Dr. Juan Lara
June 12, 2007
Puerto Rico's housing market has fared better than the US market in the past year, but it hasn't been spared the effects of the local reccession. Mortgage originations declined in 2006 for the first time in many years, and the drop was rather sharp.
In addition, in the early months of the current year banks have been foreclosing delinquent mortgages at twice the pace of the previous year. These are clear signs of the weakening of household finances caused by the recession.
Nontheless, the local market's troubles are mild compared to what has been happening on the Mainland, where some companies involved in sub-prime lending have gone under and many homeowners are facing a drop in property values. The local market looks good in comparison.
But even though sub-prime lending has not been as big and issue here as in the States, there is no denying that home sales have been hurt by the sour economy. Projections of housing demand on the Island have been revised accordingly. Before the recession, we were projecting demand for 21, 856 new housing units annually during 2006-2010. We now foresee annual demand for 19, 685 units, on average, during the five year period. Total demand, for both new and existing units, is projected at 40, 773 units per year.
The fact is that market fundamentals are strong, the recession notwithstanding. The ongoing demographic shift in Puerto Rico supports a healthy rate of new household formation that procedures fresh demand for housing year after year. In addition, interests rates are still attractive and buying a home is still one of the best possible investments for a Puerto Rican household. This is not necessarily true for households on the Mainland, because the drop in property values in some areas erodes the investment value of residential units.
It is expected that 98, 428 new households wil be formed in the period 2006-2010, which implies a need for that same number of new housing units. This means, as pointed out above, that 19,685 new housing units will have to be built each year during the second half of the decade. On top of that, some of the exisitng households will be selling the units they now own to move up to pricier units. These households generate simultaneously a demand for units and a supply of existing units, and while that secondary market activity does not impact the construction industry, it does account for a large chunk of the mortgage industry business.
Distribution by price segment
One of the more striking differences between the housing market in Puerto Rico an that on the US mainland is the concentration of demand in the low-income segment in the local market. Currently, the official threshold for low-income housing is $90,000, although in some areas it may go as high as $100,000. This segment is seen to account for 44% of demand for new housing units in the forecast period. Guayama, on the south east, is the region with the largest share of low-income housing in total demand for new units (63.1%), while the San Juan region has the lowest share (37.7%).
Not surprisingly, the intermediate segment in the market- units priced above $90,000 and below $500,000- has the largest demand density. A little over one half of new unit demand is in the intermediate segment, while the high- price units, beginning at $500, 000, make up a little under 5% of the market. In number of units, the intermediate segment amounts to about 10,000 per year, while the high-price segment takes about 1,000 per year.
The affordability issue
Puerto Rico lacks a housing affordability index because there are no price data for existing housing units. There is a price information for new units only, and even this is incomplete and fragmented. One might calculate an affordability index for new housing only, but that would be of little use since new units are relatively small fraction of the total houisng stock. Moreover, such and index would also be misleading, because new housing units are typically more expensive than existing units, which means than an index based on new units would overestimate the affordability problem.
It is possible to calculate an implicit affordability index using the projected price data for existing and new housing units in the demand forecast. A reading of 100 in this index means that the median-income household is able to buy the median-price property, indicating that housing is affordable. For Puerto Rico as a whole, the implicit index average 93 in the forecast period, pointing to a moderate affordability problem. The region with the highest index is Loíza- although it falls short of 100 - and that with the lowest index is San Juan.
Rental housing
The rental market in Puerto Rico is not as develop as are rental markets on the US mainland. Locally, demand for rental units is concentrated in low to very-low income households who are simply unable to buy a home. New demand for low-income rental units is projected at about 7,000 per year in the forecast period, which poses a challenge to the government's housing policies and programs.
The key issue in the assisted rent market, such as the Plan 8 market, is the lack of a sufficient number of adequate units. Supply in this segment is curtailed by low profitability and high development and operating costs. Government programs for this market must focus on strategies to stimulate supply through incentives that help offset costs and risks to developers and operators.
http://www.advantagepr.net/
June 12, 2007
Puerto Rico's housing market has fared better than the US market in the past year, but it hasn't been spared the effects of the local reccession. Mortgage originations declined in 2006 for the first time in many years, and the drop was rather sharp.
