Last Thursday and Friday the Hawaii Association of Realtors had its annual Pacific Rim Conference at the Hilton Waikoloa Village Resort.   At the end of a long week of turmoil in the financial markets, the Friday presentation by Bank of Hawaii Chief Economist Paul Brewbaker was understandably well-attended.  It probably would have been well-attended anyway, as Brewbaker is known as a fabulous speaker, funny and informative.  (I wasn’t smart enough to videotape his presentation last week, but here’s a link to a recent one on Maui, in case you want the hour-long in-depth view, and I’m adding his website to my blogroll on the right).

Note that Brewbaker does not work for the real estate industry, so he has no vested interest in where we are in the cycle.  His job is to keep the Bank and it’s clients making sound decisions, and since MSN Money named Bank of Hawaii  one of five banks “safe from the storm“, he is apparently doing his job.

The charts and graphs Brewbaker showed tracked real estate statistics in the state through three cycles, from the early 1980s to the present.  The big waves were in the 1980s when Japanese investors snapped up real estate in Hawaii (and in Manhattan where I was living at the time) driving up prices to unsustainable levels; another boom and then crash in the mid ’90s thanks to California investors (yes, I oversimplify); a little blip when visitor arrivals fell post-9/11 and the end of the dotcom boom; and then the recent boom that peaked a couple of years ago here.
Brewbaker also showed a fascinating slide which graphed Oahu/Los Angeles/San Francisco/Orange County median home sales prices, which moved pretty much in tandem.  He commented that in the second quarter of this year California & Arizona saw an unprecedented decline in prices and therefore are already seeing an increase in sales.  Maui median prices, he pointed out, are historically identical to prices in Orange County. And the point being….

Applying statistical analysis to the volatility of prices (rate of decline) here in Hawaii, Brewbaker concludes that we are already into the period of relative stability that historically can be shown to follow each boom/bust.  He further suggested that within the tranquil phase, there is a “stop” period and a “go” period…and he believes that prices have fallen enough that, as in California and Arizona, we may be moving back into the go phase.

What’s this mean for readers of my blog?

If you are a prospective seller, look carefully at recent comparable sales.  Brewbaker thinks it will take until 2013 before prices will move significantly upward, so set your expectations accordingly.

If you are a potential buyer, think about jumping off the proverbial fence!  You won’t be alone.  We’ve been amazed at the number of showings we’ve had this week.  Today’s buyers will have the entire litter to choose from, and will likely take the pick of it.  The last to move will get that darling runt of a fixer-upper.  The bet is that today’s low interest rates won’t last, and cash buyers are telling me they are much more nervous about the direction of the financial markets than they are over volatility in the real estate market.  And these aren’t speculators I’ve been talking with, merely people who’ve always wanted to own here and feel that now is the time to make that dream come true.

Caveats:  I’m not a financial advisor, nor do I have a crystal ball.  My degree in economics specialized in non-renewable resources, not in macroeconomics nor real estate!  But I do know where the real estate buys are hidden in South and North Kohala.

A hui hou,

beth@hawaiipalmproperties.com

Cell: 808-443-4588

Hawaii Palm Properties, Inc

Office in downtown Hawi near Bamboo restaurant

www.hawaiipalmproperties.com

Again from Pacific Business News: The median price of a residential home fell by 20 percent compared with August a year ago, and the median price of condominiums stayed relatively unchanged despite a 47% drop in volume.  Year to date, the median condo price is slightly up.

The previous week, the University of Hawai’i Economic Research Organization discussed resale price forecasts for Oahu as part of their updated forecast for the construction industry.  That report concluded that  “the median single-family resale price on O’ahu to decline by 3.6% this year, followed by a larger decline of over 5% in 2009. From a peak of $639,500 (annual average) in 2007, O’ahu home prices are expected to fall by 9% to $570,000 by 2010, still a relatively modest drop compared with mainland markets where in some cases prices have fallen by that much in one quarter.”

Both articles cited above are using median prices, and those prices are aggregated over an entire island.  What that means to me is that the price data you read in the press is fairly useless to you as a buyer or seller.

Taking the second issue first, here on the Big Island residential sales range from homes priced under $200,000 on the Hilo side to home in the multi-million dollar range in North Kona and the Kohala Coast.  Aggregate data do little to tell you what the factors influencing supply, demand and price are in the kind of neighborhoods you are considering.  (see an earlier post on this subject on my North Kohala blog).

Now for the statistics lecture (cringe).

I fear that the casual reader is likely to confuse a trend in median prices with the decline or rise in price one would expect for any particular property.  Recall that there are three ways statisticians calculate an “average”:  mean, median or mode.  The median price is found by listing all transactions and finding the one in the middle.  If you have five transactions, you would throw out the two highest and the two lowest.  The one left is the median price.

