Index: Puerto Rico’s housing affordability continues to deteriorate
The affordability problem is attributed to the increase in prices and high interest rates.
The Housing Affordability Index, prepared by Estudios Técnicos Inc. (ETI), continued to show a sustained deterioration in housing affordability during the first months of 2024.
“The deterioration in the level of affordability shows no signs of letting up. The index fell from 70% in the first quarter of 2023 to 54% in the first quarter of 2024,” said Leslie Adames, director of Economic Policy and Analysis at ETI.
In other words, someone who wants to apply for a mortgage loan today would only have 54% of the income required to qualify for such a loan.
The Housing Affordability Index measures whether a typical family that contributes a 20% down payment toward the purchase of a home qualifies, based on median income, for a mortgage loan.
A value of 100% means the family has the income necessary to qualify for a mortgage loan based on the average prevailing market price. A value greater than this threshold means the family has more than enough income to qualify, while values below reflect the opposite.
The average price of homes sold continues to put pressure on affordability. According to figures released by the Office of the Commissioner of Financial Institutions, the average home price increased by 25%, from $179,649 in the first quarter of 2023 to $224,484 in the first quarter of 2024.
There were notable price increases in both market segments — new and used homes. For example, in the new home segment, the price increased by 36% annually, from $262,301 in the first quarter of 2023 to $357,492 in the first quarter of 2024. In the used home segment, it increased by 24% from $173,114 to $214,304, respectively.
The increase in housing prices and the rise in the 30-year fixed mortgage interest rate have contributed to a significant reduction in unit sales, from 3,326 in the first quarter of 2021 to 2,469 in the second quarter of 2023 and 2,255 units in the first quarter of 2024.
“This situation is worrying,” said Adames. “The problem is that as long as the housing shortage in the market relative to demand continues, pressure on prices will persist, limiting the opportunities for certain segments of the population to acquire homes.”
Adames added that although the market expects the Federal Reserve to reduce the Fed Fund rate by at least 25 basis points in September, this will not necessarily imply a material reduction in the mortgage rate to pre-pandemic levels (average of 4% between 2010 and 2020).
While changes in monetary policy can affect long-term rates, including mortgage rates, other factors may prevent mortgage rates from normalizing to pre-pandemic levels.
“The federal government’s fiscal situation, recent issuances of Federal Treasury bonds, the gradual reduction of the Federal Reserve’s balance sheet, and the reduction in the savings levels of baby boomers could keep long-term interest rates high with a possible normalization to pre-financial crisis levels in 2007-2008. In the case of the 30-year fixed mortgage interest rate, this would imply rates above 5.0%, which is not at all encouraging,” Adames said.
