Historical Perspective

real estate is hot—again. A few years ago, the sluggish housing market wasn’t
exactly the stuff of scintillating conversation. Not so today. When was the last
time you made it through a week without reading or hearing about crazy low mortgage
rates or crazy high home prices?

If you recall, the last time Honolulu was
this preoccupied with real estate was in the late ’80s and ’90s, when Japanese
speculators drove home prices sky-high. But we were hooked on real estate even
before then. Like some natural phenomenon, Honolulu’s obsession rears its head
for two to three years every decade. Locals become sensitive as seismographs to
the smallest fluctuations in the housing market. No matter what the market’s like,
there always seems to be a crisis at hand.

When home prices are
high, we fret-about property taxes; about the right time to buy, sell or refinance;
about how our kids will ever be able to afford homes of their own. Declining prices
don’t give us much peace of mind, either. That’s just our equity fading away.

“If the market’s been flat for a couple years, real estate is not necessarily
the first topic of conversation at the cocktail party,” says Herb Conley, managing
director of Coldwell Banker Pacific Properties. “But when we see a lot of outside
investment and the market is either on an upswing or softening, it becomes a big
point of conversation. I can’t walk into a party these days without hearing, ‘Have
we hit the peak yet? When should I buy?’ or ‘I just bought this. Did I do right?'”

This fixation stems largely from how we view our homes. People look at
them in two ways: as shelter or as an investment. For most of us, our homes represent
the biggest chunk of our personal wealth. That equity gives us options that we
wouldn’t otherwise have, such as taking out a second mortgage to send the kids
to college or help them with a down payment.

We live on an island where
land is scarce, development rationed by the government and outside investment
almost a constant. It’s no wonder we’ve agonized over housing for decades.

is the best example of that old Will Rogers saying, ‘Buy real estate, ’cause they
ain’t makin’ any more of it,'” Conley says. “Unlike places such as Oklahoma, you
can literally see the edge here. If you go to New York, Tokyo or London, real
estate is also a huge deal.”

History of an Obsession

the end of World War II came the start of O’ahu’s first 20th-century housing crisis.
From the Great Depression to the war’s closing, the island saw barely any new
homes constructed. Few housing options awaited the return of thousands of Hawai’i
soldiers, eager to start families.

A story in the September 1947 issue
of Paradise of the Pacific, predecessor to HONOLULU Magazine, reported: “A recent
survey shows that 12,000 new dwelling units are needed to supply the basic necessities
of shelter for families in Honolulu. Under present deplorable conditions, it is
not unusual for 10 to 12 persons to share a single room and for several families
to share a small house or apartment.”

Postwar housing projects brought
some relief-Robert Hind’s suburban development of ‘Äina Haina, subdivisions on
Harold K.L. Castle lands in Käne’ohe and Kailua and the transformation of Wai’alae-Kähala
from pig farms and flower gardens to residential communities.

“From about
the time of statehood up through 1990, the real estate market tended to follow
what was happening with the local economy,” Conley says. “We were pretty much
a go-go economy, if you look at employment and state domestic product.”

real estate cycle usually mirrored the 10-year business cycle. Home prices almost
doubled over two to three years when real estate boomed. Eventually, prices would
ease off, flattening out for five to six years.

“But if you took the entire
10-year period and smoothed it out, then you got a pretty steady growth as opposed
to ‘Oh my gosh, prices are doubling,’ because there were five years where prices
didn’t change much,” Conley says. “Real estate was always the talked-about investment,
because during that short period of time when prices doubled, people made a lot
of money. But if you drew it out over the 10-year cycle, it was really just a
very nice return on investment.”

By the early 1960s, the state worried
about the number of subdivisions springing up throughout O’ahu’s 604 square miles.
Thousands of acres of agricultural land had already been converted for residential
use. In a tiny housing market vulnerable to outside influences, the state rushed
to create protections against unchecked development.

Legislators passed
the State Land Use Law in 1961, establishing a statewide zoning system-the first
ever in the nation. That same year, lawmakers passed a condominium law (another
first in the United States), recognizing the advantages of vertical development
in a state with limited land. The law led to an explosion in condo development
in the ’70s and ’80s.

