Last month, a housing fair in San Juan, Puerto Rico, drew an estimated 34,000 visitors, of whom 2,700 were pre-qualified on the spot for home loans by mortgage companies exhibiting at the event.
A resurgence in home-buyer interest is, in no small measure, attributable to what has been billed as the most far-reaching housing stimulus that’s been offered so far by any state in or territory of the United States.
That program—which Puerto Rico’s Gov. Luis Fortuno signed on Sept. 2 and is scheduled to run through next June—produced remarkable results in the last four months of 2010, when the sales of 1,108 new homes and 3,259 existing homes were closed, representing an 18% increase over the same period the year before, according to the island’s Department of Economic Development and Commerce. The dollar value of those closings rose by nearly 35% to $868.3 million.
Even with those increases, however, unit sales in Puerto Rico grew by only 4.22% for all of 2010, which indicates just how low its housing market had sunk before this stimulus package kicked into full gear.
“Before the stimulus, new home construction was tracking at about 3,500 units for 2010,” says George Joyner, executive director of Puerto Rico’s Housing Finance Authority, who spoke by phone with Builder on Wednesday. That construction figure compares with 5,000 new homes built in 2009, and more than 11,000 in 2006. In a typical year, about 8,000 new homes are built in Puerto Rico, he says.
The stimulus came about after the housing authority conferred with all stakeholders, including the island’s home builders, realtors, lenders and consumers. “We convinced everyone that this wasn’t just one problem and that we needed to address different niches,” explains Joyner.
The stimulus actually dates back to September 2009, when the Fortuno administration introduced a down-payment and closing-cost assistance program, whose funding eventually reached $65 million. At the time, FHA had okayed the use of “silent second” mortgages for down payments. Over the proceeding 15 months, 2,700 second mortgages were approved and 11,200 borrowers received down-payment or closing-cost bonuses. (FHA underwrites about 70% of all mortgages in Puerto Rico.)
This bonus package, which can’t exceed 5% of the purchase price, is limited to the purchase of primary residences with a maximum sales price of $300,000. The purchaser’s household income can’t exceed $125,000. And there’s no penalty on early resale if the homeowner volunteers 50 hours of community service a year after the resale.
Joyner says that bonuses per buyer have averaged $5,000, and the average selling price of homes for buyers qualifying for bonuses has been $134,000. Another $40 million in financing for bonuses, to carry this part of the program through to June, kicks in this month.
On mortgages of $300,000 or less, purchases of new or existing homes can also qualify for a program through which a participating lender would finance up to 105% of the purchase price. The unusual aspect of this program is that insurance covers 20% of the risk of the sale, with the bank covering the rest. And commissions are paid by the bank, developer, or seller.
Home buyers who don’t qualify for down-payment or closing-cost assistance still qualify for other incentives in the stimulus, which include:
• For new home purchases, a 100% exemption from deed, mortgage, or sale registration fees, which Joyner says would normally add up to $800 for a $150,000 mortgage; a five-year exemption on all property tax; a 100% exemption on any future capital gain tax on the resale; and $25,000 no-payment/no-interest down-payment assistance mortgage from participating lenders.
• For existing homes up to $3 million, a 50% exemption on fees, 50% exemption on capital gains tax from a resale, $10,000 down-payment assistance, 100% exemption for sellers on fees and taxes on the mortgage cancellation deed, 100% exemption for sellers’ capital gain tax, and a $5,000 annual deduction for sellers in capital losses against ordinary income if the loss arises from a the sale of his/her primary residence. This deduction may be taken annually for up to 15 years.
The stimulus also extends to rental properties by offering a total tax exemption on all net rental income from residential property for 10 years.
Joyner says that part of the impetus behind the stimulus has been to create more housing for low- and moderate-income buyers and renters. To that end, the administration is using tax credits earned from the federal government to fund construction loans for low-income rental properties. Through Dec. 31, $71 million in loans had been approved and 22 projects with 2,448 units had received funding, of which 15 projects are elderly housing.
Whether the stimulus program extends beyond June could depend, says Joyner, on how successfully Puerto Rico reduces its overhang of unsold homes. There are about 20,000 homes on the island in various stages of construction, half of which are completed but unsold.
John Caulfield is senior editor for Builder magazine.