Real Estate Musical Chairs. We are in the very first phase of what will be a massive shift in the way we live in our homes for a long time. Owners are downsizing, upsizing, moving closer to family, closer to where they want to be, and further from work. 

With July in the books we can start to see some of the closings from contracts which were written in the Covid real estate recovery. The emphasis on real estate is intentional. Most traditional data is showing a significant downturn in the economy- and that’s an understatement. Current GDP is down 32.9%. For some comparison, the decrease in GDP during the Great Depression was  26.7%.

What we are seeing in the numbers is that a lot of people are buying in Hawaii at a faster recovery rate that anyone could have predicted. Where is this money coming from? Who’s buying? Why are they buying? What does this mean for the future of our market? Are we positioned to meet an unexpected increase in demand? Most of all, how is it that people are buying property in Hawaii (and all over for that matter) when the economy is so bad?

Where is this money coming from? This initial question is actually pretty easy to answer. The money is coming from the traditional sources; financing and equity from existing real estate holdings. Interest rates are literally the lowest they have EVER been. I have clients getting BELOW 3% on a 30 year fixed rate loan. So, if people can qualify, the money is crazy cheap. Second, there is more real estate equity in the US than ever before. 53% of all homes have at least 50% equity. 37% are owned free and clear. That’s a big old pile of cash that allows for some pretty fluid mobility in a real estate market with limited supply and a lot of buyers ready to make an offer.

Who’s buying? Well, that story is pretty much the same- but with some new players. Boomers are still the bulk of our buyers. However, with more employers now seeing that telecommuting is a benefit in terms of lower overhead and lower than expected negative productivity, many people are actually free to move to and work from Hawaii.  Imagine that you work in say, Seattle or San Diego or the Bay Area or LA. For those people Hawaii is actually less expensive, have less Covid fears, and has less social tension. Hawaii quickly becomes a very logical long term strategy, and that’s before you even mention the weather, beaches, commute times, etc.

What does this mean for the future of our market? I believe this will mean that Hawaii may soon start seeing a greater participation in the real estate market from Gen X’ers and even Millennial’s. Traditionally, they have been outliers in our market, but this may be the shock to the system that moves them out of where they were and into the next phase of their lives. The main takeaway is that I expect to see a broad increase in demand over the next few years. Simply put, more people will be in the market.

Are we positioned to meet an unexpected increase in demand? Not. Even. Close. This is where I get on my soapbox. In 2015 the Hawaii Department of Business, Economic Development & Tourism reported that Hawaii Island needed about 25,000 new homes built between 2015 and 2025. Despite this warning and a steady and improving economy over the last 5 years, our current County administration has worked hard to stifle any building for the people who live and work here. The only construction of any scale over the last decade has been Kohanaiki, where prices start at $2.5M for a condo and go up to $20M for a house. Obviously that’s not going to help the people who call Hawaii home one bit, except for the needed job creation.

How is it that people are buying property in Hawaii (and all over for that matter) when the economy is so bad?  This goes back to the low cost of financing, availability of cash from home equity, employers allowing for increased mobility, and the final element- being ready, willing, and able to be where they want to be. 

This is important: We are in the very first phase  of what will be a massive shift in the way we live in our homes for a long time. Owners are downsizing, upsizing, moving closer to family, closer to where they want to be, and further from work. It’s Real Estate Musical Chairs. 

Showing Requests
Mortgage Applications
Chart 1: This is the showings scheduled year over year as shared by showing time. Whats interesting is basically other than the “COVID pause” things have trended EXACTLY along the lines of last year except higher. Lots of people wanting to see houses out there. Interesting predictor of purchase demand.
Chart 2: A steady leveling off (but a massive uptick from the bottom) of purchase mortgage applications. As a reminder the Purchase Index includes all mortgages applications for the purchase of a single-family home. It covers the entire market, both conventional and government loans, and all products. The Purchase Index has proven to be a reliable indicator of impending home sales. Another (even better) leading indicator of purchase demand.
Lots and lots of people wanting to see houses. Lots and lots of people continuing to get submit purchase applications, even with inventory levels down.
Kona Res July 2020
Kona Condo July 2020
Kohala Condo July 2020
Kohala Res July 2020

What About Current Market Conditions

Let’s look at three different measurements for both the residential and condo market under $1M.

Pending Sales

Right now there are 123 residential properties in escrow. Compared to March 1, our last clean datapoint, that number was 108. For condos, we have 120. On March 1 we had 130 in escrow. This shows a very clear movement towards residential properties. Think about this for context: The properties in escrow on March 1 were pre Covid, and right in the middle of what is traditionally about the peak of our seasonal market. Yet for residential properties we are way abouve the peak.

Current Listing Count

We have 86 houses on the market currently. March 1st it was 122, so we have a massive reduction. We have 187 condos listed on the market right now. In March it was 160, showing that condos are lagging a bit.

Inventory BIG CHANGES!

This brings us to our current inventory. Right now our residential inventory in this market is 1.9 months for residential, down from 2.6 last month.  Condo inventory is 4.6 months down from 7.1 from last month.  For perspective those numbers were 2.3 for residential and 3.4 for condos before Covid. Again, buyer preference towards residential properties is pretty clear. 

 

Mike Drutar is the Principal Broker and Owner of NextHome Paradise Realty, located on the Big Island of Hawaii.