So Many Properties are for Sale
Hmmm. Got plenty of great buys. So where are the buyers?
Housing Falls Producing Unbelieveable Values.
The island housing market's precipitous fall.
New-home sales sank 43.7% during the first quarter as uncertainty over government layoffs and the local economy kept potential buyers on the sidelines. Can the downward spiral be stopped?
No matter where you look-either by driving around the neighborhood, browsing local real-estate websites, checking the newspapers or visiting new developments-residential and commercial properties hung with "for sale" signs are practically everywhere.
The high number of unsold new units on the block, estimated at 10,000 to 13,000, definitely makes it a buyer's market. Despite low mortgage rates, incentives from developers, banks and the government, and the vast pool of properties from which to choose at knockdown prices, there are simply very few takers.
Rafael Bonnin of McCloskey, Mulet & Bonnin Appraisers
In the Condado area, for example, where an average of 60 to 65 new apartment units were sold each year between 2000 and 2008, only five units were delivered so far this year through May, from a total of nine new residential projects. In contrast, 136 units were delivered last year during the same period, said Rafael Bonnín, a partner at McCloskey, Mulet & Bonnín Appraisers.
"So far this year, the local housing market is basically paralyzed in the different market segments," Bonnín said. "The market for homes priced $500,000 and up is being absorbed even more slowly, one or two units a month."
In the Caguas and Gurabo areas, for example, in May, there were 249 units under construction valued at $500,000 and up, of which 159 were unsold and 11 optioned, according to Bonnín.
In the San Juan and Guaynabo areas (excluding Condado), there were 3,500 units under construction (mostly condominiums) by the end of 2008, of which 1,400 were optioned and the rest unsold. That number, according to Bonnín, likely hasn't changed substantially since then.
Gisela Castro, TIRI Real Estate
Gisela Castro, president of TIRI Real Estate (Trans Indies Real Estate Corp.), one of the island's leading real-estate firms, noted that in the case of Condado, where there's an unusually high number of unsold units in the higher price ranges ($500,000 and up), developers will have to continue to adjust prices downward in order to sell.
"Developers had been giving away money, which homebuyers could use for down payments, closing costs, appliances or furnishings, but that got to the point where it wasn't enough to sell the property. As a consequence, what developers are doing right now is lowering their sale prices," Castro said. "Projects with units that used to sell at $1 million are now being offered for $900,000."
Castro estimates new-home prices have dropped on average 15% to 20% this year depending on location and price range. At Gallery Plaza in Condado, for example, where condominium units were originally available at around $500,000, the developer first lowered the price to $399,000 and now is offering them at $389,000, Castro indicated.
The downward trend is mirrored in such areas as Dorado and Guaynabo.
"Apartments that used to sell for $575,000 are now going for $400,000 and, in some cases, lower," Castro said.
At Senderos de Montehiedra, in southern San Juan, new single-family homes that originally sold for $800,000 are now available for $600,000, she said.
Home sales take deep slide
According to the Construction & Sales Activity Report by local consulting firm Estudios Técnicos Inc. (ETI), the number of units sold between January and March of this year sank 43.7% in the first quarter when compared with the same period in 2008. Sales have declined steadily since, reaching a peak of 2,948 new units in the second quarter of 2008.
From there, the number dropped 12.9% in the third quarter of last year (2,567 units), another 21.2% in the fourth quarter of 2008 (2,023 units) and again at 36.3% in the first quarter of this year, with only 1,289 new units sold.
Housing Sales by Quarter
Since the peak in the second quarter of 2008, sales of new-housing units have declined an astounding 56.2%.
The biggest drops in unit sales during the first three months of the year took place in mostly working- and middle-class Carolina, with a decline of 84%. The San Juan-Guaynabo regions registered a whopping 67.6% decline with only 90 new units sold compared with the 278 units moved in the fourth quarter of last year. Some 43% of all units sold in the San Juan-Guaynabo regions during the first quarter were in the $150,000 to $199,000 price range, and 38% were priced $300,000 and over.
By price range, 50% of the units sold islandwide during the first quarter of this year were in the $105,000 to $199,000 range, with those in the price range of $150,000 to $199,000 accounting for 26% of total sales. Single-family homes dominated the market at 60% of the total, followed by high-rises (20%), walkups (16%), villas (3%) and mixed projects (1%).
Silvio Lopez, Banco Popular
All price segments in all geographic markets on the island have been affected by the housing slump, Silvio López, vice president of Banco Popular's construction group, said, adding the lower-price housing developments have a far greater chance of selling than those units in the higher-price brackets. The costlier the unit, the longer it takes to get it sold.
