Oahu Upscale Real Estate Report
September 2008
National Overview
Existing Home Resale Volume
According to the National Association of Realtors (NAR), July's national existing home resale volume was down 13% from last year, and up 3% from the previous month's seasonally adjusted rate.
Existing Home Resale Median Price
NAR reported that the July's national existing home resale median price was $212,400, down 7% from last year and down 1% from the previous month, barely ending four consecutive monthly increases.
Existing Home Inventory
NAR reported that the July month-end inventory of resale homes for sale was 4.67 million homes, which was up 2.4% from last year and up 3.9% from the June.
Existing Home Months' On Hand
NAR reported that at the end of July, there were 11.2 months' of resale inventory for sale based on July's sales and inventory, up slightly from 11.1 months at the end of June.
Existing Home Pending Sales
NAR's Pending Sales Index for June 2008 (based on contracts signed in June) was 89, down 12% from last year, but up 5% from the previous month. Closings typically follow contract signings by 2 months, making this a leading indicator.
OFHEO Same-Home Price Index (conforming loans only) Because this index is taken only from Federal National Mortgage Association (Fannie Mae) and the Federal Home Loan Mortgage Corporation (Freddie Mac) data, it includes only homes sold whose mortgages were conforming (among other things, under $417,000 for most of the US). June sales prices were down 5% compared to last year, and down .05% from the last month.
S&P/Case-Shiller 20 Metro Area Home Price Index (all resales)
This index includes all same-home sales from the 20 largest metropolitan areas in the US. June 2008 Same-Home resale prices were down 15.9% from last year, and down .5% from the previous month.
Foreclosure Filings
RealtyTrac reports that foreclosure filings (including default notices, auction sale notices, and bank repossessions) in July were reported on 272,171 properties, up 55% from last year and up 8% from the previous month.
New Home Sales
The Census Bureau reports that there were 43,000 new homes sold in July down 37% from last year, and down 7% from June.
New Home Inventory
The Census Bureau reports that the seasonally adjusted estimate of new homes for sale at the end of July was 416,000, down 5.5% from the previous month. This represents 10.1 months of sales at the current sales pace, down from 10.7 months at the end of June.
New Home Sale Median Prices
The Census Bureau reports that the median selling price for newly built homes sold in July 2008 was $230,700, down 6% from last year and up .3% from the prior month.
New Housing Starts
The Census Bureau reports that July 2008 privately owned residential housing starts were at a seasonally adjusted rate of 965,000, 30% below last year and 11% below the previous June.
New Housing Permits
The Census Bureau reports that July 2008 privately owned building permits were at an annual pace of 937,000 units, down 32% from last year, and down 18% from the previous month's pace. Permits are a leading indicator of Housing Starts.
National Association of Home Builders Housing Market Index
This index combines present sales, builders' expectations of the next six months' sales, and current traffic of prospective buyers. The August index has tied its record low of 16, flat from July.
Oahu Total Market:
The Oahu market continues in its pattern of lower volume but relatively stable pricing, especially when looking at the more accurate price per square foot measurement, rather than the more volatile median selling price.
Sold Volume
246 Single Family Homes (SFH) on Oahu were sold in August, down 35% from last year, and down 7% from the previous month. 35 Condos were sold in August, down 31% from last year and down 23% from July.
Escrow Volume
231 new Escrows were opened for SFH in August 2008, down 30% from last year and down 11% from the prior month. 316 new Escrows were opened for Condos, down 16% from last year and down 26% from the prior month.
Months' Inventory On Hand
Months' Inventory On Hand is the best indicator of market conditions, as it combines current active inventory levels with future sales (based on current escrows). At the end of August 2008, there were 9.1 months' of inventory of SFH, up from 7.5 months last year, and up from 8.1 months at the end of last month. Condos have 8.5 months' inventory on hand, up from last month's 8.3 months. For Houses, the Pearl City and Ewa regions have the tightest supply of SFH, with 6-7 month's supply, while the North Shore and Leeward regions stand out for having the most inventory relative to sales. For condos, the Waipahu, Pearl City, Kailua, and Hawaii Kai regions have the tightest inventory, while the Leeward, North Shore, Ewa, and Diamond Head regions have the most excess inventory. High or rising Months' On Hand suggest greater bargaining power for buyers.
Median Selling Price
Median Selling Price of properties sold is the most commonly used measure for price comparisons but can be misleading, especially when applied to small market segments, as it often represent a changing mix of sales rather than movements in price. The Median Selling Price for August 2008 SFH was $640,000, down 2% from last year but up 2% from last month. This ranged from a low of $369,000 for the Leeward region to a high of $1,100,000 for the Diamond Head region. For Condos, the Median Selling Price for August was $320,000, up 8% from last month. This ranged from a low of $224,500 for the Leeward region to a high of $577,500 for the Hawaii Kai region.
Average Price Per Square Foot
Average price per square foot ($PSF) is an alternative measure of price comparison which is less likely to be affected by the mix of specific properties sold in any given month. While other factors impact $PSF (land size, quality of construction, etc.) it can be a useful tool, especially with condos where land is not a factor. The August 2008 $PSF for SFH sold on Oahu was $485, up 4% from last year and up 7% from last month. This ranged from a low of $248 PSF in the Leeward region to a high of $829 PSF for the Diamond Head region. For Condos sold in August 2008, the $PSF was $461, up 3% from last month. This ranged from a low of $286 in the Makakilo region to a high of $635 in the Diamond Head region.
