the U.S. dollar by some 30% (as stated above). This has reduced available discretionary income as of May 2024 for U.S. expats residing in Mexico.

• Inflation, particularly with food costs post Covid, at both the grocery store and restaurants has increased by 15%+.

• At its May 2024 meeting, the Bank of Mexico (Banco de México) maintained its benchmark interest rate at 11.00%. This reality attracts investment in Mexico due to the high rate of return. Mexico’s annual inflation increased to 4.65% in April 2024, from 4.42% in the previous month. Q-1 2024 GDP growth in Mexico was an anemic.02%. The primary upward pressure on inflation came from price increases for prices of food & non-alcoholic beverages (5.78% vs 4.96% in March 2024).

• The labor market in Mexico is tight. Costs related to labor in Mexico are problematic for Mexican employers as President Andres Manuel Lopez Obrador (AMLO) has increased the minimum wage. AMLO remains a bull regarding wage increases in Mexico. At the beginning of his term, the minimum wage was 88 pesos (U.S.$5) per day in 2018. He established a policy of annual minimum wage increases. His stated objective is to reach a threshold of U.S.$15 a day by the end of his term in 2024. His hope is to improve standard of living of Mexicans, while improving stark income inequality realities. However, economists concerns about its potential impact on inflation have become realities. Mexico’s fight with inflation, has inadvertently caused interest rates increase to 11%. Businesses have reacted to increased labor costs by raising prices, leading to inflationary price.

• Healthcare costs remain relatively constant, along with internet access, utilities, cell phone service etc. Although subscription prices for Netflix and other preferred streaming services (NFL, MLB, NBA, Prime, Amazon etc.) continue to climb annually.

• Gasoline prices are supported by the Mexican government. We don’t drive much (We rely upon UBER for local trips and ETN autobus for excursions. UBER process have increased over the past five years).

• Airfare to the U.S. is more expensive (it’s absurd).

• We rent and pay in Mexican pesos. Thus, with the devaluation of the dollar against the peso, our rent has increased since 2019 by several hundred U.S. dollars a month.

• Costs for exploring tourist destinations outside our city have also increased. (Primarily food and hotel accommodations).

• Cost of imported goods are more expensive (Amazon/on-line purchases, certain grocery items, dog foods. books etc.).

• Water, electrical grid capacity, and existing transportation infrastructure remain immediate concerns in Mexico, particularly in our larger, populated urban cities. With increasing population in urban areas, transportation infrastructure continues to be overwhelmed at certain times of the day, or days in a month, with little planning to increase these fundamentally essential capacities. 28 of Mexico’s 32 states remain under drought conditions. Mexico City residents in certain areas do not have water service several days a week. Water delivery trucks from independent water suppliers are becoming commonplace and essential in many locales in Mexico. You must be aware of these realities. (P.S. sewage treatment plants require water to operate. In places like the Lake Chapala/Ajijic area – a magnet for U.S. expat relocation, the miasma is increasingly apparent due to the absence of consistently available water resources).

• Climate change continues to negatively impact Mexico.

• Violence against persons remains an ongoing, legitimate concern for personal safety in specific regions of Mexico (Queretaro is reportedly an exception). Security risks are fluid in Mexico – as they are in all nations. They are not static/fixed. The comparisons of reported, official violent crime rates in Mexico versus the U.S. are primarily, fundamentally, patently absurd. Reliable crime statistics/rates depend upon the integrity of the underlying mechanisms required to capture and consistently report accurate data. Mexico has an independently verified, ongoing, indisputable reputation and history of under reporting and manipulating national crime statistics. Comparisons to the same statistics in other developed nations is completely ridiculous and indicates the ignorance of one espousing said comparisons.

• Mexico experiences prescription medication shortages regularly. These shortages are fluid and may vary by geographic area in Mexico. Medications you might rely on in the U.S. may not be available in Mexico and have Mexican import restrictions on the same.

• The cost to legally immigrate to Mexico has increased markedly over the past 5 years, particularly for those seeking permanent residency – as Mexico has new, escalating, verifiable income and financial capacity requirements for those seeking this officially recognized immigration status. The minimum income and financial capacity thresholds for temporary residency status in Mexico have also increased and are variable – depending upon the specific requirements of your local Mexican embassy. Persons relocating to Mexico on a tourist visa who overstay that visa are subject to penalties – that can include incarceration in Mexico.

• Private education costs in Mexico have risen. This is particularly true for elementary and middle school children.

• Querétaro’s Marco Antonio Del Prete Tercero, the head of the Secretariat of Sustainable Development (SEDESU) announced that 18 data centers are in the process of being installed in the state. Queretaro has become an investment target for data centers. This includes constructing new facilities for Microsoft, Amazon, and others. Unwittingly, this exacerbates Mexico’s water supply and energy load challenges. Data centers are unequivocally massive energy and water hogs. Once again, the voracious appetite for commercial investment exacerbates Mexico’s and Queretaro’s existing water and energy infrastructure challenges. This is true in Mexico and across Latin America. Uruguay and Chile, like Mexico are drought stricken. Data center development in Mexico and Latin America have become hot economic development initiatives. They require fresh water coming from the public water supply to cool them. Expect public water supply issues to continue to worsen in Mexico and power grid infrastructure to become increasingly stressed.

The bottom line

Like many nations, the cost of living in Mexico has increased verifiably across the spectrum of almost every economic metric in the past five years. The American perception that ‘everything is cheaper in Mexico’ has become, primarily, an outdated myth. Without a deeper appreciation for the actual costs of relocation to any foreign country from the U.S., and the variables that affect the exchange rate between the U.S. dollar and the country you are considering relocating to (including Mexico), is a recipe to become disillusioned.

Change is constant. Currency valuations change in milliseconds. Typically, this is a process over time – not a sudden event. Currently, Mexico is NOT the purported bargain for American retirees it used to be for those who desire to reduce their cost of living and stretch their retirement income – while attempting to maintain a similar pre-retirement lifestyle they enjoyed in the U.S. Sorry, it’s just a fact. That bubble has burst.

Of course, every personal financial situation is different. Digital nomads are currently relocating to Mexico in droves. Families of foreign employers continue to relocate their employees to Mexico to support their operations here. People with more substantial financial resources continue to relocate to Mexico. People who reside in the U.S. who have a spouse with Mexican citizenship are also choosing to relocate to Mexico. Immigration to Mexico is, of course, not limited to U.S. residents.

Yes, things have changed in Mexico for U.S. retirees considering relocation to this amazing nation. However, like it or not, Mexico’s bargain bubble fiesta has deflated for those U.S. retirees with limited or fixed retirement resources, seeking a lower cost of living and the desire to maintain a similar lifestyle they enjoyed in the U.S. Do your research before relocation abroad – to any foreign country. Seek out resources that may be contrary to your current perceptions of the possibilities and the realities on the ground. Avoid confirmation bias.

The winds of change are a part of life. Bubbles inflate and deflate. Bubbles burst. Bargains come and go. It’s simply a fact.