In the Bayamón region, some 257 new-housing units were sold in the first quarter of this year versus 414 units during the same period in 2008. The Caguas region remained flat at 194 units sold, while 63 units were sold in the Fajardo region during the first three months of this year versus 110 during same period in 2008. In the Humacao region, 66 units were sold versus 379 in 2008. The Guayama region saw 35 units sold during the first quarter versus 96 during the same period in 2008.
Home sales in the Aguadilla region tanked during the first quarter of this year, with 44 units sold versus 58 in 2008. In the Arecibo region, 144 units were sold during the first quarter of 2009 versus 102 in 2008 and, in the Ponce region, 277 units were sold during the first quarter of 2009 versus 155 during the same period in 2008.
In Hato Rey near San Juan's financial district, only three housing units (all apartments) sold during the first quarter versus 40 units during the same period last year.
SJ-Guaynabo Housing Sales by Price SJ-Guaynabo Housing Sales by Quarter
Downward trend expected to continue
Rafael Rojo Home Builders Association presidentWhat really concerns Rafael Rojo, president of the Puerto Rico Home Builders Association, isn't the steep drop in sales of new housing during the first quarter compared with last year's sales, but the steady decline registered for three-consecutive quarters and the risk that things could worsen.
"If that trend continues and sales don't pick up, by the time the second quarter ends June 30, the decline in sales could fall another 25%. We are talking about serious numbers here," Rojo warned.
"On many occasions, we say things are at a standstill and people may think we are exaggerating but, in this case, the market is really reaching the point of stalling."
The fall in new-home sales actually dates back to before last year's high mark in the second quarter.
The local housing market reached a peak in the 2006 calendar year with 13,546 new units sold, dropping to 11,099 in 2007 and 9,826 in 2008. Since 2007, mortgage originations have dropped sharply, delinquency rates have increased and banks have tightened their credit requirements.
PR Housing Sales by Price PR Home Sales by Price
"There's certainly enough excess inventory out there to last several more years, especially at this sales rate. It will take too long, actually," said Jay Casalduc, general manager of FirstMortgage. Rojo indicated the industry is obviously concerned about the slump in sales but, at the same time, hopeful that once consumer confidence is restored, home sales will pick up again.
"There is still a demand and need for housing on the island, but there is no certainty. Consumers are scared with what's happening with the economy right now," Rojo said.
Rojo noted slumping homes sales have already taken a toll on several developers, who have been forced to turn over projects to their banks while others have gone out of business altogether or filed for bankruptcy.
"There is no question we are already seeing those types of cases on the island. If banks begin to foreclose on projects on a larger scale, it is going to be extremely difficult for the industry to recover, as the effects will be long-lasting," he warned.
Developers who had second and third phases of their current residential projects in the pipeline have been forced to put them on hold indefinitely because they haven't been able to completely sell the current inventory of newly built homes.
The effect on the economy of the housing slowdown isn't limited to a surplus of new units sitting empty. New building has slowed to a crawl, taking a toll on much-needed jobs and sales of cement, tiles and other construction supplies.
"What we are seeing in the housing market is a reflection of what everyone is experiencing with the island's general economy. It is a very challenging environment to say the least," López said. He added the numbers from the ETI report coincide with those from the bank.
López said a trickle of potential homebuyers continue to visit the new-housing developments, but the vast majority of those visits aren't turning into optioned home sales.
"At the end of last year, which we labeled as a very complicated one, I estimated this year was going to be more challenging, but I can honestly say it is turning out to be much tougher and challenging than anyone expected," López said.
Even the number of developers looking for construction financing at the bank has declined considerably, López noted.
"We still have meetings with some developers regarding their new projects, but they certainly aren't knocking on my door with lots of new projects. Their main concern right now is to sell their existing projects," he said.
With the much-touted $5 billion federal stimulus money yet to be felt in the island economy in a substantial way and most other industry sectors slumping, consumers remain very conservative about spending and skittish about Puerto Rico's economy, López indicated.
By the end of March, the island's inflation rate had edged up 6%, the unemployment rate climbed to 14.7%, auto sales were down 25.5%, cement sales had declined 30%, delinquencies at banks reached 8.97%, bankruptcies increased 10%, exports declined 9.9% and imports dropped 14.1%. In other words, the nearly four-year-old criollo recession isn't showing signs of easing up.
Efforts ongoing to get market moving
FirstMortgage's Casalduc said the few home sales that are taking place rely on markdowns, offers and incentives provided by developers and low-interest rate financing deals by banks, but the financial institution has yet to see any clear signs of recovery in the new-housing market.