If you were looking at prices in a subdivision of very similar homes, and there were a fairly large number of transactions, the median price trend might be a fairly useful number for judging whether you might expect to pay more or less for a particular house than the year before.

But let’s look at a popular condominium community on the Kohala Coast with a small and consistent number of sales to see what the median would tell us and compare some other approaches to analyzing price trends.  I’ve chosen Mauna Lani Point for several reasons.  Probably the most desirable condo location in Mauna Lani, it is almost oceanfront with ocean views enhanced by the contrasting green of the golf course. It is also a mature community, unlike newer developments that are still affected by the speculative buying of the past few years.  Even so, not all units there are equal, as size and number of bedrooms varies, plus some have been completely updated and others untouched in 20+ years, so there will be a range of values.

The numbers below are for the first six months of each year (sometimes one sale occurs in the second half of a year, but there is a strong seasonal selling pattern).

Seven sales in 2005 with a median price of $1,550,000

Three sales in 2006 with a median price of $ 1,950,000

Three sales in 2007 with a median price of $ 2,450,000

Five sales in 2008 with a median price of $1,275,000.

THE SKY IS FALLING!  The median price dropped to almost half the previous year’s level!  Prices fell below 2005!  What a deal!

Now let’s look at those same transactions a different way.  The square footage of the sale in the middle differed significantly from 2007 to 2008.  Let’s calculate the median price per square foot for each of the years:

2005 - $1027   2006 - $1227     2007 - $1510   2008 - $1070

Still a significant 29% decline from last year to this, but not as startling as looking at the raw prices.  Using this set of statistics, median prices are still above 2005.

What happens if instead of using median prices, we use the mean:  adding up all prices and dividing by the number of sales.  That would tell us a little bit more about how variable prices were:

2005- $ 1070   2006 - $1091   2007 - $1343   2008 - $1182

Hmmm…this set of numbers shows a much smaller 12% drop between 2007 and 2008, and still a happy 10% premium to 2005 prices.

So if you were trying to figure out what to offer as a buyer or where to price as a seller, what does all this mean?

It means you need to look at comparables not averages.  Here’s about as precise a comp as you could hope for.  Mauna Lani Point #A204 sold for $2,100,000 in 2005.  It sold again in 2008 for $2,200,000.  On a price per square foot basis, it looks as though the larger units are holding their value.  It also appears that with costs of construction rising and lots of available inventory, the owners of units in need of renovation or with a less desirable location will need to price below the choicest units.

They say that knowledge is power!  Whether on the buying or selling side, your agent should be able to help you feel empowered to make a good decision about whether your dream property is fairly priced.  And the bottom line is that none of us have a crystal ball.  The University of Hawaii economists forecast a relatively mild downturn in prices for Hawaiian real estate overall.  From a local perspective, that’s good news for current owners, and sad news for first-time buyers hoping that housing would become significantly more affordable.

A hui hou,

Beth Thoma Robinson R(S)

beth@hawaiipalmproperties.com

Cell: 808-443-4588

Hawaii Palm Properties, Inc

Office in downtown Hawi near Bamboo restaurant

www.hawaiipalmproperties.com

The question my colleagues and I hear every day is “how far will prices drop?”  And “In my home market there are condos selling for 30 cents on the dollar.  Do you expect to see that happen here in a year or two?”

Let’s see whether recent news reports shed any light on the questions.

The report per Pacific Business News:  Big Island home sales fell by almost half in August 2008 compared with the number of reported sales in August 2007.  Year-to-date residential sales are down 33% and condo sales down 27%.

First, what is indisputably important information for you as a buyer or seller:  the volume of transactions has declined significantly this year while active listings (inventory) increased.  Willing buyers are fewer than this time last year…or in other words demand has decreased while supply is increasing.  That means that unless a horde of buyers suddenly ride onto the scene, the market-clearing price at which all the inventory would be sold will have to trend down.  Which is exactly what we see daily as price reductions are reported on the MLS.  We see it in offers being accepted well below asking price.  In other words, exactly what your agent has been telling you:  if you are a buyer, it is a better time to buy than a year ago!  If you are a seller, you must price realistically for this year’s market if you want to attract buyers.

What we don’t know is at what price the many qualified prospective buyers who are watching the market will begin to jump off the proverbial fence—or whether it is even a question of further price reductions that will give them the confidence to buy. If you are one of those buyers wondering if you should wait for a better price, the best advice I can give you is to work with an agent who is experienced in the particular neighborhood of interest and get them to give you all the data.   See Part 2 of this post tomorrow for some suggestions on how to interpret the data.

A hui hou!

Beth

Beth Thoma Robinson R(S)

beth@hawaiipalmproperties.com

Cell: 808-443-4588

Hawaii Palm Properties, Inc

Office in downtown Hawi near Bamboo restaurant

www.hawaiipalmproperties.com