Spike in Hawaii home prices on the horizon – Part 1

But 2012 or 2013
could be the beginning of the next significant rise, which has the
potential to be steep.

Several factors, such as interest rates,
credit availability, the depth of the foreclosure problem and growth in
jobs and personal income will play into whether home prices get pushed
up again and to what degree. So a run-up in prices isn’t certain.

Home
production, however, can be a major influence on prices, and
residential building permits statewide last year sank to their lowest
level since at least 1980, according to state statistics. Older
statistics weren’t available.

Paul Brewbaker of local consulting
firm TZ Economics said home prices could “light up” in two or three
years based on the dearth of residential building permits from
homebuilders last year.

According to the state Department of
Business, Economic Development and Tourism, there were 2,722 private
residential building permits last year. That compared with 4,768 the
year before and a recent peak of 9,706 in 2005.

Brewbaker said the
present pace of home production won’t keep up with natural household
formation, that is demand generated by the present population as young
adults form new families who seek their own housing.

Around 4,000
new homes are needed to satisfy household formation, the local economist
said, adding that if home construction doesn’t pick up it could lead to
a short supply that drives another spike in prices.

The last time
the number of residential building permits was under 4,000 was 1998 at
the tail end of the last housing market slump that lasted roughly a
decade. That year there were 3,356 permits.

“There are very few
houses being built,” said Carl Bonham, director of UH’s economic
research group. “We are setting ourselves up for a shortage down the
road.”

Relatively flat now

Many local real estate observers like to say that Hawai’i home
prices have had a historical tendency to move in a stairstep pattern —
up, flat, up, flat — over multi-year cycles.

O’ahu’s market is now
in its third or fourth year of more-or-less flattening, but high-volume
homebuilders with land to build on aren’t planning to ramp up
production soon.

Meanwhile, three master-planned communities
totaling up to almost 29,000 homes in Central and Leeward O’ahu have
been either derailed or delayed.

High-volume home builders active
in Hawai’i say they saw decreasing buyer demand unfolding about four
years ago, and began adjusting production so they didn’t have a glut of
unsold inventory.

Now homes are more or less being built to order,
with little or no speculative development.

A report released last
month by local real estate market researcher Ricky Cassiday noted that
Hawai’i homebuilders produced and sold the fewest new homes in at least
30 years.

Cassiday’s report said statewide sales of new homes
totaled 2,050 last year — fewer than half the recent peak of 4,842 in
2006, and a 40 percent decline from 3,071 sales in 2008.

The moves
by most Hawai’i homebuilders to avoid getting caught with lots of empty
homes have helped them survive and also helped overall home prices from
dropping more than a modest amount. But now that a market recovery
appears to be under way, builders are remaining cautious.

“The
strings are pretty tight with not getting exposed to the market,” said
Mike Jones, president of the local Schuler Division of residential
developer D.R. Horton.

Schuler’s pipeline for near-term production
includes about 60 homes at Sea Country in Mā’ili, 60 at Kahiwelo in
Makakilo and about 20 at Nanala in Kapolei, as well as three projects on
Maui and a couple on the Big Island.

Developing additional
subdivisions in Makakilo and Kapolei will require hefty investment in
infrastructure, and Jones said Schuler needs to see some signs that such
investment will pay off before it proceeds.

Another major Hawai’i
homebuilder, Gentry Homes, also dialed back production a few years ago
and isn’t projecting picking up its pace this year.

“We were very
careful with our spending and with our inventory levels so we didn’t
have the product sitting there,” said Bob Brant, Gentry president and
chief executive officer.

Brant and Jones said they are keenly
waiting to see what happens to the uptick in home sales after federal
tax credits for home purchases expire at the end of this month.

If
purchases stay healthy without the credit, it could encourage
developers to disengage the brakes on building.

Reach Andrew Gomes at [email protected].