Saturday, April 23, 2016

The Cycle of House Prices and Foreclosures

Our first experience with a volatile housing market and mass foreclosures was in Texas after the oil crash, in the mid-1980’s. Ten years earlier Dallas and the surrounding areas had a real estate boom from a surge in oil prices and influx of people attracted to the area by the new jobs. Even in the suburbs north of Dallas, like Plano where we lived, there were labor shortages and high real estate prices. Track houses purchased in 1979 increased 30% in value in just 3 years. 

By the mid-1980’s, the crash in oil prices was severe and the massive layoffs included many of our friends. Houses were rarely for sale in Plano, so it was a shock to see “For Sale” signs lining the streets. We watched dumbfounded as the super hot Texas economy and real estate market became a calamity. Half built skyscrapers stood idle. A huge new shopping mall near our apartment  had empty shops and tumble weeds blowing through it. The Texas economic downturn was steep with dozens of banks going bankrupt and thousands losing their jobs and life savings.  The federal government created a corporation to "warehouse" all the debt from home mortgages and commercial properties until an orderly market returned to sell them off.

We experienced the Texas boom and bust during our early years of working, and although we were somewhat on the sidelines without the income or down payment to buy a house, the experience left a big impression on us.  

Twenty years later when we saw the rapid rise in house prices in Santa Cruz County we got a terrible feeling in our stomach.  Based on our experience, it was only a matter of time before the crash. But our friends and neighbors were convinced that house prices only go up. They claimed that the 32% price increase in their houses over the past three years, from 2002 to 2005, was only the beginning.

At the end of 2007, real estate prices in Santa Cruz County started to fall. From 2008 to 2012, house prices fell 33%.  The crash crushed the buyers who had purchased their homes at the height of the boom.

Now we are living on Oahu observing the island’s housing boom.  The average price for a single family home is currently $725,000, a 12% increase over the past three years. Oahu’s foreclosure rate of 1 in 3200 homes is one of the lowest rates in the US. In contrast, Maryland, the state with the highest foreclosure rate in the nation has a rate of 1 in 537 housing units. 

The income needed to afford a $725,000 mortgage for an average Oahu house is $290,000 a year, based on the conservative qualification criteria of a mortgage not exceeding 2.5 times your income. In contrast, the average salary for job postings in Honolulu is $40,000, which is 31% lower than the average salary of job postings nationwide. In our central Oahu condo complex, a 3 bedroom, 2 bath, 2 parking spot, 1100 square foot condo is listed at $525,000 (with no amenities like a gym or swimming pool or common area). 

The high cost for a house on Oahu feels a lot like California in 2005, particularly when the low wages in Hawaii are factored in. Even so, house prices continue to rise.

The extreme cycles of housing prices has taught us to expect the unexpected.

Sunday, March 6, 2016

The Dilemma of Renting versus Buying a House

Since moving to Oahu nine months ago, we have been perplexed about whether to buy a home or keep renting. Since we plan to move back to the Big Island at some point, our decision has to take into consideration the economy and inflation.  We could get financially crushed by buying a home if there is significant de-inflation on Oahu in the next 3 years.

The problem is we have conflicting views about whether there will be inflation or deflation in Hawaii. We have a list of things that will cause housing prices to go up in Hawaii and another list of things that will cause housing prices to go down.

Here is our list of some things we think could cause inflation in Hawaii:

1. If the U.S.’s military and defense infrastructure in the Asia - Pacific region expands, there will be strong demand for housing in Oahu.  Currently, the U.S. military presence in Oahu is down about 7% from 2012.

2. If the U.S. economy continues to improve and more jobs become available, Americans will have more money to spend on vacations and to visit Hawaii. Furthermore, Hawaii’s vacation appeal will increase if unrest spreads in vacation spots elsewhere in the world. Tourism on Oahu was up 4% this year. More tourism means more jobs and higher wages for residents which would increase the demand for housing.

