Ah, the spring of 2007, when escalating home prices seemed they would never stop.  By June, single family homes on Oahu had reached a median price of $685,000. Optimism was running at a fevered pitch, and memories of the downward drift of the mid-1990s were forgotten by many.  People got caught up in the rush. Some paid too much or selected inferior properties. Others just got stung by unfortunate timing. Now that we have the wisdom of hindsight, what lessons can be applied to your future Hawaii real estate decisions?

Don’t Run with the Herd
Stay ahead of it. It is easy to get caught up in the excitement of a rising market. If today’s prices are higher than yesterday’s, it seems logical that tomorrow’s will be even higher. Everyone’s doing it, so it must be the right thing to do. Back in the mid-2000s, Hawaii buyers were madly bidding for homes and competing with each other over each new listing.  New Ala Moana condos had long waiting lists of buyers, and Kailua beach homes as well as Kaimuki cottages were being grabbed in hours, not days. Homeowners from Los Angeles, Las Vegas and elsewhere were using their inflated equity to purchase Oahu homes. The rush caught on like a wildfire, and it worked for some of those who got in early.   Others threw caution to the wind, as the flames grew.

The wise Bertrand Russell said, “The fact that an opinion  has been widely held is no evidence whatever that it is not utterly absurd; indeed, in view of the silliness of the majority of mankind, a wide-spread belief is more likely to be foolish than sensible". Price-wise, the best time to buy - whether it’s pork bellies or properties - is when no one else is doing it.

Don’t Buy at the Peak
Sounds obvious, doesn’t it, but how do you know when it’s at that risky top? Real estate has always followed a cyclical trend, so what goes up must come down, even a little, and even in Hawaii.  Looking at the annual MLS median single family home prices* from June 2002 and on through June 2006, we have $397,000 - $442,000 - $525,000 - $670,000 - $699,000 (June 2006). There is a pattern here. How likely is it that this frenzy will go on forever?

When there is an influx of buyers and few properties, you have to pay whatever it takes.  If there’s an oversupply, and not enough buyers, you can pick and choose like a kid in a candy store.  That’s what makes a “buyer’s market” like we had in 2008, when the financing dried up and world economies came crashing down.  But only the bold and the brave had the vision, the cash, and the nerves to do it in those dark days.

Don’t Flip
Are You Feeling lucky?  Good, because it’s very possible to make a profit buying and selling real estate in the short term, if you want to take the risk and can afford to do so. It all depends on your luck, your timing, and your choices. You control the timing and the choices, and they can make or break your luck (Sorry, it has nothing to do with your horoscope or the lucky numbers you imbed in your offer price).

Always allow a margin of error in your planning and calculations, and be realistic about your buying and selling expenses. It’s best to count on around 10% for those together, since nothing is free except perhaps your time, if you value it at zero.  So if the market goes up 10% you should be able to recoup your expenses.  Yes, professional Realtor fees are not cheap, but not having the benefit of that expertise can be far more costly.

When you hold any asset for the long term, blips in the market do not matter.  It’s the short-timers that will suffer the most. Real estate is an excellent long-term investment, but a risky short-term one.  Many “flippers” made out like bandits, but the greedy ones and the latecomers got caught. Flipping is for risk takers and always will be, even in a boom.

Choose Wisely
If you are purchasing real estate with an eye to make a profit, you need to look at the long-term sale history of both the property and the neighborhood.  Look VERY carefully at where we are in the market cycle, particularly if you intend to sell in 3 years or less. In rising markets, a lot of money can be made in a few short years, but at the wrong time, the losses have been tragic. Selecting a home that will have broad appeal is more important than buying the cheapest one. Of course, if you have an Accredited Buyer’s Representative negotiating for you, you will be ahead of the game.

Oahu "short sales" are heavily tilted towards the Leeward area. There is a history of volatility, with prices being driven up faster and quicker than other areas during the “Land Rush years” and falling quicker and harder when the market changed. This has really battered our military home owners, who have no choice but to move when they receive their PCS orders. It has also pulled the Oahu sales statistics down dramatically, since there are more homes sales there than in the rest of the island together.  But if you want a newer home with contemporary amenities without paying a sky-high price, that’s the obvious area, so be careful.

