Leading Hawaii Economist Pushes Back Market Recovery til 20-Teens

Last Wednesday, August 31st, the Kauai Board of Realtors held their quarterly GMM (General Membership Meeting) at the Kauai Marriott Resort and Beach Club in Lihue. The GMM is a time for Realtors to get together and network and learn about changes in the industry, and compare views of the market.

Occasionally, one of the guest speakers is Paul Brewbaker, a brilliant economist who is kind of like a combination of a very funny stand-up comedian and an astute scholar. Formerly chief economist of Bank of Hawaii for many years, Paul now is on his own with TZ economics, and is one of the most compelling and popular speakers to the real estate industry.

When listening to Paul, I really need to pay attention because one moment I’m falling out of chair with laughter and then Paul delivers a zinger about the skew and kurtosis of the asset cycles and I’m like, “What’d he say?”

Interestingly enough, two other noted economists were delivering similar messages about similar data sets at the Kauai Chamber of Commerce meeting the following day. When the real estate market was booming, every time Brewbaker addressed the Realtor® community the question was, “When is this boom cycle ever going to end?”

Nowadays, the table is turned and everyone wants to know, “When is the market going to recover and turnaround?” It seems like from the most current information available (and your mileage may vary), while Brewbaker had suggested a turnaround by October of 2012, that prediction is being pushed out until the 20-teens. Is that 2015, 16? One can only speculate.

While it’s impractical to cover each of the 105 slides in Brewbaker’s presentation, there are a couple of highlights that illustrate and document where we are in the real estate cycle, and what we might anticipate in the future as residents and owners on Kauai. First, there is the median pricing of our housing. Was it realistic when the median price of a home on Kauai was above $600,000? Probably not.

Kauai median home prices through 8/31/2011

Right now, the median price of a home on Kauai is around $435,000. Median is defined as the price where half of the transactions are above that dollar amount and half the transactions are below the dollar amount.

While our residential market has retreated to home prices at the levels they were at between 2002-2003, when you look at the long term view of real estate in Brewbaker’s means graph, you still see the long term prognosis of real property is quite good, with condo prices increasing about 5.0 a year and single family homes 7.5% a year. Note that these numbers are seasonally adjusted.

When addressing the ongoing foreclosure crisis in the islands, Brewbaker likened the situation to a drain that was already clogged, and suggested that the residual effect of Hawaii’s Act 48, and the reaction to that was a bit like putting more hair and debris in an already clogged drain. Not a pretty image, but a good analogy.

While the recent numbers of foreclosures have decreased, it’s partially because the mainland lenders are busy switching their foreclosure proceedings into the court system. August brought 26 new judicial foreclosure filings on Kauai.

But it’s not all doom and gloom. Take a look at this interesting chart (below), which is indicating what percentage of existing mortgages are more than 90 days delinquent. It is key to note that not all of these delinquencies are bona fide hardships. Some of the delinquencies are simply homeowners realizing that the bank will not consider modifying their loan unless and until the borrower is at least 60 days behind on their mortgages. Once the homeowner stops paying the mortgage to engage their lender in the loan modification conversation, it is easy to get in the habit of not paying the mortgage.

That being said, Brewbaker quipped, “At least you guys are not Dade County!” In Southern Florida, that county has a delinquency rate five times higher than Kauai’s. Also notice that of the neighbor islands (neighbor islands have a higher percentage of second home owners than Oahu, which is considered the one “urban” market in the State of Hawaii), Kauai has the lowest delinquency rate.

In the final analysis, Brewbaker believes in the long term viability of real estate in the State of Hawaii. He demonstrated that by copying and pasting the trend data from the last real estate cycle on top of the current one, with the results indicating median prices in Honolulu could well be $1,000,000 by the year 2020. With a byline of “Kauai, you got what you wanted,” Brewbaker showed the data about residential building starts on our island, which have virtually ground to a halt.

In boom times, there was pressure on the county and council to stop the building and expansion from ruining our island. Once the economy turned, the economic conditions took care of building and expansion.

Yet, when we have another higher order moment that shifts the momentum and accelerates the buying velocity, Brewbaker believes the prices can only go up here because we simply do not have enough inventory to satisfy the demand. How long will we need to wait? “20 teens” or will some other unforeseen event adjust the economic predictions once again? Time will tell.

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