Today's Oahu real estate prices (both single-family homes and condos/townhouses) are the stupidly highest I've seen over the last 15 years. We would not be able to afford to buy either our home or our rental property at today's prices.
Hello Nords. Do you have any speculation as to why prices are up so much? I haven't seen that credit is flowing as easily as it was back in 2006-7, so what's the driver? Asian money?? The same seems to be true in several mainland cities also.
Part of it is the 15-year recovery from Hawaii's real estate recession of the 1990s, which hit an air pocket in 2008-11 but has since gained momentum. Two-income families, multi-generation homes, relatively inexpensive mortgages, lots of "accessory dwelling units" or flat-out illegal rentals.
Part of it is the distortion in condo prices caused by recent high-rise sales in Kakaako. That area is undergoing a revitalization (or gentrification).
Part of it is speculation around the route of the light-rail system being built from the Ewa plain to Ala Moana. "Transit Oriented Development" is going to drive up property values within walking range of the rail stops. TOD is a very good thing for sustainable development, and maybe it'll be a good thing for renters, but it's not so good for people who want to own property around there.
Part of it is a huge housing shortfall. Depending on whose numbers (and politics) are credible, we're short on residences for 30,000-66,000 people out of an Oahu population of about a million. Two prime agricultural areas (Ho'opili and Koa Ridge) have just been rezoned and approved for development after literally a decade of litigation (and appeals). This trend has been going on for over 40 years. Agriculture is going to have to become much more efficient (which is achievable with today's tech) and neighborhoods are going to have to be more urban/walkable rather than suburban sprawl. After the new homes in those two areas come on the market, I suspect that the rest of the island's real estate prices will level off or even drop.
And finally, the economy is growing. People are re-discovering that this is a nice place to live, as long as you can get a job!
There are a number of thumbrules and ratios on determining whether it's better to own or rent. On this island, it's far better to commit to owning a residence for more than five years (because of the transaction costs) and to spend months learning the neighborhoods. There's no hurry to buy if you can wait for the opportunity. While people are waiting to buy they can invest their savings in equities (>10 years) or bonds/REITS (5-10 years) or CDs (<5 years) to build a bigger down payment. All of these asset classes (except for CDs) will appreciate at least as fast as the real estate market.
Then the renters are ready to buy when interest rates spike, or a recession hits, or a desperate homeowner (in their desired neighborhood) has to sell. All of that cash will make it easier to negotiate a lower price and a better mortgage, which will validate the homily that "Real estate profits are made when you buy, not when you sell."
Just to give an idea of the eye-watering scale of the prices here, in 1989 we bought our first home at the peak of the Japanese-fueled market for $277K. 4BR/2BA 1875 sq ft on a 5400 sq ft lot in horrible neglected rundown condition. Today it's assessed at about $675K and would appraise/sell for over $700K. However over 27 years that works out to an average annual growth rate of 3.5%. The CPI over that time has been about 2.5%/year. My numbers don't include commissions, maintenance, repairs, sweat equity, and other expenses over the years which would probably reduce our actual growth rate to the CPI. In other words we should've rented and invested our excess money in the stock market instead of in real estate equity. That property is now our rental.
In 2000 we found our "dream home forever": 4BR/2.5BA 2400 sq ft on a 15,600 sq ft lot in terrible condition. Good design/layout but neglected, decrepit, and filthy. The parents had died three years earlier, the trustee was thoroughly disgusted and seeking an escape, the neighbors were regularly calling the police about the residents, and the teenage heirs just wanted to cash out for college tuition. In retrospect it was the absolute bottom of the Hawaii real estate market after a decade of dropping prices, but all we knew is that it was a huge financial risk on the DIY opportunity of a lifetime. We snagged it for $405K (mainly by virtue of being local buyers) and we've poured in at least another $150K over the last 16 years. The epically gnarly sweat equity has practically been a part-time job requiring 10-20 hours per week for the first decade after the purchase. (The yardwork is now known as "functional fitness".) Today it assesses at over $950K, appraises even higher, and we could probably incite a bidding war to achieve a seven-figure sale price. It's by far the best home purchase we've ever made (or ever will make) in our lives. Yet again it's appreciated at less than 3.2%/year and we could've done way better by investing in equities instead of in real estate equity.
These numbers may be impressive by themselves, but they have to be viewed in the context of someone who's lived here for 27 years. Nobody can expect to achieve those results in three years. It might be easier to win the lottery.
And for you parents, yes, our adult daughter (and her spouse) could afford to rent here but would not be able to buy until they leave active duty. They'd carry out the same research process I described in my earlier post above and they'd have to be confident that they'd hold it for decades. We parents could help with the finances, but maybe it'd make more sense for them to live just about anywhere else on the Mainland and buy plane tickets out here a few times per year. That's an ongoing discussion which will probably take another decade or two to sort out.
