Honolulu Real Estate Trends: What's Next?
What you need to know to get in, get out, or sit tight in the latest local real estate spike.
Unless you’ve been living under a rock, instead of on the rock, you’ve heard that home prices are rising—fast. It’s as if someone lit a fuse on the market. Just how hot has the real estate market become? Sellers are consistently receiving multiple bids on a property, and buyers are outbid left and right, as low inventory and high demand cause the market to surge even further.
Vincent Daubenspeck of Re/Max Honolulu has seen this firsthand. One of his clients was moving off the island and wanted to sell his single-level home in Mililani Mauka. Before the listing was even officially on the market, they had received an offer for full asking price. The appraisal came back at full value as well, previously an anomaly in the market—historically in Hawaii, appraisals fall short of asking price. Once the listing was official, Daubenspeck was inundated with calls about the property. They quickly received two other backup offers—both above asking price, one by $30,000.
Buyers’ agents are feeling the heat, too. Mark Kumamoto of Prudential Locations had a recent client who was looking for a townhouse in Aiea. He put in two offers only to get turned down. What finally worked, for a condo the client really loved, was putting in a bid above asking price within the first week of the unit being offered.
These stories have become the norm in a market that has consistently stayed strong despite nationwide economic ups and downs.
Bryn Kaufman, one of the top real estate producers in Hawaii, finds this type of demand and limited supply all too common. “We go up against multiple offers most of the time now. The one that stands out was a home in the $1 million-plus range. I advised going in 8 percent over asking price, which the clients did. To my surprise and theirs, they still were too low, and their offer was rejected.”
Source: Associations and Board of Relators of respective cities featured
Infographic: Amy Lenoir
Mililani Millionaires by 2020?
Where is it all going? In our real estate blog in April, we reported on a forecast by the University of Hawaii Economic Research Organization (UHERO)—its prediction was that the median home price in Honolulu would climb to $650,100 through 2013, then to $724,000 in 2014, hitting $815,000 by 2015.
Economist Paul Brewbaker tells us, “People are going to have to wrap their heads around the idea of a median single-family home price on Oahu of $1 million before the 20-teens are over. It’s conceivable home prices could double … within the 20-teens.”
How you feel about that depends on where you sit in the real estate food chain, and where you want to be in the near future. Own a paid-off home? Lucky you—though you may find your houseless children or grandchildren moving back in with you. Are you in the market now, either buying, selling or trying to trade up? Stick with us, we have some advice for you in just a few paragraphs.
Why the rise?
Price increases like that can chill as much as thrill. Is this for real? Is it a bubble? Is outside money pumping up local home values, as in the 1985-1990 Japanese investment bubble, when the median price of a Honolulu home doubled in four years?
The short answers, in order: Yes. No. Not so much.
What’s happening is entirely consistent with a historic pattern in Hawaii real estate, where home prices surge for a few years, then plateau. It happened between ’77 and ’81, as average home prices shot from $94,028 to $191,597. Many of you remember the ’85-’90 explosion: average home prices went from $188,900 to $498,511.
That last one was indeed a local bubble, as Hawaii home values slumped immediately after the confluence of Japanese investment money drying up, the first Gulf War kicking off and Iniki barreling in. And then there was the long 1990s Hawaii recession that kept everything flat, from our home prices to our joie de vivre. If you’d bought a house in 1989 at the then average price of about $347,000, and sold it in 1999 at that year’s average price, well, you made a staggering $3,500.
Not so today. This time, the housing bubble burst all over Mainland cities that tried to cash in on the inflated housing boom. Hawaii sat out their orgy of speculative construction, which headed off an oversupply of homes on the market, while local lenders stayed conservative, rather than throw money at any homebuyer with a pulse, if not a credit history, the way some Mainland banks did.
In fact, Hawaii homeowners barely saw a dent in their investment. The median price of single-family homes dropped just 3 percent in 2008 and 7.9 percent in 2009. Prices started going back up in 2010 and now, as of April 2013, the median sales price on a single-family home is up to $625,000, and, for condos, $335,000. In the past year alone, the median sales price has gone up 4.2 percent for single family homes and 5 percent for condos. Not a bad investment strategy, especially when the economy as a whole has seen its share of ups and downs. Taking the long view, Hawaii real estate has typically paid off: from 1985 to 2011, the price of single-family homes increased 262.5 percent, or just over 5 percent annually on average.
Simple supply and demand is fueling the current rise. Brewbaker notes that housing starts over the past four years are the lowest Hawaii has seen for any four-year period since the end of World War II. (See sidebar on the next page for more on this.)
THE Affordability crisis
Homes in Hawaii are expensive. Everyone knows this. Recently, they’ve only gotten more expensive. According to the Honolulu Board of Realtors, the current median price for a single-family home in Honolulu is $625,000 (a condo is $335,000). Economist Paul Brewbaker says don’t be surprised if that number morphs into $1 million before the decade is over.
