As interest rates start to drop, Puerto Rico home sales to remain sluggish — for now
Sales fell 4% year-over-year to 10,479 units in 2023.
Interest rates may be on their way down, but it will be a while before Puerto Rico’s housing market bounces back from record-high inflation and interest rate hikes, according to market data and industry sources.
On Sep. 18, the Federal Reserve cut its benchmark interest rate by half a percentage point, lowering it to a range between 4.75% to 5%, down from a more than two-decade high. The Fed is expected to deliver another cut at its November policy meeting.
Because the rate establishes short-term borrowing costs for banks, it spills over into consumer products such as mortgages, auto loans and credit cards.
Mortgage rates, however, had decreased in the weeks leading to the Fed’s announcement in anticipation of the cut, and by Sep. 26, the 30-year mortgage rate had reached 6.08%, its lowest point in more than two years, according to Freddie Mac.
Mortgage rate projections
The industry is projecting mortgage rates to dip further, with the caveat that the mortgage market is influenced by various economic indicators, such as long-term bonds, particularly the 10-year Treasury yield, as well as the mortgage industry itself.
According to recent reports, Fannie Mae projects the 30-year fixed mortgage rate will average 5.7% by the fourth quarter (Q4) of 2025. The Mortgage Bankers Association anticipates 5.9% and Wells Fargo expects 5.55%.
Home sales to remain slow
For now, housing markets in both Puerto Rico and the U.S. mainland are projected to remain sluggish, according to multiple reports.
Existing-home sales in the U.S. declined 2.5% in August compared to July and 4.2% year-over-year, the National Association of Realtors reported last week.
Home sales in Puerto Rico fell 4% year-over-year to 10,479 units in 2023, according to the Office of the Commissioner of Financial Institutions (OCIF). Sales for existing and newly built houses dropped 2.7% and 17.6%, respectively. In terms of value, total home sales rose by 0.1% year-over-year to $2.03 billion in 2023, following an annual decline of 15.8% in 2022.
In 2023, the island’s seasonally adjusted purchase-only house price index rose 0.33%, following year-over-year growth of 2.49% in 2022, 9.72% in 2021 and 11.12% in 2020, Global Property Guide (GPG) reported, citing data from the Federal Housing Finance Agency (FHFA).
With interest rates still high and the local economy continuing to struggle, activity in Puerto Rico’s housing market should remain subdued during the remainder of the year, GPG said.
Puerto Rico’s residential real estate market
The real estate market in Puerto Rico is projected to reach $334.1 billion in 2024 and grow steadily at an annual rate of 3.13% to $389.7 billion by 2029, with the residential segment reaching $253.7 billion by 2024 and rising 4.12% yearly to $310.5 billion by 2029 (Statista, July 2024).
This growth is being driven in part by strong demand for luxury beachfront properties and increased interest by affluent international buyers who are attracted to the island’s coastal landscapes and generous tax incentives.
Buyers demand coastal luxury
Demand is very high for luxury real estate and beachfront properties, especially in tourist areas in San Juan, Condado and Isla Verde, Marian Hidalgo, real estate agent at Exp Puerto Rico and property inspector at Home Specs PR, told News is my Business.
“Luxury homes in Guaynabo and properties that need only a few fixes also are selling well. Outside the luxury segment, properties take longer to sell, but I think that will change because more people will be in a position to prequalify [for mortgages] as their acquisition power goes up in a lower interest rate environment,” she said.
Given market constraints, an increasing number of buyers are looking outside the coveted metro area.
“We’re seeing a lot of properties selling en la isla, something we didn’t see as much before. Exorbitant prices and lack of inventory in San Juan is pushing buyers to consider areas they normally wouldn’t consider, especially beachfront properties and those with short-term rental potential,” Hidalgo said.
Lower interest rates are no panacea
Wigberto Lugo, real estate broker at Gigi Realty PR, cautions against expecting too much too soon from the Fed’s cut.
“Just because interest rates just went down doesn’t mean that a sea of buyers is going to show up ready to buy. Prices have been steady — they’re high and continue to rise. Anyone who tells you that they’re not is wrong,” Lugo told News is my Business.
Higher interest rates have discouraged not only buyers but also sellers from putting their homes on the market. Many homeowners saw their property values balloon in the post-COVID market and considered selling their homes, until they realized their predicament as would-be buyers in that same or similar market.
“They found themselves with nowhere to go because home prices had increased just as much everywhere they looked, and they didn’t want to give up their current mortgage, which they got when the rates were lower — maybe 3.75% or 4% — for one that would now be almost twice as expensive at about 7%,” Hidalgo explained.
It’s a case of golden handcuffs, said Lugo.
“The people who bought right before the pandemic are in golden handcuffs. They’re paying, let’s say, a 3% interest rate on something that right now appraises for twice what they bought it for. They can sell it, but what are they going to do? Where will they go? You’re not going to find anything better,” he said.
As interest rates continue to decline in the coming year, more buyers will likely enter the market seeking to take advantage of those lower rates, Hidalgo said.
“That means demand will increase, inventory will shrink and prices will go up again. And while in recent months the market was behaving like a buyer’s market — because not everyone can qualify at 7% and buy at such high prices — it will again be a seller’s market,” she added.
Extreme competition
Lugo’s clients tend to be young professionals looking to become first-time homebuyers. But intense competition and extremely high prices in the metro area — San Juan, Guaynabo, Caguas, Bayamón and Carolina — are forcing them to change their plans.
“Right now, it’s such a competitive market, especially in Guaynabo and San Juan, that many owners are selling their homes above the appraised value. Young professionals and first-time buyers can’t afford these prices, so they’re staying home with their parents,” he said.
“You can’t find anything decent under $300,000. If you list something at a good price, people will snatch it from your hands. You get 20, 25-plus offers. At a price point under 350 or 300 is where you see the bidding wars,” he added.
To find a good deal, Lugo advises homebuyers and investors to look off-market.
“You have to find something outside of the market, something abandoned or something that needs work, so you can flip it. Otherwise, the pricing, the math, doesn’t work,” he said.
There’s also a psychological component hindering many buyers.
“Some people have the money to buy something now, but they don’t want to pay $250,000 for something that a couple of years ago was valued at $125,000,” he said. “The question becomes: Do you really need to move?”
Post-COVID, post-disasters
The COVID-19 pandemic profoundly changed housing markets in many ways, including shifting certain priorities.
“During the pandemic, people who lived in apartments found themselves stuck in a box, wishing they had more space, a yard and a better view. So now, all things being equal between a house and an apartment, they buy the house,” Hidalgo said.
Lugo agreed: “That’s a big reason why people move, in addition to the comfort factor. They’re trying to find their dream home because they don’t know when they’ll have to spend four months stuck in their house, and they’re willing to spend more for a property that checks all the boxes.”
A power grid damaged by a string of hurricanes and earthquakes also has changed buyer behavior.
“There’s a big boom of people seeking to leave apartments for single-family homes because of the instability of electrical service,” Lugo said. “You can’t have a power generator in an apartment, and you can’t use the roof for solar panels because it’s common property, so that makes it difficult to get alternative energy.”
