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Oahu Real Estate Market Update – Mid-Year 2021

WFH - Work From Home

— If you have been waiting for the most affordable time to buy Hawaii real estate in decades, we just passed it during the last 6 to 12 months. Still, Honolulu appears undervalued relative to California markets.

— Bargains are now going fast. We can help you find them. Are you decisive and ready to strike?

— If you think timing the market is tough, we agree.  That’s why we recommend buying:

  • When you are committed to living in the same neighborhood, and
  • When you found a suitable home that you can afford.

— We are here to help you. Contact us when you are ready to buy or sell real estate. We are expert realtors and love what we do.

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The World We Live In Today

One year ago, COVID shook world economies to the core. An epic battle was raging between massive unemployment and Q-Infinity.

During the recession, the stock market boomed. US households added $13.5 trillion in wealth last year. That’s the biggest annual increase ever.

Today, the economic recovery is in full swing and real GDP is expected to exceed pre-Covid levels by year-end.

With almost 70% of the population vaccinated, the masks are coming off. The Foo Fighters rocked a vaccinated crowd at Madison Square Garden. Travel and carefree living appear to be back in vogue.

Millennials are trading meme stocks on smartphone apps, and companies on the brink of bankruptcy capitalize on their brief fruitfly-lifespan Reddit fame.

By August, Starlink could provide broadband internet everywhere on the globe except the polar regions. And billionaires are racing for bragging rights to become some of the first space tourists.

Locally, according to the Hawaii Tourism Authority, Hawaii vacation rentals were 80% booked in June 2021, compared to only 73.6% booked in June 2019, prior to the pandemic.

Welcome to the new normal: The Roaring 2020s.

Inflation Chatter

Sometime during April, the cheapest rental car on Maui was a Toyota Camry at $722 a day.

Pundits argue that lumber and used car price inflation is a precursor to hyperinflation. Or is it just a temporary pronounced reopening-related bump from depressed levels? A typical base effect due to abnormal and distorted data by comparing one month with the same month from a year ago?

  • On 6.16.2021, the Fed chair, Jerome Powell reconfirmed the Fed’s continued commitment to transparency and accommodative policy:

“The Federal Reserve is committed to using its full range of tools to support the U.S. economy in this challenging time, thereby promoting its maximum employment and price stability goals.

  • The Fed’s key interest rates remain near zero:

“Lift-off is well into the future. We’re very far from maximum employment, for example, it’s a consideration for the future.” 

  • No tapering of buying MBS and treasuries yet:

“While reaching the standard of ‘substantial further progress’ is still a ways off, participants expect that progress will continue. In coming meetings, the committee will continue to assess the economy’s progress toward our goals. As we have said, we will provide advance notice before announcing any decision to make changes to our purchases.” ~ Jerome Powell

The recent uptick in commodity prices is “largely reflecting transitory factors.”

  • With inflation now above 2%, Powell further explained last week: “To the extent it is temporary, then it wouldn’t be appropriate to react to it, but to the extent it gets longer and longer, we will have to continue to reevaluate the risks that would affect inflation expectations.” 

The bond market appears to agree with Powell, inflation is not a problem: 10-year Treasury yields peaked at 1.74% on March 31. Now the yield is down to 1.3% (7.16.2021)

For now, economic Goldilocks conditions continue, interest rates remain low, and hikes are being penciled in for 2023.

So far, most of the pessimistic predictions have turned out to be false.” ~ Naval Ravikant

Oahu Real Estate 2021 YTD vs 2020 YTD

We compare 2021 YTD, January through June, with the same six months, January through June of the last year 2020.  Six months of data provide a sufficient sample size to spot any meaningful new trend. 

Comparing only one month of data over another makes for sensational newspaper headlines, but it does little to spot a trend. Zooming out, the bigger picture reveals that monthly comparisons merely show short-term distortions based on insufficient data.

1) 2021 YTD
1) 2021 YTD

The Oahu Median Sales Price increased by 21% (Single Family Homes) and 6.4% (Condos) during 2021 YTD compared with the same six months last year.

How Could There Be Such A Large Difference?

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MRI – Month Of Remaining Inventory = The Speed Of The Market

The Oahu real estate market is defined by record-low supply and record-high demand. Increasingly more buyers are chasing vanishing supply.

For simplicity, we can combine both supply and demand into one ratio: Months of Remaining Inventory (MRI), which is the current number of active listings divided by the monthly closed sales rate. 

MRI shows us how fast existing inventory sells, and if the market speeds up or slows down. The lower the MRI, the faster the existing inventory is being bought. When MRI is dropping, then the market is speeding up!

2) MRI Dropping
2) MRI Dropping

In the past, a balance between a buyer’s and a seller’s market is typically observed when MRI hovers around 5 or 6.

  • Single Family Home MRI dropped to a mindboggling record low of 1.2 MRI. This is the lowest MRI that I have ever seen
  • Condo MRI dropped to a record low of 2.1 MRI, and is falling fast.

