Puerto Rico

Puerto Rico’s housing market remains weak

Lalaine C. Delmendo

Puerto Rico’s housing market remains weak and its outlook is uncertain, amidst weakening demand caused by increasing interest rates, and an ailing overall economy.

During 2023, the seasonally-adjusted purchase-only house price index rose by a minuscule 0.33%, following y-o-y growth of 2.49% in 2022, 9.72% in 2021, 11.12% in 2020, and 1.12% in 2019, according to the Federal Housing Finance Agency (FHFA). When adjusted for inflation, islandwide house prices dropped 1.62% last year.

Puerto Rico’s house price annual change

Though on a quarterly basis, house prices increased 6.45% (6.76% inflation-adjusted) in Q4 2023 – a sharp improvement from a q-o-q fall of 12.34% in the prior quarter.

The Puerto Rican housing market has suffered tremendously for most of the decade. The island has experienced a prolonged economic crisis, massive debt, high unemployment, and continuing population loss. With US$70 billion in debt and US$50 billion in pension liabilities, Puerto Rico´s bankruptcy filing in May 2017 was the biggest in the history of the United States.

In recent years, the housing market showed some signs of recovery, despite the adverse impact of the Covid-19 pandemic and global economic slowdown. However, demand is weakening again, mainly due to rapidly increasing interest rates. Home sales in Puerto Rico fell by 4% y-o-y to 10,479 units in 2023, following a huge decline of 17.8% in 2022. Sales for existing and newly built houses dropped by 2.7% and 17.6%, respectively.

The surge in interest rates caused lending to be more expensive and even though the housing market has not come to a grinding stop, activity has noticeably declined.

With interest rates remaining historically high and the local economy continuing to struggle, activity in Puerto Rico’s housing market is expected to remain subdued during the remainder of the year.

Following a modest growth of 2% in 2022, Puerto Rico’s economy weakened again in 2023, with its real GDP contracting by about 0.7%, according to the International Monetary Fund (IMF). The economy is projected to shrink further by 0.2% this year.

Demand is falling again

The total number of houses sold in Puerto Rico fell by 4% y-o-y to 10,479 units in 2023, following a huge decline of 17.8% in 2022, based on figures from the Office of the Commissioner of Financial Institutions. This is slightly lower than the annual average home sales of 10,900 units recorded in the past decade (2012-2022).

During 2023:

  • For existing houses, which accounted for 92.5% of total demand, sales dropped 2.7% y-o-y to 9,694 units, after falling by 18.8% in 2022.
  • For newly built houses, sales dropped by a huge 17.6% y-o-y to just 785 units in 2023, following a 6.5% decline in the prior year.

Puerto Rico Home Sales graph

In terms of value, total home sales rose by a meager 0.1% y-o-y to US$2.03 billion in 2023, following an annual decline of 15.8% in 2022, according to figures from OCIF.

  • For existing houses, sales value was more or less steady at US$1.78 billion in 2023, after falling by 17.3% in 2022.
  • For newly built houses, sales value increased slightly by 1% y-o-y to US$245.39 million in 2023, following a 3.2% fall in the prior year.

U.S. mainlanders account for a substantial share of property demand in Puerto Rico. Foreigners can freely buy property on the islands. It is important to hire a real estate agent as knowledge of Spanish is essential. A foreigner can alternatively buy through a corporation (US$300 for Corporate Resolution). Registering a property by a corporation can be completed in around 15 days.

Rental yields are good, but rental market remains volatile

Rental yields in Puerto Rico are good to excellent, averaging 8.42% in Q1 2024, according to research conducted by the Global Property Guide in February 2024.

But rental yields vary considerably by city:

  • In San Juan, apartments offer gross rental yields ranging from 4.22% to 10.26% in Q1 2024, with a city average of 5.75%.
  • In Ponce, rental yields for apartments range from 11.19% to 11.6%, with a city average of 11.39%.
  • In Caguas, rental yields range from 8% to 8.21%, with a city average of 8.11%.
  • In Mayagüez, apartments have gross rental yields between 6.08% and 8.88%, with a city average of 7.54%.
  • In Fajardo, rental yields range from 3.12% to 4.53%, with a city average of just 3.82%.

