Sales of Oahu real estate exited July with relatively stable property sales and a dipping median sales price only to be shocked by Augusts™ volatile stock market and drastic interest rate fluctuations.

The island wide median sales price for single-family homes dropped 2.2 percent to $591,000 with condominiums trailing with a 7.7 percent dip to $277,000.                       With low interest rates fueling a market that isn™t projected to make an upswing for another few years, the lack of new listings and low inventory keep prices at bay and have yet to set off the supply-demand reaction.

The crash of the U.S. stock market in the second week of August brought on not only the revaluation of the U. S. dollar but sent interest rates for an unpredictable ride.

œRates have been on a historical downward trend, says Holly Hino, Vice President and Loan Manager for Sandalwood HomeLoans LLC.   œBut we have seen some volatility in response to policy changes.   When the stock market crashed the second week in August due to the down grade of the U.S. credit rating, rates hit an all-time low of around 3.95 percent at 0 points.   They shot up the next day to 4.00 percent at 0.750 points.    Hino says œwhen the market crashed, consumers became very reactive.

Though fielding up to ten calls per day, Hino says that the majority are refinance borrowers, not purchasers. œMortgage applications for refinances are up.   Many are previous clients who have been on the fence since November, and now the time is right for them.

A one percent difference in the 30-year-fixed interest rate can translate to a few hundred dollars in monthly principle and interest payments. Creating more of a payment difference than a reduction in price.

$600,000 Purchase Price -$120,000 DP = $480,000 Loan Amt @ 4.5 % =   $2432.09

$600,000 Purchase Price -$120,000 DP = $480,000 Loan Amt @ 5.5 % =   $2725.39

            With a 5 percent decrease in price and a 1 percent increase in interest rate

$570,000 Purchase Price – $114,000 DP = $456,000 Loan Amt @ 6.5% = $2882.23

A 5 percent price decrease would not translate into monthly savings if the interest rate increased by 1 percent.

If volatile rates are bringing refinance borrowers off the fence, it is likely that purchase borrowers are making moves as well.

œIt™s a possibility that interest rates will remain relatively low, but if you want to be in a position to take advantage of the extremely low days then it™s prudent to get an application in ahead of time says Hino.

No major shake-ups in the Oahu real estate market nine months after the expiration of the first-time homebuyer tax credit.   The credit that last year boosted Oahu sales did not lay precedent for following periods as government intervention or assistance in boosting the economy is likely to produce only temporary results.

                      œThis time last year, market activity was boosted by the first-time homebuyer credit, so the decrease in sales recorded over last year is not unexpected. We are also experiencing a decrease in inventory on Oahu, which is a positive indicator of continued strong demand in the market. It™s a much more sustainable environment, says Honolulu Board of Realtors ® President, Joyce Nakamura.

                      The month-over-month increase in new inventory island wide mirrored the small bump in inventory in Aina Haina-Kuliouou, Kapahulu-Diamond Head and Hawaii Kai.     When compared to the same period last year, the same areas including Waialae-Kahala, all had decreases in inventory.

                      Aside from two Oahu areas, properties received a closing price within 10 percent of what property was originally listed for. Maunalua-Salt Lake and the Windward Coast received between 12 and 20 percent less, respectively, than what the property was originally listed for.   The percent of price received can be a good gauge of proper pricing and neighborhood/property desirability.

                      Aina Haina-Kuliouou had the largest increase in the median sales price when compared to the same month last year. Not indicative of increased activity or a true rising number, rather the closing of a few higher-end homes.

                      Overall, there was a decrease in island wide sales for both single-family homes and condominiums and months of inventory remaining down, 3.3 percent from last year.

No major shake-ups in the Oahu real estate market nine months after the expiration of the first-time homebuyer tax credit.   The credit that last year boosted Oahu sales did not lay precedent for following periods as government intervention or assistance in boosting the economy is likely to produce only temporary results.

                      œThis time last year, market activity was boosted by the first-time homebuyer credit, so the decrease in sales recorded over last year is not unexpected. We are also experiencing a decrease in inventory on Oahu, which is a positive indicator of continued strong demand in the market. It™s a much more sustainable environment, says Honolulu Board of Realtors ® President, Joyce Nakamura.

