Puerto Rico Fires Up Housing Market

By WESLEY LOWERY
TOP STORIES IN U.S.
The Wall Street Journal

Home sales are sizzling.

In Puerto Rico.

A stimulus program on the island, long ripe with vacant houses and condos, has sent sales of new homes surging 80% and sales of existing homes up 24% in the past 10 months from a year earlier, even as the market in much of the U.S. mainland is dead.

The incentive plan, juiciest for new homes, has played a part in $2.6 billion worth of sales from its launch in September through July, according to the Puerto Rico Housing Finance Authority. The program, which includes a variety of tax breaks for both buyers and sellers of residential and commercial properties, was rolled out by Gov. Luis Fortuño as part of his effort to revive the commonwealth's economy.

"This program could provide a road map for the rest of the country if the U.S. wants to get out of this recession," said Mr. Fortuño, who took office in 2009 and is seeking re-election next year.

But Puerto Rico's efforts aren't likely to be matched on a broad scale by the states, whose governments are slashing budgets. Puerto Rico, for its part, has already done a lot of budget cutting and is currently running a deficit of about $605 million, compared to $3.3 billion when Mr. Fortuño took office.

And it was home-buying incentives, used heavily during the housing boom by buyers short on cash, that helped trigger the national mortgage crisis, as many borrowers defaulted. Puerto Rican housing officials say each borrower is evaluated to assess the loan's risk.

Puerto Rico experienced many of the same boom-to-bust and overbuilding problems as the rest of the nation and currently has one of the highest foreclosure rates in the U.S. The rate in the first quarter was 10.2% of all mortgages, higher than the national average of 8.1%, though not as high as Florida's, which at 18.97% was the highest in the U.S.

Few of the major U.S. mortgage lenders have a significant presence in Puerto Rico, where lending is dominated by banks such as San Juan-based Banco Popular, the island's largest lender. The bank originated nearly half of all new-home mortgages that qualified for the incentive program, according to Gilbert Monzon, director of Banco Popular's mortgage-lending division.

One of the incentive program's popular provisions offers qualified buyers down-payment assistance for homes purchased with a mortgage, as well as a second mortgage of as much as $25,000 that can be used to make down payments and pay closing costs. Buyers of new homes also pay no transfer taxes when a property changes hands, escape paying property taxes for five years and future capital-gains taxes, and pay no taxes on rental income for 10 years. Sellers don't have to pay capital-gains taxes on profits.

One major goal of the program is to boost demand for the nearly 10,000 vacant homes scattered across the island. Some are foreclosures; others are new condominiums left over from the nation's construction boom. The program was set to expire June 30, but in July Mr. Fortuño said he would extend it through Oct. 31.

Puerto Rico says the infusion of government funds into the housing market is starting to trickle down to its population of about four million. For the first time since 2006, the commonwealth closed its fiscal year, which ends June 30, with a net gain in jobs. The unemployment rate edged down to 16% in May from 16.7% a year earlier.

"It's too soon for an official declaration, but the economic indicators say we've bottomed out and the recession has ended," said Juan Lara, an economist at the University of Puerto Rico. He said the housing incentives deserved some of the credit.

As for the second mortgages, they are "silent seconds," held by the government rather than by banks. The government has dished out $60 million of funding for more than 4,500 silent seconds so far. More than a quarter of the mortgages would have to be foreclosed on for the government to incur losses, said George Joyner, executive director of the Puerto Rico Housing Finance Authority.

The tax incentives forgo a portion of future revenue. But "these are sales that wouldn't be happening otherwise. We'd rather take 50% of the revenue than not get anything at all," said Edward Calvesbert, deputy secretary of the Economic Development and Commerce Department. The silent seconds and down-payment assistance are financed largely by a $500 million economic-stimulus program passed in March 2009 and the Housing Finance Authority's annual budget. "Everybody realized the importance of restarting the real estate market after the crash," Mr. Calvesbert said.

Carmenchi Garcia, a San Juan real-estate agent, said sales had picked up at Ciudadela Nordeste, a new five-story condo building in Guaynabo, where prices range from $275,000 to $355,000. She sold three of the building's 19 units in the six months after the building opened in July of last year. So far this year, she has sold seven units, and credits the pickup in sales to the incentives. Ms. Garcia described buyers as "a mix of people returning to Puerto Rico from the states as well as locals with a steady income who have been holding out for a deal."

Real-estate agents say some existing homes and condos in older buildings, which appeal mainly to the local population, are selling more slowly. Sergio Marxuach, policy director at the Center for the New Economy, a Puerto Rican economic think tank, said one reason was that the targeted consumers—who still need steady employment and good credit—couldn't get mortgages. "A large number of potential buyers don't qualify," Mr. Marxuach said.

Jeff Kruse, an engineer, said that had made it difficult for him to sell his four-bedroom house in San German, which has an asking price of $224,000. He said banks had refused to grant a loan to his preferred buyer. "The incentives may be the reason we found a buyer," Mr. Kruse said. "But even then the banks are doing their best to spoil the deal."