Puerto Rico’s housing market remains weak

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.

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.

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.

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.

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%.

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.