So, when did you all start to realize that the business of Real Estate Sales was not going to be ‘business as normal’ anymore? For myself I remember the exact time and it was April 13th 2008 when the New York Times ran a piece titled “You Thought You Had an Equity Line.” This news piece went into a detailed description of prominent lenders sending letters to current Home Equity Loan customers telling them that there Equity Line has been suspended and ‘frozen.’ It didn’t matter if your credit was ‘rock solid’ or that you were in a neighborhood showing little declining value. This move by some of Nation’s lenders was instituted to stem the flow of losses from on the books of lenders carrying ‘bad loans.’
This is but one example of the credit crunch we are all experiencing in the real estate market today. There are many other examples and many other causes that have contributed to the crunch. Following are just some highlights and dates when they occurred:
• Percentage of all mortgages bundled into securities, 1994: 55.8% / 2007: 74.2%
• Percentage of all subprime mortgages packaged into securities, 1994: 31.6% / 2007: 92.8%
• Percentage of mortgage originations that were subprime, 1994: 4.5% / 2006: 20.1%
• Increase in face value of subprime mortgages issued between 1994 and 2006: 1,700%
• Share of mortgage originations by federally regulated savings institutions, 1987: 29.8% / 2006: 8%
• Share of mortgage originations by less regulated mortgage brokers, 1987: 20% / 2006: 58%
• Average annual rise in home price value, 1990-1999: 3% / 2000-2006; 8.6%
• U.S. home ownership rate, 1985: 63.5% / 2007: 68.2%
• Ratio of median home price to median household income, 1985: 3.2 / 2006: 4.6
• Household debt as a percentage of disposable income, 1985: 74.9% / 2006: 137%
• Percentage of mortgage holders unable to tell if their loans includes an expanded “Balloon Payment” 2007: 30%
• Percentage of mortgage holders unable to tell if their loan includes a prepayment penalty for refinancing within two years, 2007: 44%
• Foreclosures rate on prime mortgages issued between Jan. 1999 and July 2007: 2% / Subprime: 13.7%
• Total cost of the savings and loan crisis of the 1980’s in 2007 dollars: $408 Billion
• Total estimated cost of the subprime crisis so far: $150 Billion to $500 Billion.
Note: All current figures are the latest available and may not refer to the entire calendar year.
Sources: Milken Institute; U.S. Census Bureau; Federal Reserve; Wholesale Access; 2007 Mortgage Market Statistical Annual; Inside Mortgage Finance; Office of Federal Housing Enterprise Oversight; Federal Trade Commission; Loan Performance
In an attempt of trying to predict the future which we all want to know about it must be stated here and now that it is quite impossible to do so, but this graph below may help…
We are not getting closer and closer the number of sales in the mid 1990’s. As you can see the sales volume has dropped off significantly.
If and when this happens we must first realize where we are so let’s not get ahead of ourselves. Let’s see where we were as of March 31st. the end of the 1st. Quarter of 2008.
In 1995 it looked like there was about 150 Single Family Homes Sold. Exact data was not kept by the Honolulu Board of Realtors until 1987 but reports from the Board are not available.
There is almost no change here but I do not think this will continue for long, especially for Condos.
In 1995 it looked like there were approximately 160 Condos Sold.
Although we are looking at relatively insignificant lower figures for Median For Sale and Median Sold numbers we are looking at much lower sales activity. What if we are headed for 1995 or worse? Who can say? But, what may be conjectured at this point is that Hawaii Real Estate may start to take on some of the characteristics of the Mainland Market we have all been hearing about. But the questions are how much, how fast?
Who knows? I don’t. But as you can see the Median’s are not ‘falling out of the sky.’ The number of sales sure is ‘falling out of the sky’. What effect this will have prices? Down. No doubt about it. But how long will this take before we reach bottom. Your guess is as good as mine. My guess is 5-7 years from now in 2014.
Now of course the Century Old questions come up “Should I sell now?” “Should I buy now?” Every individual’s circumstances are different and you are going to have to answer this question for yourself. I have written a previous article titled “Should buy or sell now” or something similar to that and you can find it in the archives of this Oceanic Cable service at www.aroundhawaii.com.
