Oahu Real Estate Market Outlook – June 2017 –
Courtesy of the Honolulu Board of Realtors, local economist Paul Brewbaker with TZ Economics recently shared his view regarding the general US economy as well as his outlook for the local Hawaii economy and the Hawaii real estate market.
Paul’s presentations are always insightful. Check here for last year’s summary: Oahu Real Estate Market Outlook – June 2016, and compare with today’s report.
We greatly appreciate Paul’s presentations and pay particularly close attention to his current Oahu Real Estate market outlook. Following are some subjective takeaway bullet point notes from this year’s presentation during the 6/14/2017 HBR regional meeting in Honolulu.
All graphs courtesy Paul Brewbaker – TZ Economics:
1.) US and Hawaii economy:
- This is the 8th anniversary of the beginning of the current economic expansion. 8 years also represents the average length of all expansions.
- Current US GDP growth is 2.1%. Hawaii GDP growth has been around 1.6% for the last couple of years.
- Job recovery started in 2010. By 2015-2016 Hawaii payroll numbers have fully recovered and continue to grow. Slow job growth most likely will continue, but has been decelerating lately.
- Hawaii unemployment rate is dipping down to a very low 2.5% – 3%, still no sign of bottoming yet.
- Honolulu Core CPI inflation rate is currently 2.3%, and has been hovering around a steady 2% since 2008.
2.) Oahu Real Estate:
- No roller coaster this time. Modest sustainable steady pace of sales growth is expected to continue until something unforeseen happens.
- Since 2010 (last 7 years) single family home price appreciation and condo price appreciation have both been consistent and steady at about 4% and 3.9% respectively. That represents a steady continuation of the long-term price appreciation trend, without the wild swings seen during past cycles.
- Compare steady price appreciation rate during the last 5 years (mid 2012 to mid 2017) versus steep price appreciation rate during the 5 years prior to last recession (2003 to 2008).
- Condos have been outperforming (!) single family homes since 2012.
- Since mid 2012 (last 5 years) Oahu real estate appreciation has been remarkably consistent and steady at 4.3% for single family homes and 4.9% for condos.
- The more affordable price range for condos represents the low hanging fruit. Limited condo supply with higher demand translates into increased appreciation lately compared to single family homes.
- 4% appreciation (pic #5 & #6) minus 2% inflation (pic #3) means we have about 2% real annualized inflation adjusted housing appreciation, currently converging to long term trend since the 1970s.
- This sustainable steady growth could continue throughout this decade.
- ‘Months of Inventory’ has been remarkably low and stable at 2.7 months since 2013.
- The ‘Sklarz Curve’ (named after Mike Sklarz) shows the average appreciation and depreciation rate in relation to Months of Inventory. A steady balanced market was long considered a market with about 6 Months of Inventory.
- Fewer days on market –> faster absorption with lower Months of Inventory.
- Historically between 1996 and 2011 a very low 2.7 Months of Inventory would have translated into steep appreciation rates of 10%+.
- Since late 2012 we have seen Months of Inventory consistently hovering around 3, well below the 6 Months of Inventory long regarded as the stable midpoint between a Buyer’s and Seller’s market. Yet appreciation has been only modest around 4.5%. This new dynamic is shown in the yellow box.
- 2.7 Months of Inventory has not been lighting up sales prices as it has done before.
3.) Housing Affordability:
- Hawaii was never cheap, current mortgage debt to income ratio is 33.4% on Oahu. Not super high for the last 7 years and counting. Steady since 2010, no bubble here.
- Affordability is not a crisis. Home prices and nominal income both have been rising together at 4%.
- Shortage of affordable homes is the problem. – Reality: Affordability today is about as good as it ever has been, but housing supply is constrained.
- Construction spending median growth is 1.6% converging to the trend 2.2%. 1.6% construction spending growth is lagging behind 2% inflation rate.
Buyer profile for Oahu resale units has been 78.5% local between 2008 and 2015:
- Hawaii 78.5%
- Other State 7.7%
- California 6.1%
- Japan 5%
- Canada 1.2%
- Other country 1%
- Korea 0.25%
- China 0.2%
- Be mindful of the self-destructive elements of this cycle if only expensive luxury units and not enough affordable housing units are being built.
- E.g. affordable project 801 South St (completed 2015) was priced for regular working people. 96% have not sold and won’t sell. They are holding on because it is their home.
- We need more affordable projects like 801 South St to sustain Honolulu’s real estate market.
- Howard Hughes started developing 4 years ago in up-and-coming Kakaako with a focus on new luxury condos catering to affluent buyers. In the next years new development needs to be catering to regular working people to ensure a continuation of sustainable growth.
4.) Interest Rates and Fed policy:
- http://www.FederalReserve.gov shows the dot plot chart expectation increasing the fed funds rate to 2.97% by 2020.
- Fed funds rate is now at 1-1.25%. One more increase expected later this year to 1.375%. Three more increases expected next year 2018 to 2.1%.
- Gradual removal of policy accommodation remains appropriate. – All good.
5.) Conclusion and Outlook:
- Goldilocks – steady sustainable growth conditions continue..
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