Outdated Condo Laws are hurting market liquidity and thus Condo home prices in Puerto Rico.
During an economic downturn, the Federal Reserve, which regulates the U.S. money supply, makes credit more easily available to both consumers and investors in order to stimulate the economy.
More available credit and lower interest rates result in more mortgage lending which leads to an increase in real estate transactions that stabilizes and then helps increase prices. What does all this have to do with Puerto Rico’s Condominium Laws? Please hold my beer.
Puerto Rico is already part of the United States Secondary Mortgage Market system, which means that we already have access to large amounts of credit with low interest rates for real estate financing mainly through FHA, Fannie Mae, VA and USDA Loans. There’s only one problem, most of the condos in Puerto Rico do not meet secondary market guidelines.
Therefore, buyers have lost access to this low interest capital, hurting market liquidity and home values. One of the main reasons why condos in Puerto Rico fail to comply with secondary market guidelines is actually self-inflicted: local condominium laws. Puerto Rico Condominium Laws only require the condos’ Home Owners Association to set aside 5 percent of its operational budget in a reserve fund, while the secondary markets require a 10 percent reserve fund in order to gain access to the loans.
For decades, the government’s solution to the problem has been “FHA Boricua”, a high interest rate local financing for condos subsidized by tax payer money. This high interest alternative has made it harder for potential buyers to qualify for the loans and to cover higher mortgage payments. FHA Boricua interest rates often fluctuate around the 6 percent mark, even when the prevailing FHA rate is 3.5 percent. The other financing alternative for condo home buyers would be to get non-conventional loans, but their interest rates are also higher than FHA and the amount of down payment required ranges from 15 to 20 percent, which limits the amount of people that qualify for this type of loan and thus hurts the liquidity of the condo market.
If the government wants to help the local real estate market, it has to increase the reserve budget for condominiums from 5 to 10 percent so that it matches federal requirements. We are missing out on a large pool of liquidity because of an outdated law.