Hawaii Real Estate Trends Part ll

Nov 25, 2021 | General Information

Table of Contents
Who can we believe when it comes to real estate projections? Is the real estate market poised to explode or is the bubble about to burst? Let’s try to put some of the most important drivers of Hawaii’s real estate market in perspective, starting with population projections and forecasts of non-resident real estate buyers.

The resident population of Hawaii, which includes active-duty military personnel and their dependents, is projected to increase very little in the next 25 years, from 1.5 million in 2019 to 1.65 million in 2045. This is an average growth rate of 0.5 percent per year over the projection period. In other words, population growth in Hawaii is not likely to be a strong driver of real estate trends. Even without much population growth in the state, it can be assumed that Hawaii’s housing market is likely to remain unbalanced. Hawaii faces the prospect of both constrained housing supply and increasing demand. That demand is likely – and I emphasize “likely” — to mainly come from non-resident buyers.

There is no certainly to Hawaii maintaining past levels of foreign buyers of Hawaii’s real estate. The percentage of property purchased by foreign buyers is small but the amount spent is large, often with cash. Foreign buyers have been a very important part of Hawaii’s real estate market. In all forecasts of Hawaii’s real estate trends, however, the number of foreign buyers remains the wild card. And analysis of trends in foreign real estate buyers, and forecasting the future, is especially challenging because of lack of reliable data. Data on foreign buyers of Hawaii real estate is very difficult to find — either the amounts they spent or even what proportion of properties were purchased by foreigners. Foreign buyer’s identity often is concealed or not revealed.

Many of the things that make Hawaii so special, most of which we take for granted, are drivers of real estate trends in the islands generally and especially on Oahu. The popularity of the islands never seems to shrink along with demand for real estate that seems endless. People coming from all corners of the globe seek its perfect climate and sense of well-being and happiness year-round. Some people come to Hawaii with real estate investment already in mind. Many visitors to Hawaii can’t help wondering about and looking into the real estate and housing market on one of the islands. These visitors include people looking for and staying in the state’s more than 20,000 vacation rentals.

Each island paradise is a small spot of land that popped up in the ocean, but each one is different as both vacation destinations and real estate markets. The land on these islands may diminish a bit over time but, of course, will never expand. The vast surrounding ocean brings unique climate benefits with some microclimate variations depending on elevation, trade winds, and proximity to mountains and valleys. (The Big Island has 10 climate zones that all can be experienced in a day!) Temperatures typically are warm day and night throughout the year but rarely too hot. Air quality is the best in the nation. Beautiful beaches, all different, are abundant on each island.

All of Hawaii’s virtues as a hugely popular vacation destination contribute to high and rising home prices and low real estate inventory. Additional factors include restrictions on residential development, unemployment in Hawaii that is much lower than the national average and a significant military presence. Visitors pouring into the islands during cold winter months elsewhere often have the purchase of vacation properties on their minds when they arrive, partly inspired by winter time at home.

In the midst of the getaway paradise of Oahu, Honolulu is home to about 400,000 people in a metropolitan area that is home to more than a million people. The city is the focus of most real estate investment in Hawaii. Billions have poured into the city from foreign investors. All of this investment has made Hawaii the least affordable housing market in the nation.

The sales of luxury single-family homes and condos seem to be increasing every month along with median sale prices but there are fluctuations. Prices may fall slightly in 2020 according to several recent predictions (including Zillow). But besides beautiful beaches and countless attractions for tourists, many other factors are at work in the dynamics of Hawaii’s real estate market. The state has a very diverse economy, military bases that generate hundreds of thousands of jobs across the islands, several university campuses, and a thriving port.

Is there any reason to believe that the buy and hold model of property appreciation for Hawaii will change in the foreseeable future? None, really, according to all of the expert sources in Hawaii or elsewhere. For many people looking at real estate trends in Hawaii, the problem is lack of credible analysis of the factors driving trends. Too often too much credence is attributed to month-to-month statistics or even yearly stats.