                      The month-over-month increase in new inventory island wide mirrored the small bump in inventory in Aina Haina-Kuliouou, Kapahulu-Diamond Head and Hawaii Kai.     When compared to the same period last year, the same areas including Waialae-Kahala, all had decreases in inventory.

                      Aside from two Oahu areas, properties received a closing price within 10 percent of what property was originally listed for. Maunalua-Salt Lake and the Windward Coast received between 12 and 20 percent less, respectively, than what the property was originally listed for.   The percent of price received can be a good gauge of proper pricing and neighborhood/property desirability.

                      Aina Haina-Kuliouou had the largest increase in the median sales price when compared to the same month last year. Not indicative of increased activity or a true rising number, rather the closing of a few higher-end homes.

                      Overall, there was a decrease in island wide sales for both single-family homes and condominiums and months of inventory remaining down, 3.3 percent from last year.

Pending sales sported the largest increase in more than a year, according to the Honolulu Board of Realtors ® May Residential Statistical Summary.

                      Island-wide œpending real estate sales was up 22.2 percent from last year for single-family homes and 44.3 percent for condominiums, according to the May statistics. A œpending status indicates an accepted offer, pending the close of the transaction.

                      œPending sales for both single-family and condominium properties are significantly up from last year, which demonstrates the continued demand for island properties, says Joyce Nakamura, President of the Honolulu Board of Realtors ®.

                      For many, increases in buyer activity may be a welcome change to the lack of growth in the inventory sector and minimal increases in new listings for both single-family and condominium properties.

                      The island-wide median sales price and inventory volume continues to bounce around at similar levels, still teetering between a buyer and seller market.   The Historical Pending Sales Activity graph reveals that pending sales have been gradually increasing since the beginning of 2011. Pending sales could be an indication that the pendulum is beginning to gain momentum.

All information and graph from HiCentral MLS, Ltd

œWe are seeing market tightening, remarked Dr. Michael Sklarz at the recent State of Hawaii Real Estate event, sponsored by Prudential Locations. Sklarz, President and CEO of Collateral Analytics was one of four speakers comprising the panel. Paul Brewbaker, Principal of TZ Economics, Stanford Carr, President of Stanford Carr Development LLC, and Bill Chee, CEO of Prudential Locations LLC, joined Sklarz in a presentation and discussion on global and economic indicators, real estate and forecasting.

                      According to Sklarz, one of the best leading indicators is the number of months of remaining inventory. œIt™s a great leading indicator of home prices, said Sklarz. Oahu™s island wide month™s of inventory is roughly 5.5.   On a neighborhood level there are lows of 3.8 (Mililani and Kaneohe) and 10.5 on the high side (Waianae and Wahiawa). Sklarz says that an accurate depiction of the real estate market must be analyzed from a neighborhood perspective, as opposed to an Oahu perspective.

                      The basic law of supply and demand says that when supply is low, demand increase and drives up prices. œOahu™s month™s of remaining inventory is low and turning downward, pointed out Sklarz.

                      œEwa Beach has been a more volatile market, said Sklarz œprices are more vulnerable during down cycles because buyers typically leveraged more. The opposite is  œHawaii Kai and Kailua which respond similarly. With limited supply and less leverage by buyers there has been a shallower decline in the past two downturns. Neighborhood to neighborhood there are very different performances. Supply/demand, demographic of buyers and sellers and the kinds of leverage buyers are using all play important roles in how a neighborhood performs. œWhen prices come down, buyers who used a larger down payment are not suddenly turned œupside down in their homes and panicking to sell.

                      Sklarz noted that Oahu™s subprime lending is relatively low compared to nationwide statistics. Hard-hit areas like Riverside-San Bernardino-Ontario and Los Angeles-Long Beach-Glendale all saw the majority of subprime loans processed between 2003 and 2006.  œHonolulu is similar to San Francisco “metro which hasn™t been that hard hit.

                      Sklarz created a simplistic measure of a housing affordability index by comparing home prices to the median household income.   He compared Hawaii with other world cities to see how it fared internationally and found that œU.S. markets are at bargain levels. That coupled with historically low interest rates lead to Bill Chee™s sentiment of œeverything is on sale.