These numbers are clearly below the 5-6 MRI equilibrium, confirming a strong Seller’s market.

So far we looked in the rearview mirror. The following indicator is forward-looking.

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Pending Sales

Pending Sales = Properties under contract and expected to close soon.

3) Pending Sales
3) Pending Sales
  • Single Family Home Pending Sales in June 2021 far exceed multi-year peaks
  • Condo Pending Sales in June 2021 are going to the moon.

The unusual peak buying frenzy could be a precursor for still higher prices to come, especially in the condo market that has lagged the Single Family home market during COVID. 

“I can calculate the motions of the heavenly bodies, but not the madness of people.” – Isaac Newton

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Oahu Real Estate 2021 – Condo Prices On The Verge To Jump?

Supply, Demand, MRI, and Pending Sales give us a view of the past, a snapshot of today, and an indication of the future market direction. That’s until circumstances change. For now, the market looks remarkably robust as reflected in the Median Sales Price:

Median Sales Price

4) Median Sales Price
4) Median Sales Price
  • Single Family Home Median Sales Prices jumped dramatically.
  • Condo Median Sales Prices mostly remained unchanged and are hovering near the July 2019record high.

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Three Waves Rolling Through The Market

The Oahu market is made up of several submarkets. For simplicity, we look at three segments that took off at different times. Each segment had an underlying trigger that tipped the supply /demand ratio, caused MRI to drop, and launched a subsequent price move.

Single Family Homes

Trigger:  – April 2020, COVID anxiety sparked the need for social distancing and more space. Record-low interest rates increased affordability and added fuel to the run on Single Family homes. Work and schooling at home via Zoom increased demand to abandon the urban core. Mainland remote workers migrating to Hawaii out of COVID hotspots added to the demand.

Everyone suddenly wanted to get out of town. The Donut effect. – Moving out of the urban core into the country or the low-density suburbs.

Outcome:  – Demand steadily increased and inventory got bought up. As if propelled with an explosive mix of rocket fuel, prices have been escalating uninterrupted to new record highs.

Condotels

Trigger:  – In January 2021, as a result of vaccination success and COVID lockdown fatigue, we saw the first meaningful turnaround in visitor arrivals. Like a phoenix rising from the ashes, renewed interest in condotel purchases returned immediately.

Outcome:  – Inventory diminished. Condotel prices in select buildings have skyrocketed during the last six months and are now exceeding pre-COVID prices. All the desperate sellers sold last year.    

See related article:  Condotel Opportunities – COVID And The K-Shaped Recovery

Residential Condos

Trigger:  – No defined turnaround date, however, COVID anxiety has been subsiding and the price gap between SF homes and condo prices approached an unsustainable level. Since August 2020, condo MRI has been falling faster than Single Family home MRI. Pending condo sales have been increasing faster than pending Single Family home sales.

Outcome:  –  Condos that have been slow to move are now receiving multiple offers above the list price. It appears the run on condos is accelerating. Could this be the beginning of an explosive price move? Condo prices could be poised to escalate, narrowing the price gap with Single Family homes.

When we reframe a question—when we change our method of questioning—we also change the outcome.  ~ Ozan Varol

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Free Money – Negative Real Rates!

The main driver for the strong demand is the substantial drop in mortgage rates. Before COVID, in 2019, the average 30y fixed mortgage rate straddled 4%.

At the beginning of 2021, the average 30y fixed mortgage rate dropped to an unbelievable low of 2.65% (1.7.2021).

5) 30y Fixed Rate Mortgage - Free Money
5) 30y Fixed Rate Mortgage – Free Money

Today, mortgage rates remain close to the bottom at 2.88% (7.15.2021). That 2.88% rate translates into a 2% rate after tax-deductibility (assuming 30% combined federal and state taxes).

The most recent June CPI was 5.4% (!), although, as discussed, that is a transitory high anomaly due to the base effect. The Fed is committed to letting inflation run above 2% for an extended time.

That means the real cost of your 30-year mortgage loan is below zero after taxes and inflation.

(2.88% minus 30% tax deduction = 2% minus >2% inflation = <0% real rate)

Below zero is better than free. A 3% mortgage has now become an asset. – Get it while you can.

Here is a sample calculation assuming a $1Mill mortgage:

  • $1Mill, 30y fixed at 4% = $4,774.15 P&I /mo
  • $1Mill, 30y fixed at 2.88% = $4,151.60 P&I /mo

That’s a whopping $622.55/mo in savings and a 13.04% improvement in affordability.  Anybody with a job and decent credit can now afford a 13.04% more expensive home compared to 2019, all else being equal. That’s huge. You can buy a better house with the same monthly cost!

I’m not suggesting buying a more expensive house if you don’t need it. However, the best time to lock in the lowest interest rates for the next 30 years and upgrade your living environment is now. 

See related article:  Looking For Foreclosures In Hawaii?

