Hawaii Real Estate - Rumors And Reality

Oahu’s single-family home and condo median sales prices have been increasing by 4.84% and 4.67% respectively, on average per year, since 1985. Is this sustainable or are we in a bubble?

"When the fundamental reason for the increase remains in place, values could increase further." This especially applies to Hawaii real estate, a global commodity with limited supply and endless demand. Continuing strong demand and limited supply suggests values for Hawaii real estate will continue to increase.

Let’s take an example. Since April 2017, every 1-bedroom condotel in the popular Ilikai, Ilikai Marina, Waikiki Banyan, and Waikiki Sunset building increased by a whopping ~20%. That is a disproportionately larger amount than the overall market increase. Because these units are being bought primarily by investors, the market value is measured by the income generated. Another record year of tourism arrivals combined with record tourism spending could move prices even higher. Keep your winners.

The following two doomsday rumors have been circulating:

1) “Since interest rates will be moving up, prices will need to come down.” This popular pseudo-explanation has been around since the Summer of 2003 when 30-year fixed rates dropped for the first time below 5.5%.

In reality we have observed that during times when interest rates rise, people tend to select more affordable adjustable-rate mortgages instead of the fixed rate option. In other words, instead of postponing their purchase, buyers simply selected more affordable, albeit riskier adjustable loans with the expectation to refinance when 30-year fixed rates become favorable again. Borrowers also tend to buy down the rate by electing to pay higher up-front points.

The following two graphs show data from 1987 through 2017: a) average US 30-year fixed mortgage rates, and b) the median sales price for Oahu homes and condos.

There appears to be no correlation between 30-year fixed rate mortgage rate gyrations and Oahu’s median sales price. Notable times of steep interest rate increases have been:

• Between 3/27/1987 and 10/16/1987, from 9.03% to 11.58%.
• Between 10/22/1993 and 11/25/1994, from 6.74% to 9.25%.
• Between 2/16/1996 and 7/12/1996, from 6.94% to 8.42%.
• Between 10/9/1998 and 5/19/2000, from 6.49% to 8.64%.
• Between 6/20/2003 and 7/20/2006, from 5.21% to 6.80%.
• Between 11/21/2012 and 8/22/2013, from 3.31% to 4.58%.
• Between 7/7/2016 and 12/29/2016, from 3.41% to 4.32%.

Take a close look at the graph above and you will not see any downturn in the median sales price during these periods of interest rate increases.

2) “The US housing market could collapse 10% because of the new Tax Cuts and Jobs Act 2018.” This was a popular rumor circulating late last year. The new tax law caps the mortgage interest deduction for new loans at $750K instead of $1Mill. The aggregate amount of deducting state, local, and property tax are now capped at $10K per year. In exchange, all tax brackets have been lowered across the board and the standard deductions almost doubled. – Raise your hand if you believe this will cause widespread suffering in the US housing market to the extent of a 10% price drop. We shall see in the fullness of time and compare notes.

The last time the Oahu median sales price dropped 10% was because of the 2009 financial crisis, a shock event that does not compare with today’s broad-based stimulating US tax cuts. Filter the noise and calmly analyze the probability of rumored doomsday scenarios.

• A recent forecast by CoreLogic predicts that by November 2018 US property values could increase ~ 4.6% nominal (2.6% after inflation), and 30-year mortgage rates could increase 85 basis points compared with November 2017. Real disposable income is expected to increase ~4%.

At this time I see a strengthening economy in the US and around the world with minimal inflation risk and no imminent recession threat. These are conditions for Hawaii real estate values to move higher in 2018.

Conclusion:

I believe in the long-term benefits of buying Hawaii real estate. Determine your real estate needs and ignore the noise of trying to forecast and time the market. Buy and sell when you need, not when someone is suggesting times are good or bad. Stay consistent with your long-term objective. ~ May you live well and prosper.

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