                      Chee hammered in the fundamental indicator that œactivity starts before price. œAll you should be doing is watching velocity. The trick is if you™re in a neighborhood, you have to watch neighborhood velocity, overall state velocity won™t help you at all, advises Chee.

                      œSold market time is another good leading indicator of market conditions, said Sklarz. œHawaii Kai and Kailua are trending downward while Mililani has been increasing.

                      What does this all mean for the future? Stanford Carr believes we have hit bottom.

                      œAnother year or two of sideways prices then prices will start to creep up again, contended Sklarz. œMarkets that have been down will get back to prior highs by the latter part of decade. Some areas that held up will go on to create new highs. Generally an upbeat forecast going forward.

As Oahu™s housing inventory swings near a balanced market, the lending pendulum has swung far to one side.  

                      Though there was a slight bump in inventory levels in the latter part of 2010, this year will close with drastically reduced levels compared to the 2008 and 2009 years.   Properties in the $650,000-$1.1m price range have inventory to last approximately 5.5 months should no new properties enter the market. Properties between $1.1m and $1.9m have approximately ten months of inventory remaining. Six months of inventory is considered a balanced market, greater than six a buyer™s market and less than six, a seller™s market.

                      Waialae-Kahala, Aina Haina and Kuliouou all outperformed 2009.   According the Honolulu Board of Realtors ® monthly statistics all areas showed increases in the number of new listings, closed sales, median sales price, average sales price and the percentage of original list price received on a sale for both single-family homes and condominiums. Though single-family homes in the Kapahulu-Diamond Head area had a slight dip in the number of new listings and average sales price, condominiums increased across the board.

                      Low interest rates have ignited some market activity with buyers and refinancing however, tight lending restrictions have hindered actual lending.

                      œThe pendulum has swung to the far side, says Keith McClintock, Senior Loan Officer at Primary Residential Mortgage. He contends that the stated income, no-documentation programs is where we were a few years back, opposite than where we are now.   He says the biggest changes have to do with what lenders are requiring from borrowers.

                       œGuidelines are established for the conventional/conforming loans however, lenders now have what are called ˜over lays™ to these guidelines. If Fannie Mae and Feddie Mac want one year of tax returns, lenders are asking for two. If the Automated Underwriting engine asks for one month of bank statements, the underwriter will ask for two. If the appraisal has an issue, possibly a large adjustment, lenders will ask for more comparables to support the value.   It is not enough to have a good credit score and equity. He also says that prior, a large down payment and lots of equity could help offset credit score, but now, all areas of buyer qualification need to be strong, with no red flags.

                      œLess that 20 percent of borrowers receive actual pay stubs. These deposits that borrowers make are now being questioned and have to be documented as evidence of a valid deposit. McClintock™s advice to borrowers is œbe prepared to document anything and do not throw any paperwork away no matter how minute it might seem. To underwriter(s) it could make or break a transaction, or at least delay the process. Be prepared to address information from the past as far as credit, where you lived, how long you lived there and anything that may stand out.

                      He also says that loan modifications for distressed owners have become a double-edged sword. œLender™s are requiring you to default on your loan payments before a loan modification will be considered. Defaulting hurts your credit and there is no guarantee that the modification will be granted.

                      According to McClintock, only 75 percent of those who want to purchase or refinance a property can actually borrow the money. œ2011 will probably be more difficult,™ he says.

Purchasing a home is likely the largest, single purchase an individual will make.   The success of such purchase, or the equity earned on property is hinged on many factors, but ultimately comes down to smart decision-making based on one™s needs and goals.   It is this fundamental principle of understanding what one wish to accomplish that lays the foundation for success.

Though needs and goals are derived on a personal level, assuming that a purchase will either be a principle residence or investment is not off base. Keeping in mind that a principle residence can be an investment just like an investment can turn into a principle residence. Also not far off base is to assume that aside from personal needs and goals, property owners don™t want to lose money.

It™s worth noting that real estate is not a get-rich-quick scheme. One of the benefits of owning real estate is capital appreciation. Capital appreciation happens over a period of time.

