How Much is Your Home Worth Now?

After a decade of skyrocketing prices, Hawaii’s real estate market has finally slowed down. What can we expect next?

What a difference five years makes. When HONOLULU Magazine last did a feature examining home prices in Hawaii in 2004, the real estate market was on fire, with soaring prices filling hopeful home buyers with urgency. You couldn’t buy a house fast enough. Today, it’s a much different picture. The global recession has bruised Hawaii home prices and squelched demand. The median sale price for a single-family home on Oahu has dropped more than 8 percent compared with this time last year, with certain neighborhoods seeing a decline of as much as 37 percent. (See our chart of which neighborhoods have seen the most dramatic price shifts on page 32). The number of homes being sold has dropped off sharply, as well—down almost 35 percent compared with the same time in 2008.

What does this mean if you’re trying to buy or sell a home right now? We spoke with local real estate experts to get a sense of what’s really happening in the market, and get some tips for the best way to respond to the situation.

What does this mean if you’re trying to buy or sell a home right now? We spoke with local real estate experts to get a sense of what’s really happening in the market, and get some tips for the best way to respond to the situation.

First of all, it’s easy to look at numbers like this and recall the bursting of the Japanese investment bubble in 1990, which sent the local housing market into an almost decade-long spiral of pain.

But real estate pundits say the current situation is far from the end of the world. Despite increasingly gloomy economic forecasts, there are a few reasons Hawaii won’t crater the way some Mainland markets have.

“It’s pretty clear that the housing market is going to stay weak until the economy turns around,” says Harvey Shapiro, research economist at the Honolulu Board of Realtors. “But this is not a collapse in the market; this is part of the normal business cycle, accelerated by the financial woes that we’re having.”

The larger economy may be in crisis, but it’s important to note that the dropping home prices we’re seeing aren’t a bubble popping as much as an inevitable correction to a decade’s worth of dramatic increases, during which the median price of a home skyrocketed from below $300,000 in 2000 to almost $700,000 in 2007.

Chason Ishii, president of local real estate firm Coldwell Banker Pacific Properties, says, “The escalation was really based on long-overdue, pent-up demand. When new inventory became available, the market continuously moved forward, as the economy and the overall business was doing quite well.”

Now that we’ve moved over the crest, Hawaii is left with a relatively modest number of available homes. Oahu’s inventory this April totaled 1,822 single-family homes and 2,514 condominiums, less than the same time last year. This scarcity will create a natural safety net for prices, especially compared with states such as Florida and Nevada, where rampant overdevelopment has led to a glut of empty, unwanted homes.

And finally, even in the go-go atmosphere of the past decade, Hawaii has remained more conservative than other Mainland cities, both in terms of who’s buying property and how they’re financing it. Ricky Cassiday, of real estate consultancy Data@Work, says, “A lot of people want to come here to live. But it’s a much bigger step to buy here. The people who own houses in Hawaii are generally different from those on the Mainland; they didn’t get into this for the home equity. It’s more of a longterm commitment.”
   

Selling When No One is Buying

Real estate analysts might minimize the severity of the downturn, but it’s small comfort for anyone trying to sell a home. Buyers have adopted a wait-and-see attitude.

“Demand is low because of the mystery and the fear,” says Cassiday. “Home shopping is a collaborative process. Everyone’s looking over their shoulder, saying, ‘She just got it for 50 cents, I want it for 45 cents. Maybe if I wait five months or a year …’”

He recommends that sellers be realistic about pricing, which in this time of slow decline means not only matching the prices of similar listings in your neighborhood, but beating them. It’s also important to make sure your property is in good, livable shape. With bargains available everywhere, buyers have become less tolerant of fixer-uppers.

Home sellers may be relieved to learn that most of the sales slump has been in the high-end luxury segment of the market. In March, 75 percent of the single-family homes sold were in the $400,000 to $799,000 price range. Similarly, 76 percent of condos sold were under $400,000. “What we’re looking at is a basic, local market—homes being bought by people who need shelter, who are having lifestyle changes,” says Ishii. “Take a look at the remaining months of inventory for houses over $1 million. There is 66.4 remaining months of inventory. That’s over five years’ worth. But when you look at homes in the $500,000 range, those inventory levels are similar to previous years.”