In the 1960s, the state created the Land Use Commission
to designate parcels into one of four categories: agriculture, urban, rural and
conservation. Even today, the Commission determines where O’ahu residents can
live and how many new homes can be built each year.

Does this agency benefit
Hawai’i homebuyers? That is open to debate. The permitting process for development
is time-consuming and expensive, requiring builders to obtain regulatory approvals
from both the state Land Use Commission and county departments. Developers can
spend an average of seven years before gaining the necessary approvals, choking
the supply of housing in Hawai’i, even when people need it.

“If a developer
wants to jump through all the hoops-get agricultural land reclassified into an
urban district, hire an attorney, an engineer, someone to write the cultural impact
statement and the environmental impact statement-it’s got to have deep pockets,”
says Paul Brewbaker, chief economist for Bank of Hawai’i. “That preserves the
monopoly power of a small number of landed oligopolists and large homebuilding
firms and excludes the small developer. It’s no accident that people who already
own these old plantation lands, like Castle & Cooke, have huge development units.”

the early ’70s, developers built more than 12,000 new homes each year. We haven’t
built as many since. In 2002, fewer than 3,000 new homes were authorized on O’ahu,
about the same number that were built in 1940.

Land-ownership issues emerged
in heated debates at the Legislature throughout the 1960s, the decade that followed
the historic Democratic Revolution of 1954. For years, people who bought single-family
homes in Hawai’i usually owned the house and leased the land beneath it. Hawai’i’s
leasehold system was an anomaly in the United States. Once viewed as a way to
decrease the cost of homeownership in the Islands, the system also preserved the
concentration of land ownership. The state and federal government owned about
47 percent of Hawai’i lands, and 49 percent belonged to just 72 landowners, including
Bishop Estate, Castle & Cooke and Campbell Estate.

“Leasing your land is
problematic for the homeowner, from a financing standpoint, because it’s more
difficult to [use your home for collateral],” Brewbaker says. “The structure and
the land are complimentary goods, like a hot dog and a bun. But 30 years from
now, you’re probably not gonna take your hot dog and move it to another bun. With
homes, people borrow money for 30 years and probably want to live in that home
for 30 years. People want their collateral to be portable, and leasehold land
tenure complicates that.”

When leaseholders started seeing huge hikes in
their land rents (up to 2,000 percent, in some cases), fee simple ownership started
to look like a better deal. The Legislature agreed. In 1967, lawmakers passed
the Land Reform Act, which allowed the mandatory conversion of leasehold lots
to homeowners through the process of condemnation. It was the most radical shake-up
in land ownership that Hawai’i had seen that century.

“People were on a
mission those days to break up the Big Five that had this oligopolistic position
in the market,” Brewbaker says. “These so-called reformers were part of that leftist,
catch-a-wave generation-of which [U.S. Sen. Daniel] Inouye is the last remaining
figure today-that considered land-reform movements to be integral to economic

Many landowners agreed to sell lands to their lessees for
negotiated prices. Bishop Estate, however, challenged the constitutionality of
the law, accusing the state of stealing its lands. The estate was Hawai’i’s largest
private landowner, owning 56,600 acres on O’ahu, or 22 percent of the Island’s
private land holdings. Bishop Estate took its case all the way to the U.S. Supreme
Court in the early 1980s, where justices unanimously held that lessees could buy
the land beneath their homes in the belief that increased homeownership was good
public policy.

Out of Our Hands

Before mandatory lease-to-fee
conversion swept the Islands, Hawai’i faced the housing crisis of the 1970s. Raging
national inflation thrust Island home prices out of reach for more than 60 percent
of local families. Mortgage rates nationwide shot up as high as 18 percent. By
the end of the decade, only 1.1 percent of owner-occupied and rental units in
Honolulu were vacant. And although sales were flat, prices still climbed.

state tried to remedy the situation with the creation of the Hula Mae Program,
which offered mortgage loans at interest rates well below those of current conventional

But the hysteria of the 1970s underscored what we knew all along:
Hawai’i is a small housing market buffeted by outside events. Not long after Hawai’i
recovered from the economic turmoil, the state took another hit.

