Though I am in Seattle, I continue to sell Kauai real estate with the help of my wonderful on-island partners. I thought I would do a little, but I am actually doing a lot. It's amazing how much you can accomplish these days with the wonders of internet, phone, and fax.
I thought you would like an update for the Kauai (and Hawaii) real estate market. Please open the attached charts. The first shows home and condo sales for June, and year-to-date through June 30 for 2010. These charts show number of sales and median sales prices for each of the islands. Be sure to scroll down, because there are also graphs.
The second attachment shows July sales and median prices for Kauai only.
Ladies and gentlemen ... [drum roll] we do have a trend! Sales by and large have been picking up. Prices by and large have come down.
There is a trend in mortgage rates, too. As many of you surely know, rates are extraordinarily low right now due to the Fed's keeping the overnight rate low in order to help the housing market. The Fed's language has led many economic commentators to believe they will continue to hold rates down for some time. At some point, of course, they will have to raise them, but we don't know when that point will be.
And finally, there is a trend in banks, in their risk tolerance and in their patience with mortgage holders in arrears. Risk tolerance is making it more difficult for new buyers to obtain loans, and the banks are also getting tough with those who fall behind in their payment of existing mortgages.
Let's look at these trends in a little more detail. We'll start with the first chart, the one that shows all the islands.
A Positive Trend ... So Far
A cursory glance at this chart quickly reveals that for both homes and condos, for each of the islands, for both the month of June and for the period of January through June 30, 2010, the number of sales has risen, often dramatically. In Kauai, for example, single family home sales are up nearly 72 percent for the year so far. Kauai condo sales are up 64 percent for the same period.
In addition, the increase in sales seems to be accelerating in some cases. If you compare the percent change columns for year-to-date (lower chart) to the percent change columns for June (upper chart), you will see that Kauai home sales increased about 72 percent year-to-date and 76 percent in June. Kauai condo sales are up some 64 percent for the year and up 62.5 percent for June.
In Maui, condo sales are up about 64 percent year-to-date, but up about 91 percent for June. Maui home sales, however, are up nearly 43 percent for the year, but up only 18.5 percent for June. One possible interpretation is that people considering buying a condo in Maui are beginning to realize that they can now afford a house. This trend is also starting to appear in Kauai, though not yet as pronounced as in Maui, as homes in the resort areas become more affordable.
Another factor that could explain the discrepancy is loans. It's much easier to get a loan for a home than for a condo. Lenders consider condos to be more transient, and have standards about occupancy and other factors that have to be met for them to grant a loan. Some lenders don't handle condos, but do handle second homes.
Now take a look at the part of the chart that shows prices. Notice that in the vast majority of cases, prices have declined, down as much as 31 percent for Maui condos year-to-date. The few price increases are all very small -- the largest is 2.6 percent for Oahu homes year-to-date. In Kauai, home prices are down 2.2 percent year-to-date and condo prices are down 10.3 percent.
What's happened is that prices have fallen far enough to entice buyers back into the market. Though the price changes may not appear as dramatic as the increase in sales, don't forget that we were in a price down trend for a very long time, and the effect is cumulative.
If these trends continue, we may see more sales, and prices bouncing around this same level for awhile. The reason I don't say they will be increasing, at least in the near term, is that even with the dramatic increase in sales, the market is still flooded with accumulated inventory. And many, perhaps most of the sales are of distressed property: short sales and bank repos. That means there is price pressure on the remaining non-distressed inventory. In some cases, the sellers of this non-distressed property can afford to wait until the market turns around, or simply take their property off the market if it doesn't sell. But in other cases, these sellers are really just one step from distress themselves. Overall, it's a good time for buyers, but still a challenging one for sellers unless they are willing to compete with distress sales.
Banks and Their Dilemma
It is a curious period in banking. When the boom turned to major bust in 2008, the big banks with all the toxic bundled residential mortgages got a bailout from Uncle Sam. Most of them have paid that money back.
The smaller community banks don't have bundles of residential mortgages in their portfolio. What they do have is commercial real estate loans. The vast majority of commercial real estate lending is done by these smaller, local banks. In a recession, people don't shop as much. Offices lay off workers. Industry slows down. This means lower revenues for commercial property (and lower prices for those who are able to finance a purchase.)
In addition, commercial loans usually have a 10 year term. Fifteen and 30 year terms are unheard of in commercial real estate. That means there's always more refinancing going on in this market. Many commercial property owners need to refinance now, and some of them can't do it. Their vacancy rate has increased, their rents have decreased, and so their values have dropped, and at the same time, their lenders have much tighter standards. Some banks are just sitting on their bad commercial loans, but they can't do that forever. You may have noticed that it's the small community banks that are going under. And there's no bailout for them.
The question here is, will these problems in the commercial real estate spectrum spread to the real estate market as a whole? I thought in 2008 and 2009 that they would, but so far, that hasn't happened. The good news is, in an economic recovery, the commercial loan problem will go away faster and more easily than the toxic mortgages and all their derivatives. But with sales and employment down again, the jury is still out on recovery and its timing.
