Puerto Rico Economic Pulse ©

April 2007: What Moved my Wealth?

An analysis of the mortgage industry in PR

Studies by the Federal Reserve Board have shown that an increase in housing wealth leads to an increase in long-run consumption 1.5 times greater than stock wealth increases. Homeownership in Puerto Rico is estimated at around 80% of households. Several arguments support this theory. For instance, home prices are less volatile than stock prices. Stocks are highly concentrated among high-income individuals. Finally, stocks are subject to capital gain taxes and early withdrawal penalties.  In contrast, housing wealth receives a more favorable tax treatment. Will future gains in housing wealth require a healthy mortgage banking industry and an efficient construction industry in PR? Currently the mortgage banking industry is facing tough times. In addition, the signs of a slowing construction industry and declining stock prices, raised concerns about what would be the source of household wealth for the upcoming years.