There is an interesting Opinion piece in today’s El Vocero newspaper about the current market cycle of real estate in Puerto Rico and the Fed’s interest rate hikes. Will the lack of new construction in Puerto Rico combined with other financial incentives mean we jump quickly from the contraction phase to the recovery phase? What is your opinion?
To read the Opinion Piece in Spanish, click here: EL VOCERO
Here is an English translation of the piece:
The recent rise of the Federal Reserve of half a point in interest rates, represents an increase in the mortgage interest rate that brought it from 7.75% to 8.5%. Similarly, the Federal Reserve also announced that further interest rate hikes could emerge in 2023, depending on economic conditions.
To contextualize this phenomenon, it will only be necessary to understand that the local real estate market is adjusting jointly to the stabilization of the economy. That is the response of the dimension of real estate within an integrated economy, which the Federal Reserve wants to avoid its recession after the inflation that the pandemic produced.
This phenomenon is tied to the well-known real estate cycle (Real Estate Market Cycle) which guides the behavior of the property purchase and sale market. This cycle is made up of four stages, namely: expansion, contraction, recession and recovery.
As we all know, at the moment there is little inventory of properties, vis-a-vis the demand of buyers in a scenario where the construction of new projects is limited.
In this way we identify that we are in the contraction stage. How does rising mortgage interest impact the real estate cycle? The answer to this is the essence of the transformation or advancement of the cycle, to oscillate from the contraction in which we find ourselves towards the recovery that we all expect.
To better understand the above, in practical terms in the contraction we see the limited inventory of properties for sale above market value. It is for this reason that it is sold with the condition of "not subject to appraisal"; which contrasts with the previous offer when there was an excess of inventory where we saw properties sold below market value, those that were advertised with a "negotiable price".
The above phenomenon is part of a natural process of the recessionary moment in real estate. This increase in property prices causes the need to increase interest rates. In this way, with the rise in mortgage interest, it affects the purchasing power of the buyer. This seeks to balance the market again and bring it to a midpoint where stability is to the benefit of the seller and buyer of properties.
In short, inflation is at its highest level in the last four decades. We have to see the rise in interest rates as a necessary remedy to contain said inflation, even if we don't like it.
On the other hand, the country is at a point of modulation in its economy with the support of economic variables such as reconstruction funds. Similarly, funds from the buyer assistance program is another variable that will help stabilize the economy. These two positive variables cancel the negative effect of the rise in mortgage interest. The foregoing would produce economic activity in 2023, which in turn would bring economic growth to advance the real estate cycle to the expected recovery stage. That should be the expectation of the real estate and mortgage industry, for the good of all.