Let's get back to the big banks with all the residential loans. Despite the bailout, some big banks did fail, and they were scooped up by even bigger banks. Those banks then had a lot of bad mortgages added to their portfolios, where they already had plenty of bad debt of their own.They got temporary federal help from Fannie and Freddie, which bought up many of them. But now Fan and Fred, under pressure to improve their own horrendous balance sheets, are asking the banks to repurchase these mortgages. At Bank of America, the nation's largest bank, these repurchase requests have increased by $3.5 billion to $11.1 billion. Though some of the repurchases are being disputed, the banks are again under the gun. In addition, even with federal help, even with the wads of cash they are now sitting on, banks are extremely skittish about lending. They went through a major crisis, and though they got government help, they don't ever want to go down that road again -- and in fact, they probably couldn't, due to new financial legislation and the public's resistance to further bailouts. So in a conservative lending environment, buyers are finding it increasingly hard to obtain financing. On the other hand, rates are so low that buyers who are well qualified, including large investors who buy multiple properties, are coming back into the market and bringing it up.
There is, however, one trend that could influence the market in a negative way, and that is the way banks are handling their remaining problem loans, or "non-performing assets."
When the down turn began and banks became flooded with these short sales (in which a property's sales price is lower than the amount owed), they didn't know how to react. Banks use real estate as collateral, but they don't know much about selling it or managing it. The majority of these early short sales fell through as buyers waited weeks, if not months, for a bank committee to respond to their offer, often with a price higher than the list price and an arcane list of demands.
Then in 2009 and early 2010 the banks, at least some of them, seemed to catch on a little better and became more flexible, enabling more of these sales to go through. Still, there was a lot of inventory on the banks' short sale desks, and it continued to pile up. What that means is there were a lot of people behind on their payments, for increasing amounts of time, while the overwhelmed banks waited to get to their files.
Now the banks are cracking down on these unpaid mortgages. There is a distinct change in attitude. They are less willing to work with sellers who are behind and quicker to file for foreclosure. In some cases, a signed purchase agreement may already be in the works and well on its way to closing, but the bank chooses to foreclose anyway. In a way, this is an odd development, because when banks foreclose, they immediately put the foreclosed property back on the market. If the market becomes flooded with these bank repo properties, it will cause their prices (the value that the bank recoups on its assets) to fall. No one is certain why the banks are suddenly getting tough. I suspect it may be a reaction to a spate of media articles about people remaining in their homes without paying their mortgages. If the word spreads that mortgage holders can get away with that kind of behavior for a year or more, it could lead to a trend that would be disastrous for the banks. So they are choosing the lesser of two evils.
If this trend continues, many more foreclosures will be coming onto the market and prices could drop once again. On the other hand, banks may see values starting to fall and rethink their strategy.
So What's It All About, Alfie?
Wish I knew. The most interesting trends are always the ones just past the right margin of the charts, the ones you can't see. The future.
Trends give perspective because they provide a snapshot of the present seen through the arch of the past (to borrow from Tennyson, who put it much more eloquently.) A close examination may reveal at least some seeds of the future.
What we see in this year's trends are lower prices and an increased appetite of buyers for real estate. There are still major problems in our economy and the world's, with too much debt and stubborn unemployment. A doomsday scenario is always possible. We've heard a lot about those lately, but even if they're true, what can you do? So here's a more positive possible scenario.
I hope this is how things unfold, though they may not:. We are by no means done working through the problems of the past credit bubble. However, today's buyers, though they may struggle to obtain a loan and feel burdened by a mountain of new paperwork, will be solid. Their mortgages will be true assets, and if the banks and the economy are able to hold up, these assets will slowly start to strengthen the banks' portfolios, and eventually the banks themselves. Then banks will feel comfortable lending again. More buyers will come into the market. Sellers who don't need to sell, but would like to, will come out of their caves. Real estate will flow.
And then, just around the time the market is functioning beautifully again .. the Fed will decide to raise interest rates. Count on it.
As that sage Roseanne Rosannadanna used to say, it's always something!
But that's all past the right margin. Where we are right now, today, is in a pretty sweet spot for buyers.
And sellers who are willing to open their eyes to the reality of market pricing have an opportunity to get their property sold.
It's better news than we've seen in some time. So if you're in the market, or want to enter it, I suggest you take a moment to appreciate the unique opportunities you have at this juncture in time. Then visualize what you want, with as much detail as you can.
Appreciation and visualization. I have two college degrees, and I used to think this exercise was flakey, to use a printable term. But then I started practicing it, and started getting results. So you might want to try it, even if you're not in the real estate market. You have nothing to lose, and it just might lead you where you want to go. I hope so, whatever your goals may be.
I wish I had even more time to spend on real estate trends. If you'd like to learn more, or if you have more property-specific questions, give me a call or drop me a line. I don't have all the answers, but I can promise I'll do my level best to help you learn what you need to learn, and use it to get where you want to go.
With warmest aloha,