“It will never be cheap,” he says. “This is Honolulu.”
Law professor Randy Roth agrees. “It’s awfully hard for a young person to own a home here,” he says. In fact, three of four of Roth’s adult children live on the Mainland, and while housing certainly isn’t the only reason, that it’s cheaper to own a home in most other states means they’re there, not here.
“Hawaii is paradise … You make sacrifices,” he adds. In the early 1990s, Roth helped write and edit two books, both titled The Price of Paradise, on that exact topic.
Skyrocketing home prices likely mean more sacrifices for those that don’t already own a home. It’s simple economics: Supply and demand. It’s the problem of way too many people wanting homes coupled with stifling restrictions, because of geography—we live on an island, after all—and government bureaucracy.
Brewbaker puts it more bluntly: “Honolulu in the 21st century is not endowing the newborn with the existing per capita housing stock—and that doesn’t even take into account second-home buyers and the manner of absentee owners, the offshore investors,” he says. “Yes, this is a housing capital formation rate that is probably too low unless you intend to drive people out of Hawaii, but my contention is that this is in fact what the ‘Politics of NIMBY’ actually is about. The crunchy granola types, now that they’ve moved to Mililani, do not want anybody else ever to have the ability to do what they did.” But, this also includes their kids, he concludes, adding that new homes being built on Oahu between 2009 and 2012 are lower than in any four-year period since World War II.
What does this mean for future Island homeowners? Or, those that want to retire here? Interest may be low, but prices are only going up and, despite new developments on the West side and in Kakaako, inventory will still be drastically low.
Basically, all that ever-growing numbers of home buyers can do now is try to grab an existing home when someone decides to sell. So far this year, we’ve seen an average of 356 single-family homes and 521 condos come up for sale each month, a drop of 27.2 percent in inventory of single family homes, and 21.4 percent in condo inventory from 10 years ago.
All this while Hawaii’s population has grown 2.4 percent in the past 10 years. Interest rates are crazy low at about 3.5 percent for a 30-year fixed mortgage (Remember when interest rates were 8.5 percent in the year 2000?) And consumer confidence has grown as we start to feel the recession fade.
Kevin Miyama, of Prudential locations, and the president of the Honolulu Board of Realtors, attributes the booming demand for real estate to four factors: military, construction, tourism and the government. “The focus on the military in Hawaii means that public money is coming in from the government, and strengthening our economy, creating construction jobs, both civilian and military. There are at least five or six new development projects being built, as well as the rail project, all indicators of a strong construction sector. Tourism numbers are up, with per person expenditure at a high, all contributing to our economy here in Hawaii. And lastly, the government in Hawaii, one of our largest employers, is once again hiring.”
“Real estate is hot because, first, and most importantly, consumer confidence is back,” agrees Yukiko Sato, a realtor associate with Coldwell Banker Pacific Properties. “Unemployment is also down, so there is a larger pool of eligible buyers in the market. Another wildcard factor is increased demand from overseas investors. In addition, the combination of historically low levels of new construction and the lowest resale inventory since 2005 will push demand past the existing supply.”
Like we said, poised to explode.
Time to Sell?
If you were thinking about selling anyway, consider yourself lucky. You’ll likely get what you want for your place and then some. Currently, single-family homes are consistently receiving 98.5 percent of their listing price, and condos are getting 99.1 percent. That’s already better than just two years ago when, sellers were getting 95 percent of their list price. Twenty-nine percent of listings are receiving multiple offers, the rest, at least one or two. And as we noted at the top of this article, some sellers are even getting offers higher than their asking price.
You will also very likely sell your home or condo quickly. In 2003, the average time a single-family home sat on the market was 29 days. That jumped up to 52 in 2008, and now the average is only 23 days, barely three weeks.
The temptation for you will be to hang on for as long as possible, certain there will be a higher offer down the road.
“If a seller can wait, they definitely should, says realtor Daubenspeck. “Appraisals have still not caught up to the potential, nor to the peak of the market.” He recommends holding on to property for another three to four years.
Of course, what’s a real estate article without a little contradictory advice? As much as some people estimate million-dollar-median home values by the end of the teens, all upswings end. Kaufman warns that, at some point, the seller is going to just have to choose, and hope they’ve maximized their home’s potential. And if you’re on a timetable, say, to leave the Islands, you may have to take what you can get when you can.
The last big seller’s market in Hawaii was back in 2005-2006, when prices skyrocketed 20 percent within the year. Real estate is cyclical. It’s high now, but as Rochelle Lee Gregson, CEO of Honolulu Board of Realtors, points out, “At some point, sellers will see the opportunity and start making the right decisions at the right time. And let’s not forget the new developments that are sitting on the horizon. We’re going to be experiencing at least six new developments over the next five years or so.”
Trying to Buy?