Despite good yields, Puerto Rico’s rental market remains volatile, with a vacancy rate of about 12.3%, up from 10% in 2010 and 7.4% in 2000, mainly due to continued population loss, according to the U.S. Department of Housing and Urban Development (HUD).

“Continued population loss in Puerto Rico has led to increasingly soft rental market conditions and rising vacancy rates,” said HUD.

San Juan’s average monthly rent for 2-bedroom apartments currently ranges from US$876 in Rio Piedras to US$3,100 in Condado-Miramar.

Round-trip transaction costs, i.e., the costs of buying and selling a property, are very low in Puerto Rico.

Tourism continues to grow strongly

Puerto Rico’s tourism sector continues to grow, welcoming a record-breaking 6.1 million passengers at the Luis Muñoz Marin International Airport in 2023. It represented a huge increase of 18.6% from the prior year.

The figure does not yet include the visitors arriving from the island’s two cruise ports, which welcomes over 500 ships annually.

“Puerto Rico’s travel sector has continued to break barriers and set new records in 2023,” said Brad Dean, CEO of Discover Puerto Rico. “I’m thrilled with our team’s achievements that consistently leverage data, thought leadership, and partnerships with key stakeholders in the industry and across Puerto Rico to further build the Island’s consideration for leisure, business and event travel.”

The island also recorded an all-time record high in tourism revenues, with US$9,8 billion in 2023, up by 13% from the previous year. An additional US$180 million was also generated from meetings and convention business last year – an increase of 20% as compared to 2022 and a whopping 49% from the pre-pandemic year of 2019.

Other indicators also point to the strong growth of the tourism sector:

  • More than 96,700 people are now employed in travel and tourism-related jobs – the highest ever recorded. The leisure and hospitality sector saw an increase of 21% as compared to pre-pandemic levels, according to the U.S. Bureau of Labor Statistics.
  • An increase of 7% in lodging demand and 14% in lodging revenues.
  • A satisfaction score of 98%, underscoring that visitors continue to enjoy their time in Puerto Rico.
  • Total registrations in hotels and paradores in Puerto Rico increased by 3.2% y-o-y to 2.53 million in 2023 – the highest recorded since 2016.

About 55% to 65% of visitor arrivals in Puerto Rico in the past five years came from the United States.

Tourism accounts for about 7% of Puerto Rico’s GDP.

Puerto Rico Total Registrations in Hotels and Paradores graph

Residential construction activity increasing

Cement production and sales, the construction industry’s key indicators, are both increasing, albeit at different rates.

  • Cement production rose by 8.6% y-o-y to more than 9 million bags in 2023, following annual growth of 11.6% in 2022 and declines of 29.5% in 2021 and 14.6% in 2020, according to the Office of the Commissioner of Financial Institutions (OCIF).
  • Cement sales increased slightly by 1.3% to around 14.7 million bags in 2023 from a year earlier, after falling by 6.8% in 2022 and rising by 12.5% in 2021 and 2.8% in 2020.

Puerto Rico Cement Production and Sales graph

Residential foreclosures increasing, but delinquent mortgages declining

In the first three quarters of 2023, residential foreclosures in Puerto Rico rose slightly by 1.2% to 1,960 units as compared to the same period in the prior year, according to the Office of the Commissioner of Financial Institutions (OCIF).

The total amount of residential units foreclosed during the said period totaled US$207.32 million.

Despite this, delinquent mortgages continue to fall. As of September 2023, there were a total of 346,903 delinquent mortgages in Puerto Rico, down by 2.6% from a year earlier. This was equivalent to about US$31.93 billion.

During the onset of the Covid-19 pandemic, residential foreclosures dropped sharply due to the imposition of moratoriums to help struggling homeowners. As a result, the number of foreclosures in Puerto Rico plunged by almost 78% y-o-y to just 911 units in 2020, in contrast to the 31.3% rise in 2019 and the lowest level recorded in recent memory. However in 2021 when the moratoriums were lifted, foreclosures surged again by a whopping 235.5% y-o-y to 3,056 units. Foreclosures fell again by 27.7% to 2,210 units in 2022.

The pre-pandemic level of residential foreclosures averaged 3,800 from 2008 to 2019.

Puerto Rico Foreclosures of Residential Units graph

Economic crisis, natural disasters, and the housing market

Puerto Rico’s recession began in the fourth quarter of 2006. GDP has grown very little or declined over the past decade, contracting every year from 2005 to 2018, with an exception in 2012 when the economy grew by a meager 0.03%.