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Get Out Of Forbearance  

If your lender granted you mortgage forbearance or deferment and you no longer need it, consider getting out of it asap. It makes little sense to kick the can further down the road.

Catch up on your payments. You must be current on your existing mortgage payments for at least three months to refinance or apply for a new loan.

Mortgage rates remain low for now. But they are unlikely to move lower. And eventually, they move up. If you have been thinking about buying a home or refinancing your existing one, today’s low mortgage rates are as good as it gets.

See related article:  Confessions Of A Real Estate Investor

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What Happens Next?

A trend is a trend until it is no more.  If you have been following our blog, you know that we don’t have a crystal ball.

Around 1995, the internet was supposed to allow people to work from home in the suburbs. That never materialized until COVID proliferated Zoom. But as COVID anxiety subsides, people will gravitate back to the urban core and benefit from living within walking distance of everything.  

Perhaps I’m a bit biased towards condo living. I work from my condo across from the beach with fresh air and a view, see the picture at the top.

See related article: Condo Or Single-Family Home?

If you are looking for real estate opportunities, then consider…

  • Arbitrage – Why chase after scarce Single Family Home inventory when Condos are readily available and attractively priced.There are more than twice as many Condos available than Single Family Homes.
  • Regression to the Mean – Condos are undervalued and appear to be bargains compared to Single Family Homes. The gap between Condo prices and sharply higher Single Family Home prices widened too far. Low mortgage rates make condos today more affordable than any time during the last several years.
  • ‘Pending Sales’ and dropping MRI numbers foretell Condo prices could be jumping significantly.

Regardless if you need a condo or a house, contact us when you are ready to proceed. We are here to help.

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Bonus Section

On 7.14.2021, the brilliant Paul Brewbaker, principal of TZ Economics, delighted the Honolulu Board of Realtors with his latest slideshow presentation: The Future is Now: Recovery and Trends

The following select slides are from Paul’s presentation with snippet notes for your benefit.

6) Condo Sales Activity Rebound After Stalling During COVID
6) Condo Sales Activity Strongly Rebounding After Stalling During COVID
7) Condo MRI Dropping Fast
7) Condo MRI Dropping Fast – Inventory Squeeze!
8) New Residential Construction - Lowest Since WW2
8) New Residential Construction – Lowest Since WW2 – Less Homes Built Than In 1928 – No Supply Bubble – Inventory Squeeze
9) More Oahu Housing Construction Data
9) More Detailed Oahu Housing Construction Data
10) SF Home Median Price Break-out. Condos Below Trend Since 2018
10) Strong SF Home Median Price Break-out And Might Be Peaking (?) – Condos Still Below Trend Since 2018 – Opportunity?
11) SF Home Long-term Trend
11) SF Home Long-term Trend – No Bubble Here
12) Condos - Below Long-term Trend
12) Condos – Below Long-term Trend – Relative Affordability – Opportunity?
13) WFH vs SF Home Demand
13) Work From Home Might Be Here To Stay vs SF Home Demand Might Soften
14) WFH - Pre vs Post Crisis
14) WFH Here To Stay? – Pre vs Post Crisis
15) Labor Productivity Growth Jumps Since COVID
15) Labor Productivity Growth Jumps Since COVID – Who Would Have Thought?
16) New Business Applications Jump Since COVID
16) New Business Applications Jump Since COVID – Crisis Creates New Disruptive Busines Opportunities
17) Inflation - Honolulu vs US Urban
17) Inflation – Honolulu vs US Urban
18) Inflation - Long-term Trend - Honolulu vs US Urban
18) Inflation – Long-term Trend – Honolulu vs US Urban
19) Fed Policy Framed Around 2% Inflation. Ok To Run Above For An Extended Time
19) Fed Policy Is Framed Around 2% Inflation. Ok To Run Above For An Extended Time – Homing Behavior Of The Balancing Feedback Loop
20) The Fed Expects Inflation To Revert To 2%
20) The Fed Expects Inflation To Revert To 2%
21) Fed Target Rate Projection
21) Fed Target Rate Projection
22) 10y Treasury vs 30y Mortgage Rates - No Sign Of Inflation Concerns
22) 10y Treasury vs 30y Mortgage Rates – No Sign Of Inflation Concerns
23) Hawaii Undervalued
23) Honolulu Appears Undervalued

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— We don’t just write about this stuff. We are expert realtors specializing in representing buyers and sellers of real estate in any market condition. We are committed to providing the most excellent service available on the planet. We love what we do and look forward to assisting you too!

Contact us when you are serious and ready. We are here to help.  

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Also…, we want to make this The Best real estate website you visit. We love to get your feedback. Let us know your ideas on how we might improve. We are humbled by your support and remain committed to constant learning and growing with you.  ~ Mahalo & Aloha

Oahu Real Estate Market Update – Mid-Year 2021 was last modified: September 6th, 2021 by George Krischke
George Krischke
Principal Broker (R) Hawaii Living See my other articles

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