In 1985,
the Reagan administration decided to cure the trade deficit by letting the dollar
float against the yen (as well as some other currencies). The declining dollar
made prime Hawai’i properties suddenly affordable for anyone whose wealth was
in yen. Over the next few years, billions of dollars in Japanese capital flooded
the Islands. The New York Times compared the invasion to the 1941 attack on Pearl

Japanese speculators bought Kähala mansions without ever seeing
their interiors. Billionaire Genshiro Kawamoto got local media attention for driving
around Honolulu in his white limousine, snapping up properties along the way.
During a four-month shopping spree in 1987, Kawamoto reportedly bought more than
75 O’ahu homes and apartments, many of them in the Portlock area.

The stream
of Japanese investment into a market that had been undersupplied for the past
decade propelled home prices upward. From 1986 to 1990, the median price for a
single-family home more than doubled from $171,200 to $352,000.

News headlines
at the time summed up public sentiment. In July of ’89, The Honolulu Advertiser
lamented, “Real Estate Prices Aren’t Falling Off.” By ’91, the headlines read,
“There’s No Place Like Home If You Can Find and Afford One.”

Real estate
became a hot political issue. The fear was that rapidly rising home prices would
lock locals out of the housing market. Mayor Frank Fasi wanted to make foreign
ownership of Hawai’i land illegal. The Waihee administration proposed a punitive
tax to stop real estate speculation.

During a 1990 address before the Japan-Hawai’i
Economic Council in Nagoya, Waihee said: “While there is no doubt that Hawai’i’s
residents have benefited from an economy that is fueled by dollars from Tokyo,
Vancouver, Sydney and Chicago, there is also no doubt that Hawai’i’s residents
are experiencing a sense of loss-loss of their land to others and, more important,
loss of control.”

State and city politicians became home developers, opening
up the ‘Ewa plain for the construction of new residential communities. The state
sold large parcels to homebuilders, requiring them to make 60 percent of those
new homes affordable to residents earning right around the county’s median annual
income. Sales from the remaining 40 percent of new homes, set at market price,
were to subsidize the cost of the affordable homes. The program also imposed restrictions
dealing with the appreciation and resale of these homes-restrictions developers
wouldn’t have to bother with in a fully private project.

“The savings was
significant, sometimes up to $50,000,” says Ricky Cassiday, owner of Data@Work,
a real estate market analysis firm in Honolulu. When developers offered affordable
units to the public on a first-come, first-serve basis, “everybody would rush
down to buy one. If a builder had only 50 houses to give out, people would cheat,
cut in line, get into fights.”

If you managed to get an affordable house,
it was almost like you’d won the lottery.

The affordable housing program
had its critics. Several homebuilders questioned the fairness of large-scale government
projects competing with the private sector, which the state also regulated. Some
residents worried that developers would inflate the price of the remaining 40
percent of homes, driving up market values.

Economists warned that the
program would work only during a strong economy. The theory behind the program
was that the market-priced homes would help pay for the affordable ones. If the
economy went sour, market prices would fall and wreak havoc on the developers’.

exactly what happened. “Demand for housing stopped as soon as the Gulf War started
in 1991], tourists stopped coming and everything came to a halt,” Cassiday says.
“Although there was an oversupply of housing units, developers had to finish their
projects, because they promised the government they would. And it was still a
bubble, with this run-up in prices brought on by the Japanese and people from
the Mainland coming here and deciding to buy.”

Hawai’i’s housing bubble
burst, however, when the Japanese stopped buying. The stock and real estate markets
in Japan had collapsed. Locals who’d bought their homes while prices climbed saw
their property values decline for most of the decade.

“When Japanese investment
went away in 1991, we had probably the biggest decrease in prices that I’m aware
of, in the history of Hawai’i real estate,” Conley says. “For seven years, from
’91 to ’97, the number of home sales literally went down each year.”

locals lost interest in the state and city’s affordable housing programs, because
suddenly, all the homes on the market became more affordable. In 1999, the city
amended its affordable housing ordinance, allowing anyone to purchase these modest-priced
homes, regardless of income.

