Did Puerto Rico experience a housing bubble?

Puerto Rico has been in recession for about five years now. Naturally, the real estate market is very poor with far fewer sales and lower sales prices. Since the US mainland is now recognized to have gone through a dramatic once-in-a-century housing bubble, many people assume that Puerto Rico experienced a similar thing. The trouble is that, until now, publicly available house price indices for Puerto Rico have not existed.

This is beginning to change with the arrival of a house price index for Puerto Rico from the Federal Housing Finance Authority (FHFA). The FHFA was created in 2008 from other federal housing agencies to supervise Fannie Mae and Freddie Mac when they were put into conservatorship. The house price indices that they publish for many different regions are repeat sale indices much like the Case-Shiller Index and so track prices changes in sales of the exact same homes sold at different times. The data comes from records of Fannie Mae and Freddie Mac. The indices for Puerto Rico are described
here and include additional data from the Federal Housing Administration (FHA) and the Federal Home Loan Bank of New York (FHLBNY).

This data for Puerto Rico and other regions is available here .

Without further ado, here is a plot of the house price indices for Puerto Rico and a few other major metropolitan regions: Miami, Los Angeles, Tampa and Chicago. These are the purchase-only, seasonally adjusted numbers. I have normalized them all to 100 at the first quarter of 1995 (where the Puerto Rico data series begins).



So did Puerto Rico experience a housing bubble? Well prices certainly went up. They rose about 86% from the first quarter of 1995 to the peak in the second quarter of 2008, 13 years later. That is a 4.8% annual appreciation. The annual change in CPI over that time is 2.6% so that is a 2.2% real annual appreciation. (The inflation rate in Puerto Rico is actually much higher). The decline from the peak over the last two years is about 7%.

This doesn't really support the viewpoint that Puerto Rico experienced a housing bubble. For example the data for Puerto Rico looks nothing like the dramatic boom-bust seen in the data for Miami, Los Angeles or Tampa. It looks closer to that of Chicago or even milder.

I found some other data here from Freddie Mac. This is a median house price. The chart below shows the median home price appreciation for the US and Puerto Rico over 12 years, up though 2009.



I have taken those annual appreciation numbers and turned them into an "index" by normalizing them to 100 in 1996.



This shows the same thing; that there was no housing bubble in Puerto Rico.

Puerto Rico avoided much of the housing bubble madness for a few reasons. There was no subprime lending in Puerto Rico. Wall Street never took any interest in the Island whose financial system is somewhat old fashioned (now considered a good thing). Loans originated on the Island were either securitized through the federal agencies, Fannie, Freddie, Ginny Mae or FHA or kept on the balance sheet of the banks. In addition, the Island has been in recession since about 2006 so the banks in Puerto Rico were curtailing lending (to some extent at least) well before the bust started in the US two years later. This isn't to say that all is well in Puerto Rico. The five year recession has produced a 10% cumulative decline in GDP which some would call a depression. The levels of bad loans at banks is even higher than on the mainland. But the dynamics were different. The recession in Puerto Rico was not one caused by the exuberance and bust of a real estate bubble. It had other causes that I won't go into here. But the bottom line is that Puerto Rico's housing market did not experience a housing bubble.