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The Honolulu Advertiser
Posted on: Sunday, April 4, 2010

Spike in Hawaii home prices on the horizon

by Andrew Gomes
Advertiser Staff Writer

Hawai'i home sales volume has been rising for nearly a year, but the pipeline to produce new homes is at a more than 30-year low, leading a local economist to warn that a price spike could be in the making.

A jump in prices isn't likely in the next year or two, based on projections by the University of Hawai'i Economic Research Organization, which forecasts that median home prices on O'ahu will eke out roughly 1 percent gains this year and next.

But 2012 or 2013 could be the beginning of the next significant rise, which has the potential to be steep.

Several factors, such as interest rates, credit availability, the depth of the foreclosure problem and growth in jobs and personal income will play into whether home prices get pushed up again and to what degree. So a run-up in prices isn't certain.

Home production, however, can be a major influence on prices, and residential building permits statewide last year sank to their lowest level since at least 1980, according to state statistics. Older statistics weren't available.

Paul Brewbaker of local consulting firm TZ Economics said home prices could "light up" in two or three years based on the dearth of residential building permits from homebuilders last year.

According to the state Department of Business, Economic Development and Tourism, there were 2,722 private residential building permits last year. That compared with 4,768 the year before and a recent peak of 9,706 in 2005.

Brewbaker said the present pace of home production won't keep up with natural household formation, that is demand generated by the present population as young adults form new families who seek their own housing.

Around 4,000 new homes are needed to satisfy household formation, the local economist said, adding that if home construction doesn't pick up it could lead to a short supply that drives another spike in prices.

The last time the number of residential building permits was under 4,000 was 1998 at the tail end of the last housing market slump that lasted roughly a decade. That year there were 3,356 permits.

"There are very few houses being built," said Carl Bonham, director of UH's economic research group. "We are setting ourselves up for a shortage down the road."


Many local real estate observers like to say that Hawai'i home prices have had a historical tendency to move in a stairstep pattern up, flat, up, flat over multi-year cycles.

O'ahu's market is now in its third or fourth year of more-or-less flattening, but high-volume homebuilders with land to build on aren't planning to ramp up production soon.

Meanwhile, three master-planned communities totaling up to almost 29,000 homes in Central and Leeward O'ahu have been either derailed or delayed.

High-volume home builders active in Hawai'i say they saw decreasing buyer demand unfolding about four years ago, and began adjusting production so they didn't have a glut of unsold inventory.

Now homes are more or less being built to order, with little or no speculative development.

A report released last month by local real estate market researcher Ricky Cassiday noted that Hawai'i homebuilders produced and sold the fewest new homes in at least 30 years.

Cassiday's report said statewide sales of new homes totaled 2,050 last year fewer than half the recent peak of 4,842 in 2006, and a 40 percent decline from 3,071 sales in 2008.

The moves by most Hawai'i homebuilders to avoid getting caught with lots of empty homes have helped them survive and also helped overall home prices from dropping more than a modest amount. But now that a market recovery appears to be under way, builders are remaining cautious.

"The strings are pretty tight with not getting exposed to the market," said Mike Jones, president of the local Schuler Division of residential developer D.R. Horton.

Schuler's pipeline for near-term production includes about 60 homes at Sea Country in Mā'ili, 60 at Kahiwelo in Makakilo and about 20 at Nanala in Kapolei, as well as three projects on Maui and a couple on the Big Island.

Developing additional subdivisions in Makakilo and Kapolei will require hefty investment in infrastructure, and Jones said Schuler needs to see some signs that such investment will pay off before it proceeds.

Another major Hawai'i homebuilder, Gentry Homes, also dialed back production a few years ago and isn't projecting picking up its pace this year.

"We were very careful with our spending and with our inventory levels so we didn't have the product sitting there," said Bob Brant, Gentry president and chief executive officer.

Brant and Jones said they are keenly waiting to see what happens to the uptick in home sales after federal tax credits for home purchases expire at the end of this month.

If purchases stay healthy without the credit, it could encourage developers to disengage the brakes on building.


Still, some observers wonder how much builders can ramp up production if demand continues to build over the next year or two.

Two massive housing projects planned for O'ahu are uncertain, while a third could be near gaining a key approval but is still at least a couple of years away from delivering initial homes.

One uncertain project is Ho'opili, proposed by Schuler for up to 11,750 homes on the 'Ewa Plain. The developer had anticipated delivering the first Ho'opili homes in 2012 if it could obtain regulatory approvals for the highly contentious project. In August, however, the state Land Use Commission ruled that Schuler's petition to urbanize 1,554 acres of farmland was deficient.

Jones said his firm is working on addressing issues with the Ho'opili petition, but is uncertain when it may return to the LUC to seek approval.

Another uncertain master-planned community is Waiawa Ridge, which has regulatory approvals for 10,000 to 12,000 homes on 3,700 acres near Mililani. The last estimate was for initial home deliveries to begin this year, but construction had been delayed and the developer, an affiliate of Gentry, lost its right to develop the land owned by Kamehameha Schools last year.

A third major pending project is Koa Ridge by Castle & Cooke, adjacent to Mililani.

Castle & Cooke is expected to receive a decision this week from the Land Use Commission on redistricting 768 acres of farmland for the project planned for 5,000 homes.

Castle & Cooke had hoped to start delivering Koa Ridge homes upon finishing Mililani, which happened last year. But the plan in the works since the mid-1990s has been delayed several times. If the developer receives approval, the first homes could be finished in 2012.

A couple of other big projects involving the James Campbell Co. Makaiwa Hills with 4,100 homes near Makakilo and Kapolei West with 2,400 homes have necessary zoning but are on development timetables to deliver initial homes in 2014 or 2015.

Haseko Homes is still developing in 'Ewa Beach, but is building the Hoakalei Resort with 2,350 higher-end resort homes after recently completing the 2,500-home Ocean Pointe community.

New high-rise condominiums could be built to satisfy demand, but they generally take a few years to develop.

Cassiday said the relatively low inventory of previously owned homes that are for sale is another factor that could press prices skyward if demand surges and inventory doesn't grow.

"No matter what you say, Hawai'i is undersupplied in housing," he said.

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