Why I think we are about to enter a new market
Even in the worst of markets, houses are bought and sold every day. When the economy was in free-fall in 2008 and 2009, people still bought and sold houses. Why? Because people buy and sell homes not because of the state of the economy today, tomorrow, or next year. People buy and sell, mostly, because they are at a point in their life where they need to or they want to.
Here’s something to remember- buying a home is most often an emotional decision, validated by data. I look at it like a sliding scale for every transaction. Some purchases are purely data driven. Think of something like an investment property where the return of investment (ROI) is the sole deciding factor. Other purchases are largely emotional- this can go for a primary residence, and even more so for a second or vacation home.
Here in Hawaii we have a very significant portion of our home buyer market making purchases for second homes and vacation homes. These are largely emotional purchases. Now, that’s not to say that these are impulse purchases! In fact, these are very often the result of a long thought out plan, based on retirement plans, asset allocation, and throughout plans for a new lifestyle.
What does it mean to buy a property in Hawaii? For most people it is a finish line of some sort. It may have been a near term goal, or possible a lifelong goal. But make no mistake, it’s not something done on a whim. If you buy in Hawaii you really have to want it. It ends up being one of those things that’s sort of stuck with you. Hawaii is as much of an idea, or dream if you will, as it is a place.
REASON NUMBER 1: When people encounter times of great stress, they begin to look outward for possible external changes that might help them in a stressful time. They look to their dreams and lofty goals, and they envision a future where they are living the best version of their life. For some people it’s getting a backyard swimming pool, or taking more vacations. For a lot of people, that dream is Hawaii.
If we look back at the housing market in Hawaii post 9/11 we will see a doubling of the number of sales in just a few years. There’s no doubt that the lure of easy loans was part of the run up, but still, people had to want to come here. I think we are going to see the same thing in the next few years, and I think it’s going to have an even greater impact on housing this time around.
Hawaii has ignored it’s housing problems for 5 years, and now it’s the Perfect Storm or Perfect Opportunity, depending on your point of view
My opinion is that we will see higher demand for housing in Hawaii due to the desirability of the lifestyle, and our relative safety from Covid, so far. That opinion begs the question: How is Hawaii positioned to deal with this increased demand? For that answer, let’s look at some data. The Hawaii Department of Business, Economic Development, and Tourism published a report in 2015 stating Hawaii County needed to add about 24,000 new housing units by 2025. That’s 2,400 new houses and condos per year. I’m here to tell you that I would be shocked if we added a net of 2,400 housing units over the last 5 years. We have this problem for a number of reasons. I’ll go into 7 of them below.
- The State of Hawaii has refused to decommission usable lands for housing development. They instead promote “infill” which is where existing lots located in already developed areas are used for individual housing units. This strategy relies on maintaining and updating the infrastructure in those areas.
- The State of Hawaii has spent the lion’s share of its infrastructure budget on Oahu to the detriment of the other islands, thereby taking the “infill” strategy, and cutting it off at the knees, while also making new development impractical.
- The County of Hawaii has added additional requirements to already approved housing projects, making them less financially viable for the developer. This has resulted in developers having to change their existing plans. Even worse, this lack of reliability by the County of Hawaii causes concern on the part of developers for future projects. Who wants to get permission from the government, only to have the requirements change at a moment’s notice?
- The State of Hawaii’s Land Use Commission must approve all rezoning of parcels over 15 acres. This is in addition to the County rezoning process. The Land Use Commission process for rezoning is very lengthy and the process for someone, ANYONE to file a contested case is far too easy. Basically, if anybody complains, the developer will have to wait 5-8 years for the rezoning. This is the single biggest reason for the lack of housing in Hawaii. Nobody is willing to put up millions of dollars to buy a parcel of land in order to build 100 or more homes for the people who live and work here, if they have to wait 5-8 years for the rezoning, which could be denied at the end.
- The County of Hawaii building permits and inspections move at a snail’s pace. In the past year, the average wait for approval for a permit, according to people I’ve spoken with in the business, has been about 6 months. That’s just to get the permit, which does not take into account the construction and inspections. In all, it takes just under a year to build a modest home.
- The Hawaii Landlord Tenant Code is written strongly in favor of the tenant, and the process of evicting a non-paying tenant is extremely long and expensive. This has resulted in less investment into developing rental housing, adding a further constraint to supply.
- The County and State of Hawaii have decided that they will arbitrarily choose when the rule of law will be enforced. This goes back to the Thirty Meter Telescope (TMT) project. TMT has a valid permit to build a telescope. They went through a decade to get approvals. Then TMT got sued and went to the Supreme Court of Hawaii, where a panel of judges ruled that they followed the law and had a valid permit to build- they had the right. Then the Governor and the Mayor arbitrarily decided that since a vocal minority were against the TMT, the government would provide police protection for people blocking access to the land that TMT had the right to build on, effectively providing an armed government blockade against TMT.
If the Government can’t be trusted to follow their own laws regarding building, is there any wonder why builders do not want to build here?
So- all these things lead us to our Perfect Storm- or for some of you, the Perfect Opportunity. Increased demand is on the horizon (that’s an educated guess). Due to State and County Governmental action and inaction, limited supply exists for the foreseeable future (that’s a fact). And what happens to price when demand is increased and supply is limited? We know the answer.
If you agree with my assessment about our future demand and supply, it’s time to talk about buying.
Mike Drutar is the Principal Broker and Owner of NextHome Paradise Realty, located on the Big Island of Hawaii.