Posted on: Sunday, June 27, 2004

Are home prices too high? Market will decide

By Sean Hao
Advertiser Staff Writer

As shocking as the recent increases in Hawai'i home prices have been, the rise is not out of line with inflation, and incomes have generally kept pace, making homes more affordable now than they were in the early 1990s.

As of May, the median home price in Honolulu stood at $445,000, up 53 percent from May 2000, when the median was $290,000, according to the Honolulu Board of Realtors.

"If you went to sleep in 2001 and you woke up this year, you're going to have a heart attack," said Paul Brewbaker, chief economist for Bank of Hawaii.

But if you take a slightly longer view, today's prices don't look that surprising. The $445,000 median price is not a huge premium over prices during the last housing boom in the early to mid 1990s, Brewbaker said.

At the peak of the last boom in 1994, the median-priced home was $360,000. When simply adjusted for inflation, that price grew to $403,000 as of last year. If prices continue to rise at about 15 percent a year, which they have done in recent years, that same home would be valued at about $600,000 in 2006, which would represent a 2.5 percent real return per year since 1994, Brewbaker said.

"That's not that high a rate of return," Brewbaker said. "Not withstanding how unnerving it is to see home prices go up as rapidly as they have the last couple years, when you fit it in against this long-term pattern of concentrations of appreciation, followed by concentrations of stagnation, it all pencils out to very modest rates of appreciation."

Depending on timing, buyers during a housing boom may need to exercise patience. For example, a buyer of a home priced at $360,000 in 1994 would have had to wait until this year before prices would rise above that level when adjusted for inflation, Brewbaker said.

Bill Chee, president of residential real estate firm Prudential Locations, said those who bought during the last boom and held on to their homes until this year would be break-even or have realized a gain on their investment.

"Everyone has recovered," he said. "There's not a place in Hawai'i I think where prices haven't recovered."

Still, for some, memories of falling home prices during the mid '90s are hard to forget.

"There is a group of people that are concerned about it, but those are the people who were in the market in the early nineties" when an exodus of Japanese investors pulled real estate values down, Chee said. "Those people have long memories. They're anticipating an adjustment, but our thinking is that's not going to happen this time because there's no outside force that's going to pull out."

Hawai'i residents, who have been the main force driving the housing boom, have been able to afford to buy because of rising incomes and falling interest rates.

The gap between the average home price and the affordable price is nowhere near the levels of the early 1990s. In 1990 an average income meant you could afford a home priced at $144,000, given the interest rates at the time. But the median home price in 1990 was more than double that at $352,000.

The gap between what people can afford to pay and the median price narrowed to just $50,000 last year. And while it has grown with the increase in home prices and mortgage rates in recent months, it is still not back to the level of 1990.

"We haven't gotten to the point where prices have gotten out of line with the fundamentals," said Carl Bonham, an economist at the University of Hawai'i Economic Research Organization.

So are housing prices too high? Bonham said the market will answer that question.

"Basically, what happens with the market is people set their prices too high, market times (days on the market) increase and things get stagnant," he said.

Until then, continued economic expansion should support rising prices, Bonham said.

"There's a little evidence of a peak, but that's going to depend largely on income growth and job growth," he said.

The market also is susceptible to threats to the state's overall economy such as geopolitical turbulence and potentially higher interest rates. In addition, rising prices will become their own limiting factor as they push more potential buyers to the sidelines, Brewbaker said.

"At some point affordability does become a binding constraint," he said. "Values get so high that the average home buyer (and) the average family, no longer can participate."

In addition, as homes become less affordable, and further appreciation becomes less likely, people may start deploying capital into investments with greater upside potential, Brewbaker said.

"That may be something we see unfold over the next couple years," he said.

Reach Sean Hao at shao@honoluluadvertiser.com or 525-8093.

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