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The Honolulu Advertiser

Posted on: Sunday, July 3, 2005

Housing bubble? Experts say no

 •  Through the roof
 •  Rising rates may price more out of market
Reader poll: When do you think Hawai'i's housing market will cool off?

By Andrew Gomes
Advertiser Staff Writer

When the median selling price of O'ahu single-family homes rose $65,000 from April to May and hit $610,000, Bob Ristelhueber couldn't help but think: bubble.

"That's a sure sign of panic buying," said Ristelhueber, a retiree who bought a Big Island home two years ago. "Anyone who doesn't think Honolulu is in the midst of a housing bubble isn't paying attention."

Sentiments similar to Ristelhueber's can be heard from office water coolers to dining tables around the state, reflecting a general public disbelief that Hawai'i home prices can be anything but on a course of unsustainable inflation that will burst.

The expectation that prices will fall is also an idea burned in the memory of many who experienced the 1994-1999 crash of Hawai'i's real estate market when O'ahu single-family home prices shrank nearly 20 percent.

But local economists and real estate experts predict the upward ride for Hawai'i home prices will continue — though at a slower pace — for another year or two as long as the state economy isn't derailed and interest rates remain attractive.

Paul Brewbaker, Bank of Hawaii chief economist, and Mike Sklarz, former chairman of the state Council on Revenues, say the housing price peak, whenever it arrives, will most likely be followed by a leveling off of prices rather than a drastic drop.

That runs counter to some national economists, who predict housing prices falling in many U.S. markets, but they haven't identified Hawai'i as one of them.

Federal Reserve Chairman Alan Greenspan said last month that housing prices in "some local markets ... seem to have risen to unsustainable levels." He declined to say which markets.

It's hard not to think Hawai'i is in a bubble when everyone seems to have a story of a nearby home selling for an astronomical price.

Take the 2,000-square-foot home on Sixth Avenue near the freeway in Kaimuki that was recently listed for $875,000. The 14-year-old home sold three times in the past two years, first at $402,000 and most recently at $660,000 in August.

Since 2000, the price of a typical O'ahu single-family home has just about doubled.

The amazing stories make for good conversation around the backyard grill, but real estate analysts say a broader look at the market tends to soften the extremes.

A doubling of prices over five years is about 20 percent per year, not cause for worry, according to Brewbaker. "Twenty percent per year is seriously good in a sustained way," he said.

It's the last several months when prices of single-family homes have risen nearly 30 percent, that has brought out the bubble theorists. Prices in May rose by an even sharper 37 percent, a record for this real estate expansion cycle.

"Most people ask, 'Is it a bubble? Is the price going to come down, and when?' " said Prudential Locations broker Mike DeMello.

DeMello said he tells clients that the market's momentum gives him assurance that prices won't end their rise soon. But he also tells buyers that as long as they are comfortable with the mortgage payment, don't worry about where prices are going.

Prices likely will move higher and level off without a dramatic fall, according to Brewbaker, Sklarz and Honolulu Board of Realtors economist Harvey Shapiro.

They boil it down to a question of supply and demand.

Limits on building

Unlike many Mainland markets where some industry observers warn of overbuilding, Hawai'i's land permitting process has limited building.

"The most notable aspect of home building since the 1990s has been the lack of it," Brewbaker said. In a superheated housing market like O'ahu's, you'd expect home building to be setting records. But the number of homes built last year — 3,811 — was below the 65-year median of 3,999.

With relatively few new homes added to the market, record numbers of purchases have eliminated much of the inventory.

This year through May, the average number of O'ahu homes on the market are at their lowest level since the Honolulu Realtor board began keeping statistics two decades ago.

Demand, meanwhile, is climbing, driven primarily by low interest rates. The favorable rates and rising home prices have also unleashed pent-up demand from residents in homes that lost value in the late 1990s.

Job growth has contributed, allowing more residents to buy homes. O'ahu's population has also increased by 17,834 since 2000.

And don't forget the baby boomers buying second homes. Investors — including baby boomers, wealthy individuals converting poorly performing stock investments into real estate and speculators aiming to resell quickly for profit — made up an estimated 23 percent of O'ahu home buyers last year.

Rising property values have persuaded some homeowners to trade up.

