State of Real Estate SPECIAL EDITION 2010 From the Desk of Bill Chee CEO, Prudential Locations The question on everyone s mind is have we hit bottom yet? For the answer, we turn to the data. The beauty about statistics is that it removes the emotional factor, by setting aside fear and panic, as well as undue optimism. The data reveals that what has recently happened to our local market, though unsettling, is normal, is well within typical cycle limits, and is indeed showing signs that this phase has bottomed. In short, I believe 2010 offers opportunity. Here is a summary of what we can expect in the months to come. Odds are that interest rates will rise in 2010, bringing some urgency to act early in the year. Government tax incentives and low inventory will also boost the markets on Oahu during the first half of the year. Shortages of listing inventories, especially in the affordably priced markets, will bring competition among buyers in many neighborhoods. Although I expect overall Oahu prices to remain stable or flat, increasing velocity (activity) suggests that more neighborhoods will be increasing in median price rather than declining. Unprecedented low interest rates bring obvious advantages to both first-time home buyers and move-up or down sellers/buyers. This combined with free money from the Government and lower prices make this a very a rare event in the market. Opportunity is knocking. Not all sellers are advantaged in this market. Those who purchased their homes in the last 4 years may have little or no equity, depending on their neighborhood. Add a must sell situation such as death, divorce or job transfer out of state and, for those residents in these situations, 2010 may cause a financial hardship. Developers may find increased activity this year and those who are offering buyers incentives and price reductions will benefit through increased sales at least for the first half of the year. Neighbor Island off-shore owners will continue to be the most adversely impacted and may continue to account for the majority of the foreclosure activity in the state. A quick recovery here is clearly not in the cards for so many reasons, primarily the current national economy and its very slow recovery. Summary: Let interest rates be your friend in 2010. Hear directly from the experts on where they think Hawaii real estate is headed. Watch video transcripts from our State of Real Estate Event featuring presentations from Paul Brewbaker, Dr. Mike Sklarz and Bill Chee. View them at www.stateofrealestatehawaii.com
What are the positive influences affecting the 2010 market? One of the best reasons to own real estate in Hawaii is that there will always be a demand, due to the finite supply of land on Oahu. Sklarz said that the staircase-like pattern in sales prices here are very typical of supply-constrained coastal areas, such as Boston, Los Angeles, San Francisco and Seattle. In these areas, it is very difficult to build more, so demand increases and prices take off to offset demand. In interior markets, such as Chicago, St. Louis or Kansas City, there is plenty of land to build on when demand increases, so these parts of the country trend very differently. Additionally, the amount of housing authorized for construction shows that new construction is as low as it s ever been since the 1940s. We are not building homes in Hawaii at a pace adequate to endow the newborn with a house of their own, said Brewbaker. I m thinking we re going to be supply short in a year or two. Other positive factors include the acceleration of growth in the country s gross domestic product, one of the tests that will ultimately determine when the recession is over. Brewbaker is therefore not concerned about a double dip. Mortgage delinquencies are also low, in spite of the news that Hawaii foreclosures are up. Compared to other major metropolitan areas on the mainland, home prices in Honolulu have taken top honors once again as the highest priced real estate in the country. Oahu s median sale price recently surpassed declining markets in San Diego, Orange County and San Francisco, according to the National Association of Realtors. Neighbor Islands The recession has hit the neighbor islands considerably harder than Oahu, due in a big part to drops in tourism and the increase in the number of foreclosures in those counties. Hawaii s foreclosure numbers have increased, but much of the toxicity exists on Maui, Kauai and the Big Island particularly in the resort markets there. Things are way better here than they are on the mainland, said Brewbaker. Where our toxicity exists is on the Neighbor Islands particularly in the resort markets. Sklarz and Brewbaker agree that, in general, the statistics show that the worst of the declines is behind us and that we re at or near the bottom.