Renovate Cautiously
When you put money into your home, do it as if you are getting ready to sell, even if you aren’t planning to do so. Unusual colors, fancy fixtures, and personal tastes can sabotage your future values. Go for quality in line with the neighborhood. Kahala quality won’t pay off in Kalihi, or just about anywhere else. And if you put Waipahu fixtures in Hawaii Loa Ridge, you will get back pennies on your dollar.  If you aim to have the best house in Kapolei, remember that the median price for your neighborhood will limit what you can sell for, even if your interior looks more like Diamond Head. 

The annual Cost Vs Value Report published by Remodeling Magazine can give some guidance on which renovations are worth doing from the perspective of resale value: http://www.remodeling.hw.net/2010/costvsvalue/division/pacific/city/honolulu--hi.aspx .  

Some of my personal remodeling no-no’s are: wallpaper (too personal), inconsistent flooring (looks chopped up), exotic paint colors inside or outside (stick to soft neutrals), uneven stick-on floor tile (when it looks like it took just a couple of six-packs), and heavy drapes (look old-fashioned).

Stop Obsessing
If you do not intend to sell, there is no reason to focus on monthly ups and downs in the market, whether it is in your stocks (ouch!) or your real estate. Let’s say you purchased a home for $500,000 and financed with 20% down. Your investment was $100,000, not $500,000. (The bank invested the balance, and they have problems of their own you don’t need to take on!)  So if the value goes up to $510,000, your investment (on paper at least) made $10,000 on your initial $100,000 and your gross profit is 10%. Not bad compared to the alternatives you have these days for investing.  If the market goes up to $600,000 and then your profit is $100,000 which is a 200% return on your investment.  Likewise, if you don’t sell, and the market goes down similarly, you have lost nothing unless you need to sell at that moment in time. 

Keep the big picture. You most likely have saved yourself a bundle in tax deductions. And if the property in question is your home, you have gained a roof over your head for that time, which is priceless.

Told You So
Was the real estate industry was responsible for pumping up sales with an overly-optimistic prognosis?

Not the Honolulu Board of Realtors - they issued their monthly press releases which made front-page news. From early June 2006:  "The statistics for May are right in line with our predictions of more normal market conditions,"  quoting Harvey Shapiro, the late, great Research Economist at the Board of REALTORS®. "Single family homes took 52 days to sell, from the time of listing to a contract, which is a vast change from the 20 to 30 day range we had in the past few years. Condominiums, at 38 days, are showing the same pattern. The frenzied period of market expansion that lasted eight years is clearly over and the Oahu housing market is returning to steady-state, historical conditions."

And again in August 2006 "We had an exceptionally long period of expansion - more than eight years starting from the second quarter of 1997 through the third quarter of last year. Historically, previous 'up' phases in Oahu real estate cycles lasted no longer than five years before normal conditions were restored."

But during the past decade, so-called experts from various professions offered opinions of only blue sky and bright future prices.  Some advised bold and risky actions, with a pot of gold waiting for all real estate investors. Realtors were a part of this, especially those who were not in business during the past downturn or those suffering from amnesia.  Other observers saw only the dark side, with doom awaiting everyone whose money was not hidden under the mattress.

Is Now the Time?
All that said, now appears to be a great time to buy a Hawaii home. Whether you are considering a vacation property, beach condo, a retirement home, or maybe a Waikiki condotel, there are better opportunities right now that we’ve seen for years. Prices have stabilized, and seem to be starting to pick up – signs that the cycle could be turning upward again. Pending home sales are the leading edge of the market, and these are up 14% over last year at this time. Inventory of homes is down almost 7%.** The number of properties available is exceeded by the demand for homes, putting pressure on prices. Never-before-seen interest rates are available for those who qualify.

A Rising Tide Lifts All Boats
Will you be watching from Shore or floating up with the tide?? Yes, there will always be risks, but the opportunities are real for those who don’t want to wait for the next stampede or or just stay on the sidelines. I see great values every day and make sure that the buyers I represent know about them first. For sellers, I create a marketing plan to insure that their property stands out from the rest.  The opportunities are there right now for those who are ready to grab them. If you need help finding yours, email me at mailto:stephanieg@remax.net. 

*All sales figures are from the Honolulu Board of Realtors, compiled from MSL data.
**Based on the Year-to-Date statistics through Oct. 31, 2010.