Puerto Rico’s Stagnant Economy Keeps Banks, Real-Estate Under Pressure
With mortgage rates still close to historic lows and an increasing number of foreclosed and empty properties available throughout Puerto Rico at reduced prices, it’s definitely what Realtors call a buyer’s market.
However, the supply of homes is larger than the demand, as there are very few viable homebuyers left with good credit out there.
Puerto Rico’s lingering economic downturn—now in its 10th year and with few signs of improvement—plus the rapidly shrinking population as a result of the large migration of young, working-class professionals, are pushing the number of foreclosed properties on the island this year to a new record high.
By the same token, the volume of mortgage-loan originations is at an all-time low, down to about $700 million as of June 2016, from a 10-year high of $1.9 billion set in March 2008.
In similar fashion, the sale of new housing units has dropped significantly, from a high of 13,336 units set in 2006 to a low of 2,343 units in 2015.
How bad is it?
There were a record 4,459 foreclosures in 2015, and the latest 12-month projection from the Puerto Rico Financial Institutions Commissioner’s Office (OCIF by its Spanish acronym) points to this year closing with a new record of 4,794 foreclosures, up 335 cases, or 13.4% over 2015.
In terms of mortgage delinquencies—mortgage loans 60 to 90 days overdue—the island’s rate is at 13.86%, or nearly three times the national average of 4.77%.
The number of homes in the different stages of the foreclosure process hover around 18,300, valued at $2.5 billion, according to OCIF. However, that number continues to be fed from the nearly 25,000 mortgages that are 90-days delinquent, plus another 8,662 cases that are 60-days delinquent, as of July of this year.
A mortgage formally enters the foreclosure process after being 120-days delinquent. However, that process can take between 18 to 24 months as it passes through the legal system.
It’s the economy…
For Silvio López, president of the Puerto Rico Mortgage Bankers Association (MBA), the situation with the island’s real-estate market is a clear reflection of Puerto Rico’s economic situation.
“There are several issues that really concern me. One is the migration of Puerto Ricans and its subsequent reduction in population, and the low 40% labor-force participation rate. This is about Economics 101, simple supply and demand…. It basically means the number of individuals who can actively participate in the local real-estate market and need a mortgage loan is more limited with each passing day. In addition, the many regulations that have been imposed on the industry have affected credit availability, not just here, but in the mainland U.S. as well,” López commented to Caribbean Business.
According to the Puerto Rico Statistics Institute, nearly half a million Puerto Ricans have left the island since 2005. About 64,000 Puerto Ricans left last year, matching the highest number reported in 2014 for the past 11 years, the Statistics Institute said last week.
As a result, López added, the number of mortgage-loan originations over the past 10 years has been reduced significantly. And while property values have stabilized after falling as much as 40% in certain areas, there’s still downward pressure, he said.
On the positive side, mortgage rates remain low, and while the Federal Reserve has plans to raise interest rates, López believes there are homebuyers who can still seize market opportunities.
“Having low mortgage rates does several things. First, clients that can refinance their properties can get relief from their financial situations. We know the finances of many families has been affected, so there’s still an opportunity, because as I look at mortgage portfolios, I see many individuals who haven’t taken advantage of benefiting from lower interest rates and monthly payments,” López said.
In addition, there are investors buying properties, especially in those core segments where there’s still demand and a need for housing, which is anything below $200,000, López indicated.
Household formation down due to massive migration
According to economist José Joaquín “Joaco” Villamil, chairman of Estudios Técnicos Inc., about 50% of local emigrants have been individuals below the age of 25.
“This has had a major impact on household formation, which is the key variable in determining housing needs,” he explained to Caribbean Business.
From an annual average of around 21,000 new households in the period between 1970 and 2000, the average fell to 11,000 new households during the 2000-2010 period. Villamil warned that in this decade it could go down even further to 7,000 new households per year.
“Property values have fallen by 25% on average, although there are some zones in which there has been appreciation, mostly due to new entrants in the real-estate market associated with Acts 20 and 22,” he said.
Most of the new construction is for housing with prices below $200,000, and in San Juan, there is only one market-rate project under construction, Ciudadela’s Phase III, Villamil commented.
Not a public-policy issue
When asked what can be done in terms of public policy to decrease the number of mortgage foreclosures on the island, OCIF Commissioner Rafael Blanco said this is clearly not a public-policy issue, but an economic one.
“This isn’t a legal or political problem. The Legislature can’t fix this unless laws that foster economic development are enacted,” Blanco told Caribbean Business. “As long as the economy doesn’t grow and unless there’s an inflexion point, we will continue to have this problem.”
Nevertheless, he noted that local banks, as well as the Federal Deposit Insurance Corp., have done several things to tackle the high levels of foreclosures, including the sale of delinquent properties in bulk to hedge funds as well as open public auctions.
Coincidentally, www.auction.com will be conducting an online action Sept. 24 for 204 foreclosed residential properties in Puerto Rico, with most of them being owned by local banks.
Due to the island’s economic situation, many individuals and families have seen their incomes slashed. There are many cases where both spouses qualified for a mortgage, but one of them lost their job, or is no longer in the household to contribute financially, Blanco said.