Certain neighborhoods, like east Oahu, command higher prices due to desirability on many different levels. It is this desirability that helps neighborhoods retain value over time. Year-to-date, closed sales in east Oahu were higher than the first seven months of 2009. Though inventory levels are at low compared to 2009, there were more new single-family listings in July 2010 than July 2009 and the days it took for sellers to receive an accepted contract continue to decline.

Whether we have reached the trough or are close to it, the fact remains that the market will not make a v-like climb to the next high. History tells us that the market will bounce around at trough levels before making the gradual climb. The natural catalyst for the climb is supply and demand. It is both individual and market demand that drive markets. Individual demand involves an individual facing constrained optimization: given their income (constraint), what will maximize their personal satisfaction and what will be their opportunity cost be to obtain it.   Market demand is the sum of individual demands: buyers and their price thresholds.

Maximizing personal satisfaction ultimately has to do with spending dollars wisely. One of the best ways to maximize this strategy is using Other People™s Money, or OPM - borrowing. Majority of real estate purchases use a combination of cash down payment and financing. Interest rates will directly affect how much a person can borrow. Low interest rates can often offset small increases in price. There are many factors that are valued when seeking financing but the easiest to examine is the interest rate.   See example.

Buyer wishes to keep principle and interest payments fixed at $2500 per month.   Buyer is not sure whether to purchase now or wait a few years for the market to become clearer.

Scenario One: 30-year-fixed @ 4.25% = buyer able to borrow $508,192

Scenario Two: 30-year-fixed @ 5.25% = buyer able to borrow $452,731

There is an approximate $55,000 difference in what buyer can borrow based on interest rate alone.

The chart shows 30-year-fixed interest rates from the 1970™s.   Interest rates have never been as low as they are right now.

Understanding how different variables, like interest rates, influence buying-power is crucial. Having a clear understanding of what your needs and goals are will help facilitate decision-making.

It was only a short time ago when places like Ewa Beach and the west side of Oahu seemed reserved for short sales, bank-owned properties and foreclosures. Today, areas of Oahu™s prime real estate are being sprinkled with like-kind sales, unveiling truth that financial woes holds no bias.

As of June 13, 2010, Kapahulu-Diamond Head through Hawaii Kai had eight single-family homes and nine condo/townhouses for sale under lender conditions. There are 10 single-family homes and three condo/townhouses currently in escrow and in the past six months, 12 single-family and 13 condo/townhouses have sold under lender conditions.

Sought-after good deals are often more difficult to procure when dealing with these three types of lender sales.

Short sales are becoming more prevalent in today™s market. A short sale is when a property™s value falls below what is owed to the mortgagee or lien-holder. Borrowers, or owners, who are qualified to sell their properties in short sale, list their property as they would a normal sale. Since the sale will be deficient of what is owed, the lien-holder must approve the sale price, as lien-holder will be required to absorb the deficiency. This process of negotiating with the lien-holder can be very time consuming and stressful for both homeowners and real estate agents.   Borrowers/homeowners can expect a short sale to take upwards of three months for the lien-holder to respond.

If a short sale is not approved and/or successful, a lien-holder may exercise its right to foreclose.

Hawaii has no statutory right of redemption for mortgage foreclosures. States with this right of redemption allow the defaulting party to reclaim the property, within a specified timeframe after foreclosure, by paying debt in full plus any incurred foreclosure costs.

Real estate owned or REO is a class of property owned by the lien-holder/lender after an unsuccessful sale at a foreclosure auction. Typically at a foreclosure auction, the lender will set an opening bid for at least the outstanding loan amount. Should there be no bidders, then the bank will legally repossess the property. Shortly after repossession, the bank will go through the process of selling the property on its own.

Properties under foreclosure, short sale or REO can be in poor shape and require necessary repairs and maintenance.

The eight single-family homes sprawling from Kapahulu-Diamond Head to Hawaii Kai, include a million-dollar home on Diamond Head Rd., two in the Portlock areas and others located throughout Kaimuki and Palolo. 50 percent of the single-family homes in escrow are in Kalama Valley.

Low interest rates and government incentives were the likely catalysts that spurred increased residential sales activity on Oahu.

