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.