“The situation has worsened with the large number of people who have migrated, leaving their unpaid homes and vehicles behind at the airport on their way out,” the local bank regulator indicated. “Nevertheless, I am confident that once the fiscal control board starts tending to our fiscal matters and the [congressional] task force deals with our economic issues, this will instill a certain level of certainty and, therefore, help the island’s economy.”
With so many foreclosed properties, home values have gone down and now a new phenomenon has emerged that has not happened on the island in a long time: properties under water, whereby the mortgage owed to the bank is higher than the property’s value in the market, Blanco explained.
“That’s one of the reasons, especially between 2005 and 2008, that many properties were sold with no down payment, with 100% financing. These are now the people who have no motivation to continue making payments because they see no economic benefit. Ultimately, they end up having their properties foreclosed and renting elsewhere or leaving the island altogether,” he said. “By the same token, there’s a group of investors that sees as attractive to buy now, with low prices and mortgage rates, but with the threat these could go up. It’s a buyer’s market and this is the only positive thing about it.”
Many people may criticize it, but Blanco said banks’ loss-mitigation programs have had a positive impact on the housing market. While there have been over 4,000 foreclosures every year, loss mitigation has saved an average of 13,000 homes each year, he noted.
“Last year, 13,173 homes were saved through loss mitigation and so far this year, we’ve had 7,000 cases, so we should end this year with about the same number as last year. In 2014, there were 20,900 cases and another 22,000 in 2013,” Blanco added.
Office and commercial space affected too
The lingering economic slump and the migration of working-age individuals have also affected the island’s office and commercial real-estate market.
An estimate made recently suggested there was some 2 million square feet of empty office space in the San Juan-metro area, which includes San Juan, Guaynabo, Carolina, Bayamón and Cataño.
“The problem with the office market is that once a space is made available, it isn’t absorbed because of two factors—low demand from the service sector and staff reductions due to cost containment or technology,” Estudios Técnicos’ Villamil pointed out.
Class A and B office buildings have reduced rates and offered incentives to attract tenants, and the nature of these incentives and lower rents is dependent on location and specific buildings, he indicated.
“Firms move from lower-class buildings because of these lower rents, but the other properties remain unoccupied. The traditional market dynamic was that newly formed firms would occupy these empty properties, but this isn’t happening,” Villamil said.
The result, he added, is the very rapid deterioration of urban neighborhoods that then generate a fall in property values.
Villamil indicated average commercial property values have so far fallen significantly to at least half of the assessed values 10 years ago. Location and the specific property are important in setting values, he said.
“What has become a major problem in some urban areas is the number of abandoned properties and their almost immediate deterioration. This makes the immediate area undesirable and, in some cases, unsafe. This is why amending the public nuisance legislation to make expropriations easier and the process of turning over these properties to private-sector developers is so important, since this could mitigate the high costs of construction that have been an obstacle in recent years,” Villamil pointed out.
Although there are no official statistics on vacancy rates in the commercial sector, he said the fact that retail sales have been stagnant and have fallen in the past year is consistent with recent work done by Estudios Técnicos concerning the matter.
There are variations between the San Juan-metro area, where vacancy rates are much lower, and the rest of the island and between covered and strip malls. In the metro area, vacancy rates in covered malls remain fairly low, but in strip malls outside San Juan, they reach 25%, Villamil noted.
“There’s no new commercial construction of any significance taking place, although Planning Board procedures are holding up a major project in San Juan’s Hato Rey district that would include retail facilities and a hotel,” he said.
Popular launches two initiatives to move repos, help first timers
Wage reductions, layoffs, bankruptcies, divorce and health issues have hampered homeowners’ ability to pay their mortgages.
At the same time, those same challenges have affected the ability of some to qualify for their first home.
Banco Popular, the island’s leading bank with about 1,600 repossessed homes on its books, launched in April two innovative programs to not only reduce the number of repossessed homes in its inventory, but also help those unable to qualify to become homeowners.
Popular created the “deShow” initiative last year as a pilot program to manage its inventory of repossessed properties, which have remained empty, unsold and in need of repairs.
“For the past year, we’ve been working with several ideas, trying to understand what was impeding potential buyers from acquiring a home. The deShow program is a new vehicle that will improve the chances of homeownership on the island,” Gilberto Monzón, executive vice president of Popular’s individual credit group, explained to Caribbean Business.
Through deShow, Monzón said Popular will invest an average of $10,000 for repairs on each eligible repossessed property to bring it up to market value, so it is ready for sale and to move in right away.
Between 800 and 1,000 of these properties, with about $120 million in value, will be eligible for the deShow program, while the remainder will be available for sale “as is,” he explained.
About half of the homes under the deShow program are valued under $100,000 and located throughout the island, Monzón said.
‘Rent to Own’
About 400 of Popular’s repossessed homes will be available for the bank’s Rent to Own program, the first of its kind on the island. Through this program, an individual can rent the property through a pre-established period (typically 18 months) and 11% of the rental payment goes toward the property’s downpayment, explained Alex Flores, deShow first vice president.
The rental amount is intended to be similar to that of a mortgage payment to create good payment habits.
“The program has an educational component that provides tools to help prepare the individual to achieve or re-establish an ability to pay. This program is aimed at potential first-time homebuyers with bad or no credit history,” Flores said.