Full Speed Ahead

with prices rising as we write, you really don’t need us to tell you that real
estate is hot again. The Hawai’i housing market started to simmer in 2001 before
erupting in last year’s flurry of low mortgage rates. In less than three years,
the median price for a single-family home on O’ahu has surged 66 percent, from
$299,900 to $451,000.

“The reason our market has been so strong is because
income has been going up for a number of years, roughly 4 percent to 5 percent,
while interest rates have been going just the opposite way,” Conley says. “Until
recently, housing prices have not shot up.”

People are selling houses as
fast as they can list ’em. As of June, properties sat an average of just 20 days
on the market before they were sold, according to the Honolulu Board of Realtors.
With those kinds of numbers, no one’s predicting that the housing market is losing

If you’re concerned that today’s boom looks too much like the bubble
of the ’90s, relax. The last time around, Japanese investment drove home prices
to unprecedented levels. This time, it’s mostly organic. Most people buying homes
now are actually moving into them, whether it’s their first home or a trade-up.

Of course, baby boomers and tech types from California continue to be steady
forces in the local market, says Mike Sklarz, chief valuation officer of Fidelity
National Information Solutions. Hawai’i still looks like a good deal to them,
considering that median home prices have already exceeded half-a-million dollars
in several southern California cities.

“If you look at relevant values
across the country, we’re still reasonably priced,” Sklarz says. “People make
a bunch of money in California, they look at Hawai’i and say, ‘Wait, this place
is undervalued, relatively speaking.’ Now we got this baby boom generation looking
for second homes or retirement homes, which is further fuel for this.”

not over yet. Most analysts seem to agree that prices have at least two years
to go before they peak.

“It’s going to end up at least $600,000,” Brewbaker
says. “At any point in time, it can only go so far, because of affordability.”

But even as demand for homes on O’ahu keeps growing, the number of homes
on sale remains near historic lows. According to the Honolulu Board of Realtors,
there were just 1,036 single-family homes and 1,450 condos for sale in June, compared
with typical monthly levels of about 2,000 single-family homes and 4,000 condos
throughout the 1990s.

The picture seems even bleaker, if you factor in
the inevitable increase of mortgage rates. In that case, entry-level homebuyers
would get hit hardest. People who would’ve barely managed to qualify for loans
at current rates would face an even tougher situation.

“It’s a problem
every cycle,” Brewbaker notes. “Everyone who is a homeowner at some point wasn’t,
so the problem can be solved. This does tell you that when there’s a window of
opportunity like this, you’d better be on it. The way it’s done here in Hawai’i
is that you pool together the family’s resources, or you hui with your friends
to buy a home.”

That explains why it’s not uncommon for parents to kick
in some money for their kids’ down payment or co-sign on a mortgage loan. It’s
also one of the reasons why homes in Hawai’i are considered the most crowded in
the nation, according to U.S. Census figures. About 15.9 percent of Hawai’i homes
have more than one person per room. It’s probably no surprise, given how customary
it is for multiple generations, or even multiple families, to share a house.

you’re already a homeowner, do yourself a favor. Avoid obsessing over the slightest
ups and downs in the market. If you view your home as a long-term investment,
it will always pay off.

“There’s a generalized upward slope in the housing
market, because in the long run, prices are never going to fall,” Brewbaker says.
“Sometimes, it backs off a little-if you bought a home in 1990 you were out of
the money until 1998, and you just got back in the money the last year or two.
But the real rate of return on a home on O’ahu has historically been about 2.5

Cassiday agrees. “The long-term history of Hawaiian real estate
has shown that it’s better to start than to not start at all, because that’s how
you build wealth. This is a tight society-it’s about generations. Parents help
their kids. Friends invest in a high-end deal or scrape enough money together
for a place.”

It’s no wonder real estate is all we can talk about. It’s
as if our whole future is at stake.