3. If the Federal Reserve keeps interest rates low that will help keep the cost of a mortgages lower and the demand for houses higher.

4. The 76 million baby boomers are retiring in large numbers (some estimate over 10,000 a day). If even 1/10th of one percent of them move to Hawaii that would add 760,000 new residents to Hawaii which would increase the demand and prices for housing.

5. Affluent buyers from China and India may continue to buy homes in Hawaii which is already a positive factor in Hawaii real estate prices. 

Here is our list of some things we think might cause de-inflation:

1. The military presence in the Asia – Pacific region could be decreased by the next U.S. president and congress which would reduce the housing demand in Hawaii. Even cuts in military housing allowances for soldiers stationed in Oahu would have a negative effect on housing prices in Oahu.

2.  If the U.S. economy suddenly stalls, which some people think it might, Oahu could see a sudden drop in the number of visitors. There are numerous things that could tamper with the U.S. economic recovery. Robots and automation, for instance, are replacing workers in the U.S. in manufacturing plants, warehouses, and retail jobs. The rising U.S. dollar makes a vacation more expensive for visitors from Japan, China, and Canada.  A shrinking tourist industry would result in job cuts that would ultimately effect the demand for houses on Oahu.

3. Although the 76 million baby boomers are starting to retire in large numbers, they may not have enough income to move or even visit Hawaii.

4. Although lower oil prices have reduced the cost of airfares to Hawaii, they have also lowered the cost of driving vacations on the mainland which may reduce the number of visitors to Hawaii.

5. If the Federal Reserve raises the interest rates it will make buying a house in Hawaii much more expensive which could damper demand. An interest rate increase from 4% to 8% would increase a mortgage payment 54% percent.

Over the last year, more rentals have come available in central Oahu and many are renting for 10% less than last year.  Like many places in the U.S. right now, the current cost of a home in Oahu plus the additional expenses of owning is more expensive than renting. Our plan is to keep track of the cost of renting versus buying and watch for changes that may result in inflation or deflation. Right now, we believe the risk of a collapse in the housing market is too high to buy. 

Sunday, November 29, 2015

2016 Year of the Fire Monkey Predictions

It is time for our annual predictions based on the Chinese lunar calendar for 2016, the Year of the Fire Monkey.  As we predicted, the current 2015 Wood Sheep year has seen some financial improvement of the economy and more jobs. Unfortunately, the strength of the hostility star overshadowed the normal calm and diplomacy that Sheep years can bring.

The Chinese Monkey New Year starts Feb 8, 2016. In contrast to the Sheep Year, the Monkey Year will be wild, crazy, and disorderly. Organizations and groups will find it hard to make progress during the constantly fluctuating Monkey Year; accomplishments and financial success will be through your individual efforts. This year will bring the 2016 summer Olympics in Rio de Janeiro and a contentious U.S. presidential election in November.

During the last Fire Monkey Year, 60 years ago (1956), Eisenhower was reelected as the U.S. president and the Olympics were in Melbourne.  The Soviets invaded Hungary, Britain and France bombed Egypt to reopen the Suez Canal, Israel captured the Straits of Tiran, and there was a military coup in Sumatra. Racial tensions were high in the U.S. and the Supreme Court ruled that race separation on buses was unconstitutional. Morocco and Tunisia gained independence from France, Sudan became independent from Egypt, an Islamic republic was formed in Pakistan, and the last French troops left Vietnam.

The 2016 Monkey Year will go by at a fast pace with lots of communication, humor and wit. This is the year for new thinking, new ideas, and inventions. It is a time for taking risks and wild ideas, but watch out for monkey schemes and deception.

Unfortunately, the year will be dominated by the star of illness, so you should guard your health and energy. Extreme views and lawlessness will pervade the year and it will be more difficult for world leaders to keep control.  The Monkey Year will be a great  for money opportunities, but make sure to keep safe, healthy, and secure.