If prices are consistently on the rise, and seller is king, where does that leave you if you’re trying to buy? Not in a bad place, actually, if you act quickly. “This is actually a good time for buyers as well,” Gregson says. “The inventory may be low, which is nudging prices upward, but interest rates are also low, which works in the buyer’s interest.”
Just 20 years ago, the average mortgage interest rate was 16.04 percent. In 2012, the average mortgage interest rate was 3.6 percent. Yes—real estate paradox alert—low interest rates means you have more competitors as you chase your dream home. As Ed Pei, executive director of the Hawaii Bankers Association. explains, “Low interest rates have helped more home owners qualify for mortgage loans, and so the demand has been strong, and has helped to drive up prices.”
“People are going to have to wrap their heads around the idea of a median single-family home price on Oahu of $1 million before the 20-teens are over. It’s conceivable home prices could double … within the 20-teens.”
—Economist Paul Brewbaker
Don’t lose sight of the first half of his observation: You can at least get in the game more easily. You can qualify for a larger mortgage, with a smaller down or income, in a low-interest environment than you could in a high-interest environment.
“Things aren’t going to get more affordable in Hawaii,” says Miyama who advises getting a foot in the door. “Start somewhere and build a financial foundation, build equity.”
As the realtors we interviewed related, be prepared to meet or exceed asking price. Be prepared to jostle for the attention of the sellers if there are multiple offers. Don’t be surprised if your realtor suggests writing a letter to the seller, essentially selling yourself to be their buyer. According to online industry trade journal rismedia.com, this is a thing now.
Try desperately hard not to fall in love with a place. This is a business deal, especially if you’re trying to ride this price rocket for a few years and hop off.
Expect to look at many, many old homes or condos that barely seem worth the rapidly rising asking price, then be prepared to move aggressively on one you think will work for you. “Buyers will need to move quickly and confidently in order to get the property they have targeted,” says Sato. “Buyers should have a clear picture of their financing, and getting pre-approved before shopping will help a great deal. Buyers can also be proactive by working with a realtor who can negotiate and act quickly in a hot, fast market.”
HIGH-HOME EQUITY = HIGHER PROPERTY TAXES
The past couple of have been good to Hawaii homeowners: Their equity has mushroomed. But no one escapes The Taxman.
Real property taxes are calculated based on the assessed value of the home multiplied by the tax rate set by the City Council. Currently the Honolulu rate is $3.50 per $1,000 of net taxable property—one of the lowest in the nation. So, if your home is assessed at $600,000, your property taxes for the year are $2,100.
Many homeowners can expect to pay more taxes simply because values are increasing. As far as the tax rate itself, that’s up to the Council. Currently, the Council’s operating budget has a $40 million budget shortfall, says Lowell Kalapa, president of the Tax Foundation of Hawaii. This may spur it to raise the rate.
“One of the things they’re going to have to do is look at the property-tax rates,” he says. “The valuations may in and of themselves be able to generate the $40 million shortfall and make it up by just the fact that assessments are going up.”
But, Council member Ann Kobayashi says, the Council isn’t going to raise property taxes. “Our sewer rates are going up, our water rates are going up, auto registration is going up,” says the chair of the budget committee. “We’re talking about people’s homes and we hate to tax someone out of their home. Bottom line, we don’t want to hurt the homeowner.”
Kobayashi acknowledges that city costs are increasing, so they’re “constantly looking for new ways to raise money.” She adds that funds will come from property taxes on new developments. That won’t be immediate, though.
Hawaii’s property-tax rates are low simply because they don’t go toward education and health—big-ticket items that are funded by the state’s other taxes: the general excise, income and corporate taxes. Homeowners in New Jersey often pay between $8,000 to $10,000 on property taxes, says Kalapa, even though their homes are valued at less than homes here in Hawaii. “When people say housing is so expensive in Hawaii, it’s not so much because of the property tax, as much as it is the lack of land that’s zoned urban,” he adds. That’s a whole other issue for the Council to tackle (or not).
Looking for an Upgrade?
Individual situations may vary widely for those intending to sell one property to buy another in this rising market. How much bigger or more expensive is your target home versus the one you’re selling? How much equity do you have in your current home, leaving you how much to finance on your target home? Are you trying to transition from an apartment to a house? The main thing to remember, according to Miyama, is that all boats are rising in this tide. You may get more for your current home if you wait a while to sell, but your next home is only getting more expensive too. It could be a wash, financially.
Unless you plan to sell here and jump into another market, that is. Imagine if projections hold true and the average Honolulu home sells for $815,000 in 2015. Imagine also that Las Vegas, our favorite escape hatch, continues to crawl out of the wreck of its burst housing bubble with depressed prices, as seems likely. Why, you’d be able to buy 5.3 homes in Sin City, incorporate as a small town, name it after yourself and appoint yourself mayor. New Ewa, 89129, here we come!