Timing is everything is real estate. If you have been waiting to sell your home until the time is right, is that time now? This is a question that is on the minds of many homeowners who have been watching home prices go up. The current real estate cycle shows that Hawaii home values started rising in 2001 and have been on a steady climb since then.
This boom has been longer and steeper than many observers expected. It exceeded the expectations even of those who witnessed the last up cycle from 1986-1990. The boom has also fueled unexpected wealth for homeowners who timed it right and supported a strong economy locally and nationally.
For buyers who did not jump on the boat, they seem to have been left on the dock. But are there glimmers of hope on the horizon? After becoming increasingly desperate over the past 5 years, the tide may be turning. But will prices actually come down? And if so, what about rising interest rates? What can we learn from looking back to help plan for the future?
The Bubble Playing real estate Wheel of Fortune is very different now. In the late 1980s, foreign investors, many from Japan, were swarming over prime Hawaii real estate. They scooped up everything from simple leasehold cottages to penthouse condominiums on the beach, plus golf courses, office buildings, and hotels. True stories rivaled fiction - eccentric billionaires picking out dozens of homes from their limousines by merely pointing a finger - without ever going inside. Then came the crash of 1990 with values slipping, a stale economy, and homeowners unable to pay off their mortgages with what their homes were worth. The bubble burst. Buyers became golden - and sellers and Realtors had to change strategies. They started bending over backward to lure buyers with offers of special financing, free appliances, and no problem if they need to sell their home first. Sellers would wait.
It's Different Now Is this where we are going? Yes, it is true that the mainland market is slowing down in many areas. California markets are changing, and sales are slipping (keep in mind that this means the number of sales is declining, not necessarily the prices). Hawaii historically follows the West Coast by a year or two. What is not clear is whether the next real estate cycle will follow the past pattern.
There are many differences between the situation now and then. Our Island economy has become more robust and diverse. The past five-plus years of rising prices is fueled by very different forces than that of the 80s. Buyers are coming increasingly from the U.S. mainland. Demographics plays an important part in the current trends - the sheer number of Baby Boomers cannot be discounted. How many would like a vacation or retirement home in Hawaii? A surprising number of Boomers are playing a big part in the current demand for Hawaii real estate. This trend is likely to continue for the next 10 years or more and may soften the impact of other forces - such as rising interest rates - that would otherwise cool down our high prices.
Not Number One Are our real estate prices so out of line? At one time Honolulu had the distinction of having the highest median prices in the nation, but this is no longer true. In fact, Hawaii is outpaced by San Francisco, San Diego, and Orange County among others. Real estate shoppers from these affluent areas including retirees have been snapping up properties for years, which they consider reasonable compared to their own neighborhoods. And as much as I hate to bring it up, our property taxes are considered to be very low compared to these areas where the local school system is funded from this source. The State of Hawaii makes up for lower property taxes in other ways!
No Bubble Here Many property owners have been looking at the past price increases and wondering if we are now at the top of the cycle, with a decline in the near future. Should property owners sell now, become renters, and wait to purchase at lower future prices?
It takes time for the new direction to become clear - months of consistent change that create a definite pattern. The "top of the market" is established after leveling or decline reveal it retroactively . Don't expect a dramatic shift if you believe the local experts. And rentals are generally in short supply in Hawaii regardless of prices so don't look for bargain rentals to help your housing plan.
What we are starting to see is more properties coming onto the market than before. Buyers should finally get some relief in the form of more choices of houses and condos to purchase. This will require truly motivated sellers to price their properties closer to past sales if they want quick action. Prices will still creep up as long as the demand for homes continues to outpace the growing inventory.
Risky Business It is no longer wise is to expect short term buying or selling (otherwise known as "flipping") to produce reliable profits for investors or homeowners. This tactic is only successful when prices rise at a rate that will make up for the expenses and risks involved, which are considerable. It is a very poor strategy when it involves borrowing heavily against your principal residence and high expectations for profits on property owned just a short time. Some have made money, but many novice real estate investors have been burned due to poor planning, shortage of capital for improvements, and changes in the market. Be very suspicious of promises made by those snake-oil vendors who sponsor seminars to teach you their secrets. There are no magic tricks, and most money made in real estate takes years and involves plenty of hard work. Your real estate buying and selling are an important part of your long-term personal financial plan and should be viewed as part of the "big picture".
Create Your Goals Before you decide on how to time your buying and selling, consider first your own time frames - these are more important than the whims of the market. If you plan on living in an area for at least 3 to 5 years, owning your own home may be a wise priority. If you know you will be leaving in a year or two, think carefully about your options. In either case, meet with your tax or financial advisor to hear an unbiased opinion of what is best for you.
For buyers, rising interest rates in the future are an important consideration. If you are waiting for lower prices, here are some things to consider. Even if prices level off or decline, your mortgage payment on the same property might be higher in a hear or two. Actual affordability of Hawaii homes has been fairly steady over the recent years of price increases since mortgage rates have been rock-bottom. It is worth taking the time to calculate what you can afford now before you decide to wait for a better future market. A serious discussion with a Realtor and mortgage lender will answer your questions.
If you own your home and it no longer meets your needs, this could be the time to take you equity and run, especially if your future home will be in a less pricey area or if you are downsizing to a smaller Hawaii home. The current market will be in your favor for both selling and buying. Life does not always work out that way, and you might be moving from a lower cost area and trying to stretch your home dollars or wanting to buy a larger home or one closer to town, for example. There's no easy way to do this without spending more but with current interest rates still well under 7% you may have time on your side for a bit longer before the rates creep further up.
Act, or React? Sometimes you have to wonder whether to let your mood be determined by the alarming real estate headlines. When prices were low and falling, the papers were bemoaning about sellers losing their equity, our poor economy, and that homes were sitting on the market. No one wanted to buy in a falling market because the value tomorrow would be less than today especially at double digit interest rates. Lately we have been hearing the buyer's sad plight of bidding wars, low inventory and the stress of sellers being harassed by buyers who did not want to wait for the first Open House! Now some buyers do not want to buy because the market might slow down later. Bad news makes the headlines every time in any market.
Make Your Own If you don't like the news, go out and make some of your own. Decide what you need to do after you analyze your own situation, become informed, and develop your own goals which have far more meaning than the alarming trend on the front page. In real estate, you won't get anywhere by following the crowd. Don't become paralyzed by fear and miss out on opportunities that exist right now and in every market.
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