Puerto Rico GDP Growth and Inflation graph

After huge annual house price increases in the early 2000s, the housing market came crashing down in 2008. But then the market continued down. House prices fell by more than 31% (41.3% inflation-adjusted) from Q2 2007 to Q3 2018.

There’s been high unemployment, massive emigration, and a near-catastrophic national debt crisis credit rating downgrades. Puerto Rico has lost about 20% of its jobs since 2007. The population shrank by more than 17% over the past 19 years (2004-23). Nearly half of Puerto Rico’s population lives in poverty, and household income is about US$18,000 annually – less than half that of Mississippi, the poorest U.S. state. And public health and retirement systems were insolvent.

Puerto Rico Population graph

The loss of net worth among Puerto Ricans associated with the collapse of real estate prices in the past several years has been close to US$ 30 billion, according to economic consulting firm Estudios Tecnicos’s CEO, Jose Villamil.

Puerto Rico’s economic collapse was accompanied by a banking crisis, with non-performing loans at elevated levels. Most of the problem was in the housing market, which represents about two-thirds of total loans, according to Scotia Bank. In 2006, before the crisis, the prime interest rate stood at 7.26%. It dropped to 3.25% in 2009 and remained very low since, but despite this about 80,000 families have been unable to refinance their loans and risk losing their homes.

Puerto Rico filed for the equivalent of bankruptcy protection in May 2017, unable to pay its massive debt or provide its citizens with effective services. With US$70 billion in debt and US$50 billion in pension liabilities, Puerto Rico’s bankruptcy filing was the biggest in the history of the United States, dwarfing Detroit’s US$18 billion bankruptcy filing in 2013.

Puerto Rico Government Gross Debt graph

As if Puerto Rico’s economic woes were not enough, Hurricane Maria struck the island in September 2017 – killing an estimated 2,975 people, severely damaging the island’s infrastructure, adversely affecting thousands of small businesses, and destroying nearly all agricultural production. The category 4 storm caused an estimated US$90 billion in damage. A total of 357,492 homes in Puerto Rico were damaged, according to the Federal Emergency Management Agency (FEMA). Overall, about 23% of the island’s housing stock was affected, with around a third of them located in the San Juan metropolitan area and other coastal counties.

In response to Hurricane Maria, the US Department of Housing and Urban Development (HUD) approved US$1.5 billion for the Community Development Block Grant-Disaster Recovery (CDBG-DR) Action Plan in July 2018 to assist in rebuilding. The grant includes US$1 billion for housing projects, US$ 100 million for infrastructure, and US$ 10 million for rental assistance to vulnerable households and the elderly.

Then in March 2019, HUD allocated another US$8.2 billion in funds to the program – the largest funding approved by HUD for the recovery after a disaster. Of which USD 2.85 billion is allocated for housing.

In 2021, US President Joe Biden approved another US$10 billion relief recovery funding for Puerto Rico for housing and infrastructure reconstruction, among other social programs.

In 2022, more than US$947 million in U.S. Bipartisan Infrastructure Law funding has been announced to be allocated to Puerto Rico. About US$566 million of which will be used to invest in roads, bridges, public transit, ports, and airports, and over US$78 million for clean water.

The Community Development Block Grant-Disaster Recovery (CDBG-DR) plan for Puerto Rico’s reconstruction also presents a huge opportunity for the construction industry, particularly for new housing construction.

At least twenty more hurricanes struck the islands from 2018 to 2023 but the damage was trivial when compared to Hurricane Maria.

The economy improved in 2019, registering a growth of 1.7%. However, it was immediately cut short by the pandemic, dragging the economy back to recession with a 4.4% decline in 2020.

The economy started to bounce back in 2021, registering a meager real GDP growth rate of 0.2%, according to the International Monetary Fund (IMF), followed by about 2% expansion in 2022.

Puerto Rico’s economy weakened again in 2023, with its real GDP contracting by 0.7%, based on IMF estimates. The economy is projected to shrink further by 0.2% this year.

The labor market remains strong. Unemployment stood at 5.7% in February 2024, unchanged from the previous month but down from 6% a year earlier. But it remains far above the U.S. unemployment rate of just 3.9% over the same period.

