Hawaii: One big bubble?

Question

Calling all Hawaii Real Estate investors, theorists, and especially experts to answer this big question:

Is the Hawaii (particularly Oahu) Real Estate market nothing more than one enormous bubble waiting to pop? Or is the rise in value of the homes in the area legitimate?

Or put simply: Are people buying RE in Hawaii because they desire homes, or because they think the home prices will rise?

Yes I know it is somewhat taboo to speculate on markets, but I shutter at the idea of buying at Hawaii's all time high. Throw me a bone, please!

Amit M. · Answer

Although I don't study the Hawaii market specifically, I do know that it has similarities to the Manhattan and San Francisco markets, and I know the SF market well. What these markets all have in common is that they are highly desirable with blue chip status, have almost no new land (except infill/replacement development), and have a global client base.

SF has had an annualized growth rate of about 4.5% over the last 30 years or so; rest of the country I believe 1.5-2%, many areas even less. And that makes a HUGE difference in your appreciation as the years roll by.  Of course the trick is, how to get in as even starter properties are expensive and the initial cash flow is usually not great, certainly not compared to other parts of the country. But if you can make it happen, be smart and find a creative way to do it, you will be gold 5-10 years from now. And once you get on the bandwagon, you can leverage your equity to get into another property.

Best suggestion for you: talk locally to investors in your areas of interest. Learn from their experiences. Go to the local RE clubs to find them. If I lived in Hawaii that's exactly what I'd be doing. Good luck.

Jared Crain · Answer

Josh-

We just left Oahu this summer and we miss it incredibly. When we moved there we looked to buy but were overwhelmed at the prices. There will be a strong rental population from the military bases there, and the turnover that used to occur from deployments is going I be gone now. I was at Schofield so the Kapolei, Millilani, and North Shore markets were what I knew. All had a high cost of entry from what we saw. There are properties in the Wahiawa market that offered a lower cost if entry but many would need some work to get into.

Overall the market has been growing at a steady consistent keel since we started watching it  in early 2009.  I know that the prices seem inflated, but it can't be compared to oter markets. There was a substantial drop in the 2007-2009 period and I know a guy who lost over 200k on his personal residence.

Johnny Aloha · Answer

Interesting question, and I've wondered the same thing many times.  My answer is that: it depends!

There are a lot of submarkets on Oahu.  Places like Kapolei, Ewa Beach, Mililani, and Laie (with more buildable land, less attractions, heavy traffic, hotter, or far away from jobs) experienced a considerable (but not huge) dip during 2008-2009.  That's about as much as I know about those submarkets.

But in my area (Kailua), demand remained high and the prices flatlined (or dropped maybe 5%).  Lots of reasons for this, including no buildable land, very desirable area because of the beach and hospital, military demand, etc.  For those reasons - and international buyers mentioned above - I think Kailua is pretty insulated from a bubble.  And I have my money where my mouth is!  I've thought about selling and moving profits to other areas that cash flow better but can't bring myself to do it yet.

For other areas, I'm not sure if the recent appreciation is sustainable.

You might also want to check out local forecasts at UHERO: http://www.uhero.hawaii.edu/

The state's leading economists forecasted the median sale price on Oahu to increase to $750k next summer, up from ~$640k this past summer.  So far their forecasts have been pretty accurate.  It's insane, and honestly I'm not sure how that's possible since the personal income to home price ratio is one of the worst in the country.  And just FYI, historical appreciation on Oahu in ~4.7%.

Of course, only time will tell.

Michael Olesky · Answer

Hi Josh,

First off, I'm a novice, but I owned a townhome in Aiea from 2003 to 2010.  My experience was that the bubble burst sooner in HI than in the continental US and recovered very quickly.  I don't keep track of the market out there anymore, but to me it seemed like the market on Oahu was influenced greatly by international investors.  Take a look at how the RE market on Oahu has tracked compared to Japan's economy.

When I first moved there in 2002, I lived on Kilaeua ave just above Wikiki on diamond head, and I remember seeing people buy the old 2x4 frame open air houses, which had 1/2" plywood for walls instead of drywall, for over 500k and knocking them down to build a block house.  I don't know the costs, but at the end of that project, they had to have spent over 1.5 million to end up with  a house worth around 800k.

So to help answer your question, I suggest looking at Japan's economy as well as China's as well as the US's RE market to see what part of the cycle you are in.  Also look at the value of the dollar compared to other currencies.  The thing is, Oahu doesn't have land to build on until Dole sells their pineapple fields and investors from around the world are looking at Oahu to purchase properties, so I think most burst bubbles will recovery quickly out there.

Aloha!

Mike

Jon Klaus · Answer

Highly desirable markets will be higher than other markets in up markets, down markets, recessions, and bubbles.  There will be corrections, but the baseline pricing will be higher than most of the US.  Not unlike San Francisco and Manhattan.