Estudios Técnicos: Puerto Rico has ‘very serious’ housing affordability problem
High interest rates and rising home costs are exacerbating the problem.
The Affordable Housing Index, prepared by Puerto Rico-based economic research firm Estudios Técnicos Inc., continued to show housing affordability issues on the island at the end of 2023.
The firm cited a 28% increase in the cost of newly built dwellings over the last year and high mortgage interest rates as the main barriers preventing families from purchasing homes.
Economist Leslie Adames, director of Economic Analysis and Policy at Estudios Técnicos, noted, “The value of the affordable housing index fell for the 10th consecutive month in December 2023, standing at 58%, after reaching a value of 74% in February 2023 and 104% in July 2021.”
“In other words, someone who would have wanted to apply for a mortgage loan in December 2023 would only have 58% of the income required to qualify for said loan, which really represents a very serious affordability problem in the real estate market,” Adames explained.
The Affordable Housing Index assesses if a typical family, making a 20% down payment, qualifies for a mortgage based on median income.
A value of 100% indicates that the family has the necessary income to qualify for a loan based at the average market price. A value greater than this threshold suggests they have more than sufficient income to qualify, while values below that threshold reflect the opposite.
The rising costs of housing units are a key factor limiting the availability of affordable housing on the island.
According to the Puerto Rico Office of the Commissioner of Financial Institutions (OCIF), the median sales price of new units increased by 28% annually, from $248,599 in 2022 to $318,762 in 2023. The increase for previously owned homes was a modest 2% annually, from $179,357 to $182,999 during the same period.
“While construction material costs have increased at a slower pace than observed between 2021 and 2022, they still remain above pre-pandemic levels, affecting construction costs and the prices of new units available for sale,” said Adames.
“On the other hand, excess demand relative to housing supply also continues to contribute to price increases in the used housing segment. If the influence of these factors persists, significant adjustments in sales prices that favor affordability in the local market should not be expected,” the economist said.
Adames also mentioned that the affordability issue is compounded by difficulties in accessing financing due to high interest rates. He indicated that there is little chance of a significant decrease in mortgage interest rates for the remainder of the year, noting that the Federal Reserve expects the reference Fed fund rate to remain at 5.25-5.50% until inflation reaches 2%.
“Even if the Federal Reserve were to lower the benchmark rate by about 25 basis points in the second half of 2024, there’s a possibility that long-term interest rates will remain above what they were before the pandemic due to several factors, which include the delicate fiscal and debt situation faced by the federal government, the implementation of quantitative tightening by the Fed, and the excess supply of Treasury bonds in the market,” he added.
“The 30-year fixed mortgage interest rate increased from 5.34% in 2022 to 6.81% in 2023 and had already been at 7.16% during the first two weeks of May. In 2023, 10,479 units of new and used housing were sold compared to 10,915 in 2022 and 13,289 in 2021, resulting in a cumulative reduction of 2,810 units over the last two years,” he concluded.