To provide a longer-term perspective, the graph below shows the Oahu Single Family Home trends by year from 1985-2007
Oahu Upscale Market:
For Oahu's Upscale market (defined as Homes and Condos over $1 million), volume continues to be below last year, while prices are up.
Sold Volume
37 Single Family Homes sold for over $1 Million in August 2008, down 35% from last year but flat from last month. In addition, 9 Condos sold for over $1 Million in August 2008, up from 8 last month.
Escrow Volume
Only 25 SFH which were listed for over $1 Million opened new escrows in August 2008, down 52% from last year and down 17% from last month. In addition, 7 Condos which were listed for over $1 Million opened new escrows in August 2008, down up from 5 last month.
Average Price Per Square Foot For a price segment such as Upscale Homes, Average Price Per Square Foot ($PSF) is the only reasonable measurement. Upscale Single Family Homes closed in August averaged $833 PSF, up 21% from last year and up 26% from last month. This ranges from a low of $325 PSF in the Kaneohe region to a high of $1,058 PSF for the Diamond Head region. Upscale Condos closed in August averaged $782 PSF, down 11% from last month.
Months Inventory On Hand Upscale Homes typically take longer to sell than average priced homes, and that is certainly the case on Oahu today. Inventory of upscale SFH at the end of August represents 23 months' worth of sales at the pace of August's new escrows. This ranges from a low of 5 months in the Central region to a persistent high of 73 months in the North Shore region. Inventory of upscale Condos at the end of August represents 24 months' worth of sales at the pace of August's new escrows, with most of that being in the Metro region.
Oahu Data Tables
Analysis, Forecast, and Advice
The Oahu market is continuing to slow, but prices have stayed essentially flat. Single Family Home sales volume in August was down 35% from last year, the largest year-over-year drop in at least 5 years. Worse, it appears to be an accelerating trend, as 4 out of the last 5 months have shown a greater year-over-year decline than the prior month. Condos had actually been showing a trend of smaller declines until the bottom dropped out in August, with a 31% drop in volume compared to last August. With inventory of homes for sale staying at an elevated level, the market is seeing high Months on Hand, which of course puts pressure on sellers to lower their prices to compete for the limited number of buyers.
Interestingly, even despite this Buyer's Market environment, prices have stayed essentially flat, especially according to the more accurate measurement of Average Selling Price Per Square Foot. If you look at a 12 month rolling average of Sales PSF to best smooth out month-month fluctuations, prices of both Single Family Homes and Condos have been basically flat since July 2006 (Condo Median Selling Price has actually been on a steady uptrend.)
There are two factors that are causing such a significant slowdown in sales volume. The first is that there is a significant gap between the current and future pricing beliefs of buyers and sellers. Many sellers have unrealistically high expectations of a value and selling price of their property, and they are stubbornly holding on to those price expectations; while most buyers seem to expect that prices have dropped and will continue to drop in the future. If you are a buyer and you believe prices will drop in the future, the only rational action is to either wait, or to offer that expected future lower price today (which the sellers then reject because they don't expect prices to drop). This has created a stalemate between buyers and sellers, and therefore the dramatic reduction in sales volume.
The second factor is the extraordinary disruption in the mortgage market as lenders over-correct for their excessively liberal lending during the housing boom. Many lenders of course are out of business, and those that are still lending are being much more conservative on credit requirements, down payment requirements, debt/income requirements, etc. This, coupled with appraisers recent highly conservative mindset, means that many buyers who do want to make a purchase are unable to do so.
Until these two factors are resolved – the return of a normal mortgage lending market, and a more general agreement between sellers and buyers as to appropriate pricing for homes – volume will stay low, leaving us with excessive inventory relative to sales and thus a buyer's market.
While we believe that most properties currently on the market are overpriced, we do not expect a dramatic future decline in prices as measured by median selling prices or price per square foot.
In fact, there are signs that the Mainland market may be bottoming out: Median Selling Price has increased for 4 straight months, and the rate of decrease in volume has also improved for the past 4 consecutive months. Further, the increase in US Months' on Hand has also improved for 5 straight months.
While the Oahu market is (thankfully) not directly correlated to the Mainland market, a consensus that the market there has bottomed would still create a very positive psychological shift that would change buyer expectations on Oahu as well.
Why have prices on Oahu not experienced steep declines?
We believe strongly that over the long term, Oahu real estate, and especially Oahu upscale real estate that will appeal to Mainland baby-boomers and Asian buyers, will continue to appreciate. There may be short term disruptions in this long term trend, and those should be viewed as investment opportunities.
We currently advise buyers to have their financing ready, and to give their real estate agent as much information as possible as to what they are looking for, as outstanding opportunities from highly motivated sellers will present themselves to those prepared to act quickly. Many of these opportunities will not be made publicly available, and individuals outside of the real estate profession will be unlikely to discover them on their own. We believe that there will be hundreds of such opportunities presented over the next 12 months or so, in all price ranges and of all property types.
We currently advise sellers to price their homes at or below the current Fair Market Value as advised by their real estate agent, since most buyers today are looking for bargains. Properties priced right should sell quickly, whereas anything priced even slightly over the market value will be ignored and eventually have to be reduced to below fair market value to sell. As a seller, if you have to make a price reduction, make it a large one and do it quickly in order for it to be effective.
Please check the News section of our website on a regular basis for National and Local Real Estate News of interest to Hawaii homeowners and investors. The news is hand-selected and updated daily.
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