Sometimes the problem is the way that real estate stats are interpreted for and by the news media. For example, according to the Honolulu Board of Realtors single-family closed sales went from 355 in 2017 to 309 in 2018, a drop of 54 units, This decline in single-family closed sales translates into a negative 13% drop. As a percentage, the 13% sounds like a lot — especially when publicized in the media as “Honolulu home sales drop by 13%”. However, looking at the data more closely, when single-family home sales were dropping, the median price of these sales actually rose in this period from $752,000 to $800,000 or an increase of 6.4%. Reports in the media also noted that both condos sales and prices also dropped a fraction during the same period. But these reports usually neglected tell us that days on the market for condos dropped and thus condo sales actually speeded up.

Too often the Hawaiian islands are lumped together as one real estate market. But trends in values and median list prices actually vary on each island and in parts of the islands. For example, the median home value in Kailua on the east coast of Oahu, just ten miles from Honolulu, is about $990,000, but its home values have declined more than 7% over the past year. However, the median list price per square foot in Kailua is roughly $700, almost 50% higher than Metro Honolulu. (Likewise the median rent is much higher.) In Honolulu and westward, for example, in Kapolei, the median home value is more than $300,000 lower than in Kailua.

In addition to location on an island, timeframe is of key importance in looking at real estate trends. For example, a house purchased on any part of Kauai, north shore or elsewhere, increased by at least 50% in 2009-19. Will that trend continue? Honestly no one really knows. Overall the Maui real estate market has been doing quite well. Median single-family home sale prices are approaching $750,000 and higher in South Maui and $550,000 for condos in 2019, although less in Kihei and South Maui. However, condos were sold in 2018 at much lower prices. Will media sale prices go up or down on Maui? Hard to know and especially hard from place to place on Maui.

Some real estate investors, and certainly their professional advisors, diligently do their homework on economic trends and factors that are likely to impact on real estate trends. The problem inherent in this praiseworthy exercise is that, as history has shown us so often, the past is not a very reliable prognosticator of the future. In addition, even when looking at economic and real estate trends, the experts can come up with very different conclusions and projections.

For example, in contrast to the Hawaii Board of Realtors and the Hawaii Tourism Authority, The University of Hawaii Economic Research Organization’s (UNERO) view of Hawaii’s economic trends is less than optimistic. UNERO sees a slowdown that becomes more entrenched…visitor days going forward will be below 2018 together with visitor spending…job growth in Hawaii seems to have stalled along with income growth…international travel appears to be weakening, except for visitor days in Hawaii by US travelers…but US visitors are spending less.

UNHERO’s report also sites worrisome data showing that visitor spending has “slipped to levels not seen since 2010”, especially visitors from Japan and other Asia-Pacific markets. Part of UNHERO’s gloomier view is explainable by its comparison with very robust visitor spending in the first half of 2018. But there are questions to be asked about UNERO’s analysis and projections. UHERO’s concerns about tourism and spending softness in Hawaii are not accompanied by a clear analysis of the reasons for its projections of a net loss in visitor spending. We need to know the reasons why visitor spending is declining.

In contrast to UNHERO, the State’s Department of Business, Economic Development and Tourism projects an increase of visitor arrivals in 2020. The Hawaii Tourism Authority’s reports and projections for visitor arrivals and spending in 2020 also are quite positive. But in the context of geopolitical uncertainties, especially in US-China relations (and now Iran), perhaps there should be cause for concern about potentially adverse impacts on real estate trends in Hawaii. Perhaps US and other visitors to Hawaii will spend less. Perhaps Hawaii will only see a modest pace of job and income growth. Perhaps the tourism industry will only see slow growth in the future. Perhaps…perhaps…

In the context of this uncertainty about real estate trends, we remain confident that Hawaii is doing its best to preserve and protect the unique virtues and assets of each island for the benefit of residents, visitors and future buyers and sellers of real estate. My bet is that Hawaii’s stewardship of the destination will preserve its authentic and unique experiences for visitors and sustain its ability to meet the high expectations of both visitors and real estate investors.