Not only are average-size homes somewhat protected from the shrinking demand, but neighborhoods in the city have maintained their value better than those in West Oahu and over the Pali. “Local neighborhoods closer to downtown Honolulu remain very stable, both in price and sales volume,” Ishii points out.

“Nuuanu, Manoa, Aina Haina. Being in town is always going to be in demand.”
 

Buyers’ Paradise

If home sellers are feeling the pain, home buyers who are ready to shop are reaping the benefits. It’s tempting to postpone a house purchase for six months or a year, in anticipation of even better bargains in the pipeline, but there may not be much to gain by waiting.

Shapiro calls this the best time to buy a house that he’s seen in at least a decade, noting that while prices might get lower over the coming year, they’re not going to drop dramatically. “I hear people trying to predict prices, and I think they’d be better off gambling in Vegas,” he says. “If you can get within 10 percent of a peak or a trough, you’re doing much better than the general public. If people are thinking that we’re going to see a return to the prices of 2000? Forget it; it’s not going to happen.”

Almost more important than the raw sale prices are the unprecedented interest rates, which had dipped as low as 4.25 percent for a 30-year, fixed-rate mortgage as we went to press.

The big caveat here is it’s become harder to qualify for a mortgage, and more likely that you’ll have to pony up a hefty down payment—as much as 25 percent down in many cases.

Steve Teruya, president of Finance Factors, says the days of lenient, creative lending are over. “The fallout from what happened in the subprime market has imposed stricter underwriting criteria by the big lenders, Freddie Mac, Fannie Mae. Basically, it’s gone back to the way it used to be, where you’ve got to provide all your documentation. Those low-doc and no-doc mortgages, the 100-percent financing, they’re all gone.”

FICO credit-score requirements, always a crucial element of qualifying for a loan, have also been upped. “In the past, as long as you had a credit score of 680, you would qualify for the low rate. You may still qualify, but it won’t be for that low, advertised rate,” says Ishii. “Those rates you’re seeing advertised tend to be for highly qualified applicants, with credit scores around 740.”

Scores impact not only interest rates, but loan-to-value ratios (the amount of a home’s cost covered by the mortgage loan). Pushing your score above 700 might well be the difference between a 20 percent and a 25 percent down payment.
 

Looking to Invest?

It’s a challenging time to be investing in real estate. Anyone hoping to pick up a home or condo and flip it for a profit is probably out of luck in the short term. But it still may make sense to buy a property with the aim of renting it out, especially if you can find a property that you’re able to rent out for 75 percent to 100 percent of your monthly mortgage payment.
 

Looking to Refinance?

With interest rates at rock-bottom levels, even existing home-owners can take advantage. The conventional rule of thumb says that moving at least 1 percent or 1.5 percent lower will save you significant money and, in today’s market, that applies to quite a few homeowners. Teruya says that Finance Factors has seen a 31 percent jump in the number of refinance loans in the first quarter of 2009, compared with last year.

But as with those looking at new mortgages, the real trick is being able to qualify for a refinance.

Last December, Fannie Mae tightened up its requirements for single-family home mortages: Primary-residence, cash-out refinances are limited to 85 percent of a home’s value. For a second home or an investment property, the percentage drops to 75 percent.

This means that, if you have a $500,000 home, you’ll need at least $75,000 in equity to cover a refinance, or else cover the difference in cash. Homeowners who scored mortgages in more relaxed times may find it difficult to pass muster this time around, especially if they haven’t been in the house for long.

“Anyone who bought within the past three to five years may find themselves without enough equity to refinance,” says Teruya. “Especially if they came in with 10 percent down, or 5 percent down.” Declining property values don’t help.
 

Keeping Your Cool  

The takeaway from all this? The market may be cool, but whether you’re hoping to buy a home, sell one, or just sweeten the loan you’ve already got, there are plenty of opportunities for cool moves.