However, if you are in the market to buy a home, you can bargain for a good price. At least for the next couple of years, prices will drop even more.
For the seller, it’s a different story. In the past, you could place your home on the market and have it sold fairly quickly, in a matter of weeks or days and, in some cases, at above-appraised value. Nowadays, you’re lucky if you can sell your home within six months to a year, and at a considerable discount. If you need to sell it fast, you’ll have to cut the price drastically, in many cases having to sell your home at way below the appraised value.
In 2007, the average home-sale price in 15 different island municipalities surveyed dropped an average of 5% from the previous year. A recent Demand for Housing study suggests there is a glut in the market with nearly 41,000 new units in the pipeline, of which 49.2% were slated for delivery between 2007 and 2009. Add to that an inventory of some 20,000 new and existing housing units available for sale in the market, and you have a recipe for continued dropping prices. Even if they hit bottom by 2009, it will be a few years before prices stabilize or start to rise.
Industry sources fear this is just the tip of the iceberg and the worst is yet to come if the local market doesn’t rebound soon. In a lingering recession, with an excess inventory of unsold homes (new and pre-existing), a drop in mortgage originations (sales) is usually followed by a steep drop in home prices, and mortgage originations have been dropping.
Local housing market peaked in 2004-2005
The local housing market is certainly at a crossroads after the housing boom of 2004 petered out following the two-week government shutdown in May 2006 and the recession that followed.
According to figures provided by the Puerto Rico Mortgage Bankers Association and compiled by the Financial Institutions Commissioner’s Office, the number of mortgage originations in 2007 fell 22.5% after dropping a whopping 26.7% in 2006. The value of those mortgage originations dropped 23.7%, from $7.2 billion in 2006, to $5.5 billion in 2007. Mortgage originations peaked at $12.7 billion in 2005—a huge 56.6% decline in just two years.
The THREE-year-old local economic recession has wiped out consumers’ savings (and their confidence), forcing many to postpone their home-purchasing decisions. On the other hand, rising construction costs have shrunk developers’ already thin profit margins, giving them very little leeway to cut prices, as they have to compete with a growing inventory of both new and existing unsold homes.
In a nutshell, the greater the number of unsold homes in the market, the greater the competition for the few buyers out there and the pressure to lower the asking price to close a sale.
Ironically—and fortunately—interest rates have remained stable and attractive over the past year or so and, probably will remain stable through 2009. With plenty of homes for sale and low interest rates, this time around it’s a buyer’s market with many fewer takers than in previous years. Again, this means sellers have to bring down their prices if they want to sell.
“The word out there is that the average loss in home value is between 3% and 5% annually over the past two years. However, in certain markets and projects the drop in value has been much greater,” commented Graham Castillo, president of Estudios Técnicos Inc. (ETI).
Castillo noted the high-end, overdeveloped markets outside the greater San Juan metropolitan area, with many unsold units, are the ones experiencing much greater losses in value.
“What we are seeing is that high-end markets are experiencing much slower and longer absorption rates (the rate at which available inventory is sold), and those desperate to sell are forced to lower their selling price at appraised or below-appraised value to get a quicker sale,” Castillo explained.
From what Realtors have told him, Castillo said units priced below $200,000—considered the core of the market—haven’t been affected as much because there’s still demand in that price bracket, and units in that price range move rather quickly.
“Our Demand for Housing study coincides with that notion,” Castillo noted. The study suggested a strong demand for and shortage of low-cost housing, especially under $120,000.
Glut in the housing market
According to ETI’s Demand for Housing study released last January, the local market is saturated with close to 662 residential projects and 40,919 new units in the construction pipeline, of which 20,148 units were in 312 projects that were to begin delivering units in 2007; 7,639 units in projects that plan to begin delivery in 2008; and another 3,932 units for 2009. Additional inventories are planned for later years, the study states.
It must be noted that housing units in the pipeline include those under construction, units for sale but haven’t yet begun construction and those recently built but not yet sold. Of those units in the last category, there is an estimated inventory of 10,000 to 12,000 unsold new units in the market.
Castillo said, according to the Department of Consumer Affairs, there are some 16,000 housing units in the pipeline which, in addition to the current inventory of unsold new homes, translates into very long absorption rates.
“We are particularly concerned about the condominium market because those projects under construction are high-end. I think these projects were ahead of their time in relation to the island’s economic situation,” Castillo commented. “These projects were betting on a trend shift, where those people who moved away from the San Juan metro area in recent years, were going to move back. That remains to be seen.”
Low levels of saturation were found in the $120,000-or-below segment, where demand is expected to exceed planned inventories in the middle of 2009. Saturation levels in the $120,000 to $260,000 range are somewhat higher, but new projects will be needed to supply the market in 2010, the ETI study indicates.
However, the study suggests the $260,000 to $420,000 segment has the highest level of market saturation, with a minimum four- to five-year supply. Most notably, the $360,000 to $420,000 market will experience long periods of excess inventory, while the $420,000 to $480,000 segment is also showing a relatively slower saturation level, with additional inventories needed by 2009 or 2010.
The very high-end market, i.e. $600,000 or more, is expected to experience excess inventories until 2012. On a regional basis, the Fajardo / Humacao area is the most saturated region and certainly will take the longest to sell its excess inventory. The aggregate San Juan, Bayamón, Caguas and Carolina regions have a three-year inventory of new homes or condominiums in the pipeline.
“This doesn’t mean the housing industry will come to a screeching halt; it just means there’s a lot of inventory in the pipeline and, therefore, the market will be highly competitive, where only the very best projects will sell. The days of sloppy construction are over,” Castillo said.
Based on information on new households, approximately 19,000 new housing units will be needed on a yearly basis from 2008 through 2012, mainly in the lower-income bracket. However, due to the island’s present economic factors, home sales are expected to be just over 10,000 units in 2008, with the highest-expected sales (75%) for homes selling for less than $210,000, the ETI study indicated.
Housing permits down 12.2% in Fiscal 2008
The number of approved permits in Fiscal Year (FY) ’08 experienced a reduction of 1,101 permits, or 12.2%, from 8,997 permits in FY ’07 to 7,896 permits in FY ’08. The private sector reported a 12.6% drop while the public sector showed a 7% decrease in the number of permits during the same comparative period.
During FY ’08, the number of housing units reflected a reduction of 2,101 units or 15.2%, from 13,849 units in FY ’07 to 11,748 units in FY ’08—the biggest decline in seven years. Housing units by the private sector declined 14%, or 1,831 units, when compared to FY ’07 (13,058 units in FY ’07 to 11,227 in FY ’08). Meanwhile, housing units by the public sector decreased 34.1%, or 270 fewer units, within FY ’07 (791 units in FY ’07 versus 521 units in FY ’08).
For FY ’08, cement sales (measured in 94-pound bags) decreased 10.7%, from 39.8 million bags in FY ’07 to 35.5 million in FY ’08—the lowest level in seven years. Meanwhile, cement production declined 2.8%, from 34.2 million bags in FY ’07 to 33.2 million bags in FY ’08—also a seven-year low.
Cement sales and production are considered key construction-industry indicators.
Reported by Caribbean Business