Benjamin Ignacio, a partner in a criminal defense law firm, bought a 50-year-old home in Kaimuki three years ago with his wife. The house about doubled in value, which allowed Ignacio to buy a newly built house also in Kaimuki in May.

"It seemed like a good opportunity," he said. "Hopefully, the market does go up and the equity in this new house improves."

Bust not inevitable

Housing market watchers said the main reason prices have declined historically is prolonged economic shock that leads to mass job losses or out-migration that flood a market with homes.

Most housing booms don't lead to busts. In a recent national study, 54 housing booms in different communities across the country from 1978 to 1998 were followed by only nine busts. The Federal Deposit Insurance Corp. study defined booms as a three-year price rise of 30 percent or more and busts as a decline over five years of at least 15 percent.

The report said Hawai'i's housing bust in the 1990s largely stemmed from California's recession and Japan's financial crisis that hurt Hawai'i tourism and helped shrink the state economy by about 1› percent from 1991 to 1998. Economists add that a decrease in Hawai'i's military population was another factor.

"Population outflows are extremely harmful to housing markets, because they both depress demand for homes and raise the number of homes on the market," the study said. "This combination of falling demand and surging supply can wreak havoc on home prices."

But that has been rare. In 45 of the 54 booms, post-boom home prices rose an average of 2 percent per year for the next five years.

"Home prices tend to adjust slowly during a downturn," the report said, noting that as long as homeowners can afford their mortgage, they don't have to sell.

The economic outlook for Hawai'i seems to support the theory that home prices won't collapse. The state forecasts inflation-adjusted gross state product to rise about 2.5 percent per year through 2008.

This is not to say there aren't some trends that could upset the housing market.

A rise in interest rates could reduce demand and slow price increases.

Much of Hawai'i's housing demand is from investors who tend to be more apt to sell if values decline, which could increase supply and depress prices.

Another concern is the recent popularity of adjustable-rate, interest-only and 100 percent financing mortgages that expose borrowers to more risk of defaulting if rates significantly rise or incomes fall.

Herb Conley, co-managing director of local brokerage firm Coldwell Banker Pacific Properties, said it's a widespread industry issue because more people are taking higher-risk loans.

But he said prudent buyers stick with more traditional financing that they can comfortably pay off no matter what happens to interest rates and home prices.

"When you're buying for your own home, as long as you can afford the property and comfortably make your loan payments, then where you buy in the cycle is not as critical as how long you're going to hold (the property)," Conley said.

"Historically through three cycles since the 1970s, even if someone bought at the top of the cycle, as long as they held to the top of the next cycle, the value of their home has increased.

"Warren Buffett is not a day-trader," he said of the billionaire stock investor. "He is not trying to pick timing on stocks. The ones who try to pick timing on stocks are typically the ones who statistically do the worst."

When prices peak

Experts say the first sign of the approaching price peak will likely be a prolonged slowdown in the number of sales, which hasn't happened yet.

During the Japanese investment bubble, single-family home sales began to slow in 1988, two years before the peak price. In 1990 there was another indicator: inventory doubled.

But after the 1990 peak, prices declined slightly the following year and then were more or less flat until 1995 when the economic decline prompted a lasting slide in prices.

Leading up to 1990, prices had doubled over five years. Today prices have doubled again, but Conley predicts there is more room to grow this time because the state economy is stronger.

Home sellers also hope there's more room as they push prices ever higher.

The median asking price for a single-family home on O'ahu was a record $850,000 in May, or almost 40 percent above the median purchase price.

Honolulu Realtor Board economist Shapiro said it has typically taken a year for the median purchase price to reach a median asking price.

But Conley doesn't see prices rising that high. "I do not believe we will hit $850,000," he said. "I wouldn't be surprised if we hit $700,000."

Conley said it's impossible to know exactly where the peak will be.

"Nobody's got that good a crystal ball."

Reach Andrew Gomes at agomes@honoluluadvertiser.com or 525-8065.

• • •

Through the roof

The asking price for this house at 1021 6th Ave. #A, right next to the H-1 Freeway, is $875,000.

This 14-year-old, six-bedroom, four-bath home was first sold in 1995 for $455,000. It has been sold three times since then for these prices:
August 2003 $402,000
December 2003 $514,000
August 2004 $660,000
On the market now $875,000