I can suggest this however with certainty, if you are going to move to the Mainland the answer is “Yes”, sell your home as soon as possible as it is most likely going to loose further equity. If you are not moving to the Mainland in the next 5-7 years forget about it. Stay, the market will always swing upwards again.
Take another look at that 1987-2008 Sales Graph, if you stay in Hawaii and hold onto your property you might even sell it buy back in at the bottom of the market like many did in 1998. Those who did all ended up buying low with the secure prospect of selling high in future years. This is the best investment of all. “Should I buy?” Sure go ahead, but let’s be honest here, it is most likely you are going to loose equity in your purchase for a few years before the market swings the other way again. My professional opinion is to buy when the right property presents itself, as interest rates are at an all time low and ‘if’, a big ‘if’ you can get a loan, do it and buy and hold your investment. This is the true way of real estate wealth accumulation. Go ahead now and look at this graph below and note how much buyers paid for a home in 1987 and what it sold for in today’s market.
Now…that’s a chunk of change you can make…if you buy…and hold!
Let’s take a look at the rest of the 1st. Q.T. data.
You might say things are picking up speed in purchase time to make a decision to buy primarily due to the low interest rates of today’s economy.
Although the inventory situation for Single Family Homes is shaping up nicely for this year so far the Condo inventory is still out of control. I think we are going to a lot of very disappointed sellers of condos soon. This is just not going to happen. If you are a seller of a condo and not priced right you are wasting your time. You are wasting your realtor’s time and you will most likely not sell your condo in today’s market. Condo inventory is out of control and I see daily Withdrawns and Expireds coming off of the market for sale first, due to unrealistic pricing and second the perception that realtors will work for less commission. Sure, hire a realtor for less commission. What do you think they are going to do in spending their own hard earned money in a slow market? Not spend. A lower Cooperating Broker’s commission may result in agents ‘steering’ their clients towards better commissioned properties. As I seller, I strongly recommend you don’t this.
It’s always a good idea to follow the Withdrawns and Expireds as they indicate how fast and how much homes are coming off of the market either due to reducing the for sale price or just simply giving up and removing them permanently from sale. As you can see from the graphs above the current numbers may indicate an increase in both categories. They have already done so for March ’08 by +4% and +12% respectively. Like I said, if you are selling a condo, be realistic and fair.
As you can see from these pie charts the Single Family Homes that are selling are doing so in the price range between $500,000 and $699,999 and this primarily being done in the neighborhoods of Ewa Beach, Mililani Town and Makakilo to the tune of 42% of all homes sales for March ’08.
27% of all Single Family Home sales took place in the $700,000 to $999,999 range and this price range has no specific neighborhoods. It is taking place all over the Island but primarily in more upscale neighborhoods of Mililani Mauka, Kailua, Hawaii Kai and Manoa.
In the case of Condos I am now seeing a consistent trend in all neighborhoods across the Island of buyers choosing to purchase in the lowest price ranges available. This just makes sound economic sense since hard pressed renters will most likely down scale to save on fuel, food and our astronomical, highest priced/kilowatt hour in the Nation electricity costs. Condo buyers who are smart investors will purchase in the lower end of the for sale price ranges as they will ultimately loose the least equity over the long haul. They will also be able to buy these condos which will typically at these lower prices will not come with swimming pools, bar-b-q areas which means less maintenance, less insurance and ultimately less Monthly Maintenance Fees. This is a smart move.
As you may have already surmised, the increase in Median For Sale Prices in such Neighborhoods as Kailua and Hawaii Kai are only indications of a much larger % of higher priced homes for sale as compared to lower priced homes.
I hope this report helps clear up some of your questions as to what is really happening in the Oahu Real Estate Market.
As always, please remember to check as many resources that you personally trust to properly arrive at an overall evaluation of this subject matter. All buyers and sellers should draw their own conclusions and conduct their own investigations. In evaluating Hawaii Real Estate investments you should conduct your research on the data, interview agents and brokerages and consult mortgage lenders.
I wish you all much Aloha,
Mike Gallagher Broker in Charge RE/MAX Honolulu 808-384-9015
Statistics are from the Honolulu Board of Realtors. All material is deemed reliable but not guaranteed. Any copying or distribution of this material herein is STRICTLY UNAUTHORIZED without express written permission from the Author.
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