Posted on: Sunday, June 27, 2004
Mortgage rates just one factor affecting prices
By Andrew Gomes
Advertiser Staff Writer
The boom that pushed O'ahu's median home price up more than 50 percent in the past four years was largely fueled by low interest rates.
The question on everyone's mind now is: Will increasing mortgage rates — up about 1 percentage point since March — put an end to the rising prices?
The degree to which mortgage rates may slow the stunning rise in Hawai'i home prices depends, however, on variables beyond how fast and far rates rise.
"It's not the kiss of death for Hawai'i's real estate market," Bank of Hawaii chief economist Paul Brewbaker said of higher interest rates. "Nothing is going to happen real fast, but each month moves us closer to the end of this upswing."
Low mortgage rates made homes more affordable and persuaded many fence-sitters to buy or move to a more expensive home in the past four years. The added demand drove home prices to near-record levels. Now rates are climbing.
Rates on a 30-year fixed-rate mortgage have moved up from a near 40-year low 5.45 percent average in March to 6.27 percent in May. For the week ending June 24, the rate was 6.25 percent, according to Freddie Mac.
The Mortgage Bankers Association forecasts that rates will reach 6.4 percent in the last quarter of this year and hit 7 percent by the third quarter of next year. Some economists predict that rates could approach 8 percent in the next 18 months.
Michael Sklarz, the Honolulu-based chief valuation officer for real estate data provider Fidelity National Information Solutions, said there is generally a 4 percent home price decline for the first 1 percentage point increase in the interest rate, and a 10 percent price drop if interest rates rise 2 percentage points.
But he said other variables are pulling in the opposite direction of price declines, such as the state's strong growth in jobs and personal income.
"It's kind of a race between the two," Sklarz said. "How much are interest rates going up, and if employment goes up that might offset the interest rate rise."
Employment in the state last month rose almost 4 percent compared with a year earlier, leaving the seasonally adjusted unemployment rate at 3 percent, the lowest since October 1991.
Brewbaker said other factors that support rising prices in the local real estate market include demand from baby boomers, investors betting that real estate will outperform securities, and the predominant expectation that prices will be higher in the future.
Still, higher mortgage rates will affect purchases. Rusty Rasmussen, a vice president with Castle & Cooke Mortgage, the in-house lending arm of Castle & Cooke Homes Hawaii, said the pool of qualified buyers shrinks as rates rise.
For instance, to qualify to buy a $435,000 home, a buyer generally would need to earn about $75,000 a year, assuming a 20 percent down payment and the 5.125 percent interest rate offered in March.
To qualify for the same home with a 6 percent mortgage, a buyer would need to earn $81,000. The income requirement rises to $89,000 at 7 percent, and to $98,000 at 8 percent.
"That's the fundamental reason why people say (higher interest rates are) going to put a damper on things," Rasmussen said.
Still, Rasmussen said he doesn't expect rates to affect the pace of sales or rising prices unless rates reach 7 percent. "You have a big ship," he said. "It's hard to stop."
The expansion cycle for residential real estate sales on O'ahu is in its eighth year, while price increases are in their sixth year for single-family homes and fifth year for condominiums.
This year, the median single-family home price, which is a point where half the homes sold for more and half for less, rose 11 percent, from $400,000 in January to $445,000 last month on O'ahu.
Despite higher prices, more purchases are being made. Some industry experts believe that the rise in mortgage rates since March created a rush to lock in rates for purchases that will close in the next few months, and that sales growth will begin to soften later this year.
Brewbaker said he has begun to hear stories from real estate professionals about fading numbers of multiple bids above asking prices on O'ahu. And at recent Neighbor Island real estate conferences, he's heard about a prospective buyer being advised to wait for lower prices, and another consumer who sold with the expectation of buying later at a lower price.
Brewbaker called the anecdotes early indicators that the height of the market may be "closer to the end than the beginning" — especially in places like West Hawai'i, Maui and Kaua'i where prices have been rising longer.
But on O'ahu, he believes the market still has an upside for continued price increases, though perhaps at more moderate rates, given the shorter duration of the expansion cycle, more local buyers and interest rate movement.
"I think we will see a very marginal, gradual cooling here," Brewbaker said. "It's still going to be warm or white hot."
Reach Andrew Gomes at agomes@honoluluadvertiser.com or 525-8065.
Neighbor Island median single-family home prices often have been stronger, and in May hit $620,000 on Maui, $472,500 on Kaua'i, and $307,000 on the Big Island.
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Learn more:
For a weekly comparison of mortgage rates on O'ahu see: the.honoluluadvertiser.com
/current/bz/mortgage
For a weekly survey of national mortgage rate averages, including historical data, see:
www.freddiemac.com