From Kapahulu-Diamond Head to Hawaii Kai, April 2010 home sales increased well over the same month last year. The same areas also commanded prices in the ninetieth percentile of what the property was originally listed for. The average number of days it took for properties to receive an accepted offer was relatively similar to April 2009, with the largest difference coming from Hawaii Kai at 69 days, a decrease of 32.

The period from February through the end April showed a 52.9 percent increase in the number of closed listings for all of Oahu. Looking forward, pending sales can be used as a gauge to predict how the market will fair after government incentives come to an end. To qualify for either buyer credits, buyers needed to be in contract by the end of April and close by the end of June. There were 214 properties pending at the end of February, 188 at the end of March, and 84 by the end of April.

For the past year the stars have been aligned. Low interest rates, government incentives and prices on the decline have created optimal conditions for not only local residents, but retirees, international buyers and second-home buyers. Currently interest rates are hovering near five percent but local economists expect increases by year-end. Paul Brewbaker, principal of TZ Economics and former financial risk analyst for Bank of Hawaii, at a recent conference, said that he believes that all economic indicators point to being at or near the bottom of the down cycle.

Though the end of government incentives may create a hiccup in residential real estate the effects don™t appear to be detrimental. Low interest rates and decreasing prices will afford opportunities for all buyers.

                      Hawaii land ownership dates back to the early 1800™s when all land belonged to a single owner, King Kamehameha III. Legislation of 1845-1846 created the first opportunity for land to be sold to private, individual owners. Around the same time Hawaii™s first Land Commission was created.   The Great Mahele of 1848 divided all the King™s land into ownership under the Konohiki, the King and the Royal Government. Though the Great Mahele confirmed the right of possession it did not vest title and owners had to present claims to the Land Commission to secure title ownership, which was often difficult, time consuming and took several years.   Much of the Konohiki land was sold and passed out of Hawaiian hands and many are managed by trusts like the Queen Emma Foundation, Liliuokalani Trust and Bishop Estates, with Bishop Estates having the largest surviving block.

                      Today, Hawaii™s land ownership is a greater percentage of fee simple ownership, however leasehold ownership does exist and is more prominent with condominiums.

 Fee simple ownership is the most familiar form of ownership. It is also referred to as fee simple absolute because it is the most complete form of ownership. In fee simple ownership a buyer acquires rights to the entire property including the land and improvements. Fee simple owners have the right to possess, use the land and dispose as the owner wishes- sell, lease, will, trade etc. In a leasehold purchase, the buyer or lessee purchases a leasehold interest in a condominium, has the right to occupy and possess the unit but does not own the land and pays a lease rent to the land owner, or lessor for the duration of the lease. Depending on the surrender clause in the lease, if the lease term expires not only will the land revert back to the lessor, but also will the buildings and improvements.   Often there are opportunities for leasehold owners to purchase the fee interest, thus owning their properties fee simple absolute.   If leasehold owners are not able to purchase the fee interest the lease duration will become shorter and value will be lost, as it gets closer to the end of the lease. Short lease times create obstacles in getting loans, refinancing and also resale because the future of the property is unknown.

              East Oahu has a handful of leasehold properties, most being condominiums. As of the month of February Kapahulu-Diamond Head had 31 leasehold properties available for sale, comprising 31.9 percent of the condominium inventory in that area. Hawaii Kai had only 4 leasehold properties. The Kahala Beach, Diamond Head Beach Hotel and Mawaena Kai are all leasehold properties. The Kahala Beach and Mawaena Kai both have land ownership by Bishop Estate, though Mawaena Kai does offer owners the ability to purchase the fee interest. The Kahala Beach is a beachfront condominium sandwiched between the Kahala Hotel and Resort and the Waialae Country Club.   The lease between Bishop Estates and the unit owners will expire in 2027 and there has been no success in owners acquiring the fee interest. Today, a two-bedroom unit with a garden view is being offered for sale for $60,000 leasehold. Lease rent to Bishop Estates is approximately $2,059 per month for the same unit. As the expiration of the lease looms closers, values will continue to drop. If owners are not offered the fee interest by 2027, it is likely that the building will revert back to Bishop Estates.

                  Most land protected under Bishop Estates originally belonged to Kamehameha III. Through years of succession and lineage it was left to Bernice Pauahi Bishop. From her, the Bishop Estates was created.