What a difference a year makes. Bewildered by bubbles bursting, spooked by under-water mortgages and paralyzed by the worldwide economic free fall that made headlines in 2009, consumers are cautiously forging ahead to rebuild their lives, their savings and their confidence. Economists have insisted that the economy would not rebound until the housing market recovered. With market stability returning and sales activity on the rise, recent data reveals a resiliency in real estate sales on the mainland and here locally. Looking ahead at 2010, market conditions continue to be bright for first-time home buyers and those planning to move-up or downsize. Even speculators looking to find a killer deal may find 2010 particularly bullish. But if there is one common factor among all those categories, it is the need to first get educated about the lessons learned from the sub-prime mortgage meltdown. A smarter client is a better client. This maxim is one of Prudential Locations founding principles. We were the first to develop tools to enable our clients to gain a complete picture of market conditions as a way to give them the ultimate marketplace advantage. That concept together with our ideal that the best way to build long-term wealth is with real estate, remain the core fundamentals of our approach. 2010 offers a fantastic opportunity to gain success in real estate but in order to take advantage of the opportunity you need to be armed with a thorough understanding of the market and its risks. By far the best way to keep your vulnerability to a minimum and increase your longterm wealth to the maximum is to equip yourself with the knowledge that a Prudential Locations Realtor can provide. Here s what you need to know. Where are we in this real estate cycle? A look at recent housing statistics in Honolulu compared to those going back to 1980 might surprise you. According to facts and figures such as the number of sales each month, days on the market, and inventory levels housing is acting characteristically within the normal ranges of a typical real estate cycle, even when the economy seemed dire and uncertain. In short, the sky is not falling. The market here remains sound, oscillating within the normal highs and lows as we enter 2010. Respected economist Paul Brewbaker, principal of TZ Economics and former financial risk analyst for Bank of Hawaii, is convinced that economic indicators point to our being at or very near the bottom of this down cycle. We re pretty much out of the woods, he said. I don t lie awake at night waiting for the second half of this recession. I m pretty sure it ended. Brewbaker is a graduate of Stanford University and received his Ph.D. from the University of Hawaii, and currently chairs the Hawaii Council on Revenues. But he doesn t just look at spreadsheets. He talks to local shopkeepers and relatives and people he sees on the street, to get a broader understanding of what s happening out in the real world. He said the relatively small decreases in Oahu prices in 2009 single family homes down 7.2 percent and condos down 6.2 percent were just part of the Island s normal cycle. Using median sale prices dating back to the 1970s, the line graph depicts a definite staircase-like pattern, with abrupt upward movement followed by extended sideways movement. Based on the historical data, it is this sideways movement that we are likely to see in 2010 and for a few more years beyond. Dr. Mike Sklarz, president and CEO at Collateral Analytics in Honolulu, has been analyzing real estate market trends in Hawaii for more than 25 years. He too characterizes the post boom market here as being normal. There have been three well-defined cycles in the last 30 years, said Sklarz. Our cycles repeat about every 10 years or so. It s very normal.
What should we watch out for this year? The biggest concerns this year involve the end of the home buyer tax credit, the end of record-low, sub-5 percent interest rates, and unemployment. Brewbaker contends the longer-term lack of supply will likely outweigh those issues. I m not a double-dip person, unless it involves ice cream, he said. Sklarz cited the island s continuing housing shortage as the reason for our high home prices and why we shouldn t see any more meaningful declines. We re chronically undersupplied and we have an increasing demand, with not only local residents, but retirees, second home buyers and international buyers, said Sklarz. Inventory levels are some of the lowest in 30 years. Interest Rates If you re straddling the fence trying to decide if now is the right time to buy your dream home, it s time to get ff the fence and set your home buying wheels in motion. Historically low interest rates, which are still hovering around 5 percent, are most definitely one of the critical elements enabling first timers to make that leap into homeownership. Buyers are typically stuck on price how much they pay for a property and everyone wants to get the lowest price possible. But remember, the focus on a lower purchase price is for one main reason to have a lower monthly payment. With today s low rates, you don t have to wait until prices drop to get a lower monthly payment. Once rates start rising, even if the price of a home does go down, buyers will pay more. Remember when rates began falling from 8 percent in early 2000 to 7 percent about a year later, 6 percent in mid-2001 and then dipped under 6 percent in 2003? Buyers realized that as rates fell, their buying power increased. The inverse is also true. When interest rates go up, the amount a buyer can borrow for a home goes down. For example, a buyer is qualified to purchase a $600,000 home. If interest rates go up just one point, the buyer loses $60,000 in buying power. That means the same buyer is now only qualified to purchase a home for $540,000. Interest rates ultimately have a much bigger impact on cost than the purchase price does. The low interest rates also means that buyers who couldn t qualify for a home prior to the rate decrease may now be able to get in the game. Simply, the lower the interest rate, the more the borrower can afford to borrow. For several years, we ve been happy with interest rates when they dropped below 6 percent, said Chee. But recently, they are dipping under 5 percent. When rates drop like that, buyers can afford a larger mortgage.