In addition, in the early months of the current year banks have been foreclosing delinquent mortgages at twice the pace of the previous year. These are clear signs of the weakening of household finances caused by the recession.
Nontheless, the local market's troubles are mild compared to what has been happening on the Mainland, where some companies involved in sub-prime lending have gone under and many homeowners are facing a drop in property values. The local market looks good in comparison.
But even though sub-prime lending has not been as big and issue here as in the States, there is no denying that home sales have been hurt by the sour economy. Projections of housing demand on the Island have been revised accordingly. Before the recession, we were projecting demand for 21, 856 new housing units annually during 2006-2010. We now foresee annual demand for 19, 685 units, on average, during the five year period. Total demand, for both new and existing units, is projected at 40, 773 units per year.
The fact is that market fundamentals are strong, the recession notwithstanding. The ongoing demographic shift in Puerto Rico supports a healthy rate of new household formation that procedures fresh demand for housing year after year. In addition, interests rates are still attractive and buying a home is still one of the best possible investments for a Puerto Rican household. This is not necessarily true for households on the Mainland, because the drop in property values in some areas erodes the investment value of residential units.
It is expected that 98, 428 new households wil be formed in the period 2006-2010, which implies a need for that same number of new housing units. This means, as pointed out above, that 19,685 new housing units will have to be built each year during the second half of the decade. On top of that, some of the exisitng households will be selling the units they now own to move up to pricier units. These households generate simultaneously a demand for units and a supply of existing units, and while that secondary market activity does not impact the construction industry, it does account for a large chunk of the mortgage industry business.
Distribution by price segment
One of the more striking differences between the housing market in Puerto Rico an that on the US mainland is the concentration of demand in the low-income segment in the local market. Currently, the official threshold for low-income housing is $90,000, although in some areas it may go as high as $100,000. This segment is seen to account for 44% of demand for new housing units in the forecast period. Guayama, on the south east, is the region with the largest share of low-income housing in total demand for new units (63.1%), while the San Juan region has the lowest share (37.7%).
Not surprisingly, the intermediate segment in the market- units priced above $90,000 and below $500,000- has the largest demand density. A little over one half of new unit demand is in the intermediate segment, while the high- price units, beginning at $500, 000, make up a little under 5% of the market. In number of units, the intermediate segment amounts to about 10,000 per year, while the high-price segment takes about 1,000 per year.
The affordability issue
Puerto Rico lacks a housing affordability index because there are no price data for existing housing units. There is a price information for new units only, and even this is incomplete and fragmented. One might calculate an affordability index for new housing only, but that would be of little use since new units are relatively small fraction of the total houisng stock. Moreover, such and index would also be misleading, because new housing units are typically more expensive than existing units, which means than an index based on new units would overestimate the affordability problem.
It is possible to calculate an implicit affordability index using the projected price data for existing and new housing units in the demand forecast. A reading of 100 in this index means that the median-income household is able to buy the median-price property, indicating that housing is affordable. For Puerto Rico as a whole, the implicit index average 93 in the forecast period, pointing to a moderate affordability problem. The region with the highest index is Loíza- although it falls short of 100 - and that with the lowest index is San Juan.
Rental housing
The rental market in Puerto Rico is not as develop as are rental markets on the US mainland. Locally, demand for rental units is concentrated in low to very-low income households who are simply unable to buy a home. New demand for low-income rental units is projected at about 7,000 per year in the forecast period, which poses a challenge to the government's housing policies and programs.
The key issue in the assisted rent market, such as the Plan 8 market, is the lack of a sufficient number of adequate units. Supply in this segment is curtailed by low profitability and high development and operating costs. Government programs for this market must focus on strategies to stimulate supply through incentives that help offset costs and risks to developers and operators.
http://www.advantagepr.net/