"We see a slight improvement in traffic at the projects, although not significantly more than three to six months ago. A slight increase, but nothing significant that would indicate improvement," Casalduc said.
Developers may have plans for the construction of new housing, but very few are seeking financing for them, according to Casalduc.
"Developers are focusing right now on their existing projects and how to sell them," he noted.
López said Banco Popular is evaluating the very few new cases that come in very carefully, to protect not only the bank but also clients against a residential project that, down the line, could become a problem.
Developers and banks have integrated ongoing efforts to help the market absorb the excess inventory through increased sales. Banks are offering historically low-interest rates on mortgages. There are sales promotions, advertising efforts and open houses. Developers are offering great incentives such as electric appliances, paying the down payment and even the closing costs, in some cases in conjunction with banks.
"There still is traffic, but it isn't enough. We need to stimulate the sale of existing homes more so current homebuyers can move up and purchase a new one," Casalduc said.
SJ-Guaynabo Home Sales by Price 1Q'09
A perfect storm
Without question, the main element affecting the local housing market right now is consumer uncertainty over job stability (especially in the government sector) and the state of the local economy. Potential homebuyers are also apprehensive about buying now for fear they will pay more in property taxes (expected to double) and higher legal fees on mortgage-related transactions.
"All these government-layoff announcements have many people nervous. Every week, all we hear about is the layoffs. It is a negative message of uncertainty that has the housing market very nervous. You suddenly have 30,000 government employees, many prospective homebuyers, who don't know if they are going to be next. Suddenly, you have 30,000 public employees out of the housing market because they aren't going to make a long-term investment in this cloud of uncertainty," Rojo said.
In addition to the potential 30,000 government employees expected to be laid off by the end of the calendar year, Rojo said it must be noted that another 7,000 or so private-sector employees have lost their jobs over the past year.
"Certainly, the same fear is in the private sector as well," he added. "It is very difficult to sell a long-term investment such as a house when there is this cloud of uncertainty over the market. We haven't reached bottom and, until that happens, consumers won't come out to buy a home."
Rojo said several other elements have combined to pull the local housing market down to its current point. These include a flawed new-housing incentives program and costlier mortgage-related transactions, thanks to a new and controversial Notary Law enacted late last year.
Banking on incentives
"First of all, there is no doubt last year's housing-incentives program was a success as nearly 10,000 residential units were moved out of the inventory. Had the government not provided the incentive, we would probably have a more serious problem on our hands right now," he said. "Moving that inventory had a positive effect in avoiding a much bigger collapse of the market."
The housing-incentives program of the previous administration provided a tax credit of 20%, or up to $25,000, for the purchase of a newly built home or apartment to be used as a main residence; up to 10% of the sale price, or up to $15,000, for the purchase of a newly built home or apartment to be used as a second home; and up to $10,000 for the purchase of an existing home or apartment. The government allocated $220 million of taxpayers' money for the tax credits for new residential purchases.
Unfortunately, by the time the incentives program expired late last year and the Fortuño administration unveiled its replacement, local consumers were already "spoiled" by expectations of an incentive without having to give anything in return, Rojo said.
"Breaking away from that was very hard for consumers, no doubt about it," he added.
The Fortuño administration's plan included a $24 million government contribution to establish a $240 million fund with the private sector to assist eligible families in obtaining $25,000 toward the acquisition of a new home or $10,000 for an existing home. The money would be used as a down payment and obtained through a second mortgage on which homebuyers wouldn't have to make payments on the principal or interest during the first 10 years of the loan.
Rojo credited the new program as "extremely creative and efficient" since it addresses two of the main difficulties faced by potential homebuyers right now-no money available for a down payment and difficulty qualifying for a mortgage. However, the program as approved early this year, had many flaws and restrictions which, basically, limited its scope and market, thus rendering it inoperative, he said.
Among other things, the new incentives program prohibited owners from renting the property and barred investors from participating.
"Through an involuntary error, legislators wanted to regulate the interest rate on the second mortgage by setting a fixed rate and forcing the first mortgage to be higher than the second, therefore making the program obsolete," Rojo said.
Gov. Luis Fortuño signed amendments to the law two weeks ago correcting the interest-rate issue on the second mortgage. "The fact that the program was fixed is a positive element looking forward, and we hope it will improve sales," Rojo said.
López also believes the new housing-incentives program is a good one and should help boost home sales, but it will all depend on how it is relaunched and remarketed and how it will be perceived by consumers. "We remain hopeful," he said.
Meanwhile, Casalduc insisted the program has its benefits, and the bank plans to promote it at specific projects.