What were Oahu s best performing neighborhoods? Remember, real estate is local. It s so local, in fact, that markets can vary significantly from one side of the street to another. When the National Association of Realtors talks about the median sale price nationwide, the trend might be interesting whether it is going up or down but it is not really going to tell you anything about the Hawaii market, or any specific market, really. The same can be said for the Oahu numbers. For example prices went down slightly on Oahu last year. But if you look closely at the neighborhood data, you ll see that from area to area, prices went up in some and went down in others. It is important to track the market on a neighborhood level, said Chee. There are strengths and weaknesses in different markets, so the key is to evaluate what s happening in a specific neighborhood. We track sales trends for over 250 neighborhoods. TOP 5 Performing Market Areas on Oahu Biggest Increase in Number of Sales 2009 2008 %change 1. Makakilo 120 82 46.3% 2. Hawaii Kai 190 160 18.8% 3. Pearl City-Aiea 176 163 8.0% 4. West Honolulu 118 110 7.3% 5. Kaneohe 185 176 5.1% Highest Median Price 1. Waialae-Kahala $1,250,000 2. East Oahu $ 987,500 3. Hawaii Kai $ 800,000 4. Manoa $ 795,000 5. Kailua $ 752,500 Highest Velocity of Sales Areas with lowest Days on Market (DOM) DOM 1. Nuuanu/Makiki 37 2. Manoa 39 3. Makakilo 40 4. Mililani 42 5. Pearl City/Aiea 44 Most Active Areas Areas with the highest turnover based on total inventory of homes % Homes Sold 1. Makakilo 3.6% 2. Ewa 3.4% 3. Hawaii Kai 2.6% 4. Waialae-Kahala 2.5% 5. Kailua 2.2%
Prudential Offers the Highest Level of Customer Service Prudential Locations is a full service real estate company offering the highest level of customer service and unmatched information on Hawaii s real estate market. Whether you are a first-time homebuyer or a seasoned investor, let our agents help you achieve all your real estate goals. Ask your Prudential Location agent to get you: - Instant notification when new properties come on the market - Information on how to buy foreclosures and other distressed properties - A comprehensive analysis on how much your home is worth - Tips on how to position your home to get multiple offers - Dates on our next free educational home buying seminar - Information on market activity in your neighborhood How do these economic conditions affect buyers and sellers on Oahu? Bill Chee, president and CEO at Prudential Locations, points out that success in a changing real estate market is marked by your ability to recognize and adapt to changing conditions. I ve played many different roles over the years of owner, investor, developer and in each capacity, there is a different thought process in how you approach the market, said Chee. If the market is good for sellers, and you have property you might want to sell, then be a seller. If circumstances favor buyers, then it might be prudent to consider being a buyer. The great thing about your role is you can change it to adapt to conditions. According to Chee, 2010 is a good year for first timers, move up or move down buyers as well as speculators. And that market strength is determined by its buyers. Price is driven by velocity, or the speed of the market, he said. If there are lots of buyers, the velocity increases and prices move up. Inversely, Chee notes that market velocity may occasionally abate due to lack of supply causing prices to trend sideways for a while. Overall, Chee believes the state of the market will be good as long as investors stay in tune with changing conditions and remain ready to adapt. Chee strongly recommends first-time home buyers find out how much of a loan they qualify for and get into the market. The planets are aligned for first timers this year, with the $8,000 tax credit, lower prices, lower interest rates what more could you want? he said. Investors, he said, are taking advantage of the slower, sideways market to exchange underperforming rental properties for something that commands a higher rent or in a better neighborhood. It s a great time to manipulate your portfolio and this type of slower market is ideal for an exchange contingency, he said. There is even evidence that speculators are returning to the market. With inventory drying up and days on the market going down, it may be time to start looking for the good deals and the numbers are looking pretty good for that, said Chee. If the market is good for sellers, and you have property you might want to sell, then be a seller. If circumstances favor buyers, then it might be prudent to consider being a buyer. The great thing about your role is you can change it to adapt to conditions.