The jobless rate in the islands dropped to an annual average of 8.3% in 2017-23, from 16.4% in 2010 and 15.9% in 2011. Many of the new jobs are in rebuilding, which has created many construction jobs, and much of the improvement is in fact due to the emigration of labor. And we should remember that these additional jobs in construction are mostly temporary.

Puerto Rico Unemployment Rate graph

The Housing Stimulus Act

To rescue the island’s plunging housing market, former Governor Luis Fortuño implemented the stimulus program “Impulso a la Vivienda” (Act 152) in 2010. The idea was to cut home inventories and stimulate new housing construction. Even before the ratification of Act 152, a “combo program” allowed people to buy second homes at a reduced rate, through a US$25,000 incentive, plus a US$10,000 voucher covering closing costs.

Act 152 provides:

  • Loan-to-value mortgage ratios of 105%
  • A 100% exemption from net rental income tax, for a 10-year period.
  • A 100% tax exemption during a 10-month window, plus a 100% exemption from capital gains tax at the time of resale of the new property, and a 100% exemption from fees, stamps, and vouchers. There also is a 100% exemption on temporary property tax and a five-year exemption from property taxes.

Effectiveness of Acts 20 & 22 disputed

Two laws, which came into effect in early 2012, provided significant new tax benefits to foreign individuals and businesses relocating to Puerto Rico:

  • The Export Services Act 20 (now Chapter 3 of the Puerto Rico Incentives Code 60) offers tax incentives to export services.
  • The Individual Investors Act 22 (now Chapter 2 of Code 60) provides a total exemption from Puerto Rican income taxes on all passive income realized or accrued after becoming a bona fide resident of Puerto Rico. Aside from this, other benefits offered to residents include tax exemption on gains from sales of property acquired after becoming a resident. However, the tax exemptions will apply only if the individual is a bona fide resident of Puerto Rico and if they start the process of becoming one before January 1, 2036.

Then in December 2014, the government expanded the coverage of both Acts 20 and 22, expanding the period of tax exemption. On July 11, 2017, Act 45 further expanded Acts 20 and 22, adding “medical tourism services” and “telemedicine facilities” as eligible services under Act 20; abolishing the minimum number of employees required for most Act 20 businesses. In 2020, the two laws were consolidated into Act 60.

Recently, the government introduced a new “Test” in Act 60. According to the new Act 60 program, an individual with a tax exemption decree must purchase real estate property within two years of obtaining it. This property must also be the individual’s primary residence throughout the term of the decree.

However a decade since their introduction, some claim that these two laws have not generated the expected investments and job creation in Puerto Rico, causing them to lobby for their repeal.

However, the Economic Development Department (DDEC) remains supportive of the said laws. “Studies have shown that these laws have been positive for the economy of Puerto Rico,” said Carlos Fontán of DDEC. “They provide economic activity that we may not otherwise receive. Repealing these laws would give the false impression that Puerto Rico is not open for business.”

Based on a study conducted by Econometrika Corp. and commissioned by DDEC, Acts 20 and 22 created about 33,000 new jobs between 2012 and 2017. In the said five years, Act 22 attracted 1,332 individuals and their families to live in Puerto Rico while Act 20 approved another 781. This helped Puerto Rico to increase its employment rate by 3% and total production by 2%. 

The number of decree holders plunged in 2020 due to the pandemic but in the succeeding year, 579 additional decrees were approved under Act 22 and 710 under Act 20.

Since Act 20 was enacted in 2012, at least 3,198 tax exemption decrees were approved, according to the Puerto Rico Institute of Statistics. In addition, around 6,000 tax exemption decrees were approved under Act 22 since it was enacted, according to Carlos Fontan of the Puerto Rico Department of Economic Development.

Moreover, Puerto Rico’s government has also reformed the business permits system, to attract more investment.

Major reforms:

  • Effective June 7, 2019, new and existing businesses on the island can obtain a single permit, consolidating all licenses, authorizations, and certifications;
  • A Unified Information System for the filing and processing of permits, authorizations, licenses, and certifications for land uses and operation of businesses.
  • Time limits for the issuance of permits. Before the pandemic, getting building permits take only 20 days, on average, instead of 98 days four years ago.

Sources:

Puerto Rico - More data and information