"It will all depend on the project. The incentive really helps those projects in the lower price ranges, but when it is a higher-price unit, the assistance provided by the incentives program isn't meaningful enough," Casalduc said. "Twenty-five thousand dollars has a much greater effect on a $150,000 purchase than on one that is $500,000."
Notary Law bogging down sales
Another element that has hindered the local housing market is the new Notary Law, which was signed by then-Gov. Aníbal Acevedo Vilá in August after it was passed by both legislative chambers on the last day of session.
In a nutshell, the law sets a nonnegotiable fixed 1% rate on the legal fees notaries charge for mortgage-related transactions. Although the 1% fee has been the industry standard for years, banks and notaries previously had negotiated a fee based on volume, with notaries usually charging a 0.5% fee that is included in the good-faith estimates provided by the financial institutions.
Rojo said the aggregated costs the notary law imposes on home mortgage-related transactions increase substantially, making it more difficult for consumers to become homeowners. Although there have been discussions about reverting to the negotiated fee based on volume, the Legislature has yet to act on it, Rojo said.
For homebuyers, 2009 is the year of opportunity Gisela Castro TIRI Real Estate
There is no question the island's economic crisis is keeping many consumers from buying a home. However, for those in the market for a residential property, the time couldn't be better.
"I see it as the year of opportunity for those wanting to be involved in any real-estate transaction right now, whether it is for a new or existing home or apartment. You can't find a better buyer's market than the one we have right now," said Gisela Castro, president of TIRI Real Estate, one of the island's leading real-estate firms. "In a buyer's market, it is the buyer who calls the shots and gets a better deal."
Castro pointed first to mortgage rates that are near historic lows, ranging between 5.5% and 6.5% for a 15- or 30-year fixed loan, depending on the lender.
"We also have an increase in the Federal Housing Administration [FHA] maximum loan limits. Now, a homebuyer can qualify more easily for an FHA loan, because they aren't as strict with clients' credit rating scores," Castro said.
FHA loan limits in Puerto Rico have gone up to more than $600,000 from around $250,000, meaning homebuyers can purchase a more expensive home through an FHA loan with a nice interest rate and a low down payment, ranging from 0.625% to 5.75% of the total loan amount.
"That basically is what a potential homebuyer could get through a conforming or conventional loan, but without their additional restrictions," Castro explained.
In addition, homebuyers have the new local housing-incentives program, where eligible families can obtain $25,000 toward the acquisition of a new home or $10,000 for an existing home. The money would be used as a down payment and obtained through a second mortgage on which homebuyers wouldn't have to make payments on the principal or interest during the first 10 years of the loan.
"That is on top of the price reductions homeowners and developers are using on their properties to help them sell. These definitely help the buyer obtain a property at a better price. Developers and financial institutions are also offering to make the down payment, closing costs or even the monthly payment for the first few months, while others provide the kitchen appliances and air-conditioner units with the purchase of a new property," Castro added.
Existing properties purchased at least five years ago, which have gained equity, have a greater chance of selling in this market, even if home prices have come down over the past couple of years, Castro noted.
"Owners of these homes will be able to sell their property at a gain, but not as high as five or six years ago. However, something is better than nothing," she said.
Homeowners most likely to confront greater difficulties selling their property right now are those who purchased less than four years ago, have a large amount financed and are confronted with the problem of owing more to the bank than what the property is worth in the market right now, Castro said.
Rental an option for homeowners
For those homeowners who haven't been able to sell their property, Castro said her real-estate firm offers the option to rent or lease the property until the market improves down the road.
"Even if they rent the property for half of what their monthly payments are, they will still come out ahead because they aren't assuming a complete mortgage payment and, at the same time, those payments will reduce the principal over time and, by the time the market stabilizes, the owner can decide if he or she still wants to rent or sell the property," she said.
Another alternative becoming more common these days is a lease with the option to buy, where a portion of the monthly payments goes toward the down payment on the property.
"For those individuals who are in a situation in which they just simply can't make the mortgage payments on their home, there are the loss-mitigation programs offered by the different financial institutions as well as President Barack Obama's loan modification plan that provides assistance through a mortgage loan-payment reduction of up to 31%. Many individuals are already taking advantage of it," Castro said.
Castro indicated banks are providing creative financing solutions to help get qualifying homebuyers into a new home.
"Some banks are lowering the interest rate to 2% for the first year and 3% for the second, and that is also helping homebuyers qualify and at the same time recover their initial investment, which they can use for new furnishings, decorations, upgrades or improvements to the property," she said. "This is definitely the year of opportunity for homebuyers."
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