On Top of the Aloha Beat BLOG


Bank of Hawaii economist peers into his crystal ball to see our real estate future

Paul Brewbaker has often been regarded as having a crystal ball when it comes to the future of real estate. So much so that when Paul stepped forward to address the quarterly meeting of the members of the Kauai Board of Realtors, he began by repeating the mantra of  “October 26, 2012”. Again, he repeated, “October 26, 2012”.

It’s true that he was simply kidding. But, in this phase of the real estate cycle, everyone likes to have a crystal ball or an answer as to when the Kauai real estate market will turn around. Economists of course can be wrong 99% of the time and yet,  we still respect them.

As is often the case once or twice a year, Paul Brewbaker thoroughly entertained the crowd of close to 150 Kauai realtors while sharing the pertinent data about Kauai’s economy and real estate markets as seen from an economist’s point of view. In his macro roundup, Brewbaker noted that domestic arrivals are down. He quipped that 4 months after the airlines shut down, the Honolulu Advertiser finally put the tourism  numbers in the paper. Brewbaker showed the graph of visitor arrivals and pointed out the big down turn in tourism that occurred with the break of the Koloko Dam on March 14, 2006. This current  downturn is even more significant in term's of range drop.  This is where it starts and then the repercussions radiate out through our tourism ecosystem. This  effects both the  numbers of visitors and all the adjunct businesses that serve the visitors to the island. Read yesterday's article in the Honolulu Advertiser about Maui’s tourists and yesterday’s article in the Garden Island business section regarding the numbers on Kauai.

The payroll employment trend may show up in a few months. It has not yet been reflected. Unemployment has been drifting upward. This will continue to go up until  the current cycle that we are in peaks. So much for the macro view.

Brewbaker always reminds us realtors to remember to think about real estate as an asset class, similar to stocks, commodities and the like.  Brewbaker provided an insightful context into how the real estate cycles get exaggerated in the islands. He noted that our supply is constrained by the geography. There’s a big ocean between us and a lot of the resources required for building, materials and such. The state and the county with their limited resources for permitting and the slow pace at which the bureaucratic system move, prevent the islands responding as elasticly when there is big demand such as what started back in 2000 and 2001. These dynamics create a rapid rise in valuation since the production levels don’t scale as quickly as they might on the mainland.

Brewbaker began reviewing the state numbers. He presented Oahu, which represents Hawaii’s urban market, then the neighbor islands, and usually has some charts comparing and contrasting to mainland areas, primarily California, whose markets are quite intertwined with ours here on Kauai. On Oahu, appreciation is basically done but nobody is really bailing.  Last August through this July, the fed has taken a lot extraordinary measures to maintain liquidity in the housing system. Brewbaker sees us as continuing to work out the credit crunch over the next year and a half. He quipped ”If you don’t have subprime toxicity, as a bank, you do not have to do every much.” He was referring to Bank of Hawaii, where Paul serves as the chief economist. Last quarter Merrill Lynch wrote down a number that is as large as the entire balance sheet of B of H. Ouch! Downward compression on pricing in Kauai is modest, moving from the high six hundreds to the low six hundreds. Brewbaker pointed out that Post Hurricane Iniki, values on Kauai were much lower than on Oahu, then, values gradually escalated so that Kauai’s pricing is basically on–par with Oahu. Right now, our volume is compressing and distribution is stationery.

L to R: Ian Emberson B of H, Paul Brewbaker B of H and Realtor Ron with the shiny head.

Economists describe economic cycles by defining the higher order moments which mark different phases of the cycle. Brewbaker described tranquility as that part of the cycle where business stops and then gradually starts to go again. From his perspective we are still in the stop phase of the tranquility part of the real estate cycle. Based on current data sets and not withstanding any particular catastrophic event, the go stage of tranquility is expected to begin in about two years, with prices beginning to rise a couple years later. One needs to note that since real estate is supply and demand, if a given offering or project has excessive demand and limited supply, prices can go up there sooner rather than later.

While contrasting our markets in Hawaii to say San Diego, where prices have dropped 25% in one year., Brewbaker noted that since 1975, Hawaii has traditionally ranked lower in past due mortgage payments. Delinquency rates on mortgages in the US is currently 3.24%. That number is 1.9% in Hawaii. In the opulent 2nd home/vacation home market of Kauai, we do not see a lot of sub-prime type borrowers and thus, do not have the type of volatility that one would find in markets like Florida, Arizona, Las Vegas.

Brewbaker mentioned towards the completion of his roughly one hour talk that right now production on Kauai is sustaining and that appears like a train wreck waiting to happen. Time will tell. We hear mixed reports about the larger newer projects. I have heard that Kukuiula, the large project on the South Side of the island will be starting to have layoffs and cutbacks. However, when I visited the Marriott/Ritz Carlton project at Kalapaki Bay, they seem to be going gangbusters in terms of sales and reservations.

To me, if we place stock in Hawaii’s most noted economist’s perspective, it continues to be a good market for buyers, and sellers that are “waiting for the market to turn” need to settle in for a good four or five years.  If you are a seller today, you need to price your property at its market value, independent of what you may feel it’s worth.

Ron Margolis, RA, CDPE, ABR Hawaii Life Real Estate Services 808.346.7095 email: ron@hawaiilife.com

Comment balloon 4 commentsRonnie Margolis • August 04 2008 10:36AM


Nice summary.

Posted by Brad about 12 years ago

Thanks Brad. I left out all the stuff about arbitrage and T-bill yields since a bunch of what he spoke about went a little too fast for me.

Posted by Ronnie Margolis, Kauai Realtor - CDPE, ABR, RA - On Top of the Aloh (KW Kauai) about 12 years ago

Aloha Ron,

Thanks for raising this discussion with some clarity. We spoke on this subject briefly at JoAnn Yukimura's campaign fundraiser. The kicker, as I see it, is that Brewnaker's report made clear that any predictions of a turn-around are predicated heavily on a further sustained drop in oil prices. If one looks at the energy market data available (for example, current reports from the International Energy Agency) no such drop is anticipated. My own take is that the five year number is just an arbitrary point beyond the memory of the average businessperson.

Energy cost is the thread that brings this all together, and no matter how much we see renewable energy in ther news, oil is still gigantic relative to all other sources combined.

Posted by Ben Sullivan about 12 years ago

Very cool blog.  Well written and informatvie

Posted by Charlie Arthur, CCIM (RE/MAX FIRST, INC.) almost 11 years ago