2008 Kauai Real Estate and Economy Review

O.K., is it safe to say that it will be nice to have 2008 behind us? Of course we all have much to be thankful for and let's not forget that. 2009 will be filled with a balance of opportunities and hardships. Economic indicators should show improvement once the economy is on more solid ground which we will hopefully see towards the middle to latter part of the year. One thing that hasn't changed is the beauty and desirability of Kauai. Few places in the world rival the complete package the Garden Island has to offer.

Jump to:
Government Bailouts
2008 in review: Kauai's real estate market
Fed rate cuts do NOT equal lower mortgage rates
2009: What to Expect


Government Bailouts Bailouts of a failing economy are global, not just for us in the U.S.. World leaders have spent trillions on confused inadequate rescue plans. The U.S. Federal government has already put together a dozen rescue measures in 2008 alone from the $200 billion bailout of Fannie Mae and Freddie Mac to the $1.4 trillion guarantee for bank loans. Estimates for these and proposed Obama initiatives total as much as $8 trillion. The total amount the U.S spent in today's dollars on World War II was $3.6 trillion! Japan, at the time of this writing, is debating a $50 billion stimulus plan and the EU is talking about $200 billion.

As best I can tell, there is no way to finance a massive stimulus without going into record levels of debt. However, this is a better solution if spent properly than watching the U.S. and global economy collapse. Governments, whether we like it or not, are in charge. Our short and long term success hinges on the decisions made by government officials in the year ahead.

Kauai Real Estate Market Much like the rest of the country, Kauai fell victim to increased housing inventory due to declining demand. Take your pick for the reasons for this, but let's just say that the credit crisis, increased jobless rate (7.2% as of 1/8/09), consumer confidence and overall fear of the foreseeable economic future didn't help. Kauai experienced for the second year in a row a decline of over 30% from the previous year in total unit sales in all categories. The 2008 decline in median prices and total $ sales volume was skewed by the sales of several higher end properties that held the island wide #'s at a reasonable level. Most properties experienced a 10-20% decline in values from 2007. While buyer activity was pretty good, the inability to qualify for 30 year loans killed many deals along with "cold feet". Poipu Beach/Koloa and the resort areas of the north shore got hit the hardest and will likely have the greatest upside potential once the market stabilizes.

Currently the strongest segment of the market on Kauai is single family homes in the $400,000-600,000 range. With current prices on most properties at or near 2004 levels and 2008 year end mortgage rates at 4.5% for 30 year financing, this is the best time for opportunistic buyers we have seen in a long time. Sales are being made at 10-20% off of already low listed prices. When the market prices stabilize, there will be very little negotiation off listed prices. Now is the time to buy.

Here is what 2008 looked like on Kauai:


Fed Rate Cuts Do Not Equal Lower Mortgage Rates When the Federal Reserve cuts short term rates, many people expect mortgage rates to drop and don't understand when they don't. Is a Fed rate cut really good news for mortgage rates? In fact mortgage rates typically move in the opposite direction from the Fed move. The Fed can only control the Discount Rate and the Fed Funds Rate. This is very different from mortgage rates. A mortgage can be in effect for 30 years while a rate that is set by the Fed can change from one day to the other. Why do mortgage rates seem to defy logic and move contrary to the Fed direction? Most often it is because stocks and bonds compete for the investment dollar. So if stocks like the Fed decision to cut rates and rally, bonds typically worsen. If stocks react poorly to a Fed rate hike, bonds are usually the beneficiaries. As bond prices rise, interest rates fall. As bond prices fall, interest rates rise. As the NASDAQ for example moves higher, bond prices move lower causing interest rates to rise and visa versa.

In summary, Fed rate cuts have had virtually no direct effect on mortgage rates. Additionally, mortgage rates usually will get better if stocks sell off and will get worse if stocks rally. So it is not necessarily what the Fed does that effects mortgage rates, it's how the broader markets interpret the Fed's action that will ultimately influence the direction of mortgage rates. Given the Fed's recent pledge to buy mortgage backed securities freeing up dollars for lenders to lend to home buyers, more loan programs from more lenders are on the horizon. At current 30 year fixed rate levels below 5%, the time is right to refinance or consider a home purchase.

What to Expect in 2009 In these uncertain times, anticipating and being prepared for future events is prudent. Predicting the future is a bit risky, but below are some things I feel we will experience in 2009 in the economy and the Kauai real estate market. Here goes…

1. MORTGAGE RATES WILL RISE Because mortgage rates are influenced by mortgage bonds and mortgage-backed securities, not fed rate cuts, I predict the government will keep rates down below 5% for several months by continuing to pump billions into mortgage backed securities until there are signs of some market stabilization. Interest rates will then rise from their current 4.5% 30 year fixed rate levels to perhaps as much as 6-7% before year end, maybe more if investors continue to worry about inflation.
   
   
2. INVENTORY WILL DROP AND THEN LEVEL OUT Many sellers will withhold listings from the market or cancel listings that don't sell within a reasonable period of time until there is price stabilization. Increased buying activity will occur when most people sense the market is "approaching bottom". There will be continued demand from 1st time homebuyers and investors looking for a deal. New home starts will continue to remain soft until late in the year.
   
   
3. FURTHER PRICE SOFTENING Kauai prices will continue to soften through a good part of the year. Price stabilization won't occur until late 2009 or early 2010 at the earliest, approximately 6 months after markets like California. Be careful though... your best deals may already have passed. Inventory must return to "normal" levels, credit markets must stabilize and consumers must regain confidence and increased positions in their investments.
   
   
4. CASH IS KING Sellers will gravitate more to all cash buyers willing to take a little less in exchange for greater certainty that their prospective buyer can perform.
   
   
5. UNIT SALES WILL INCREASE This will be true especially toward the 2nd half of the year as a higher % of sellers will be sufficiently motivated to make the deal and looming rises in mortgage rates will create more urgency with buyers as the window of opportunity gets narrower.
   
   
6. LOAN MODIFICATIONS VS. SHORT SALES Upside-down home sellers may try to modify their existing loans but those efforts will be met with roadblocks as lenders exhaust other options. The loan modification process will likely be cumbersome and riddled with conflicting demands within the same banks. I believe many financially troubled sellers will turn to a short sale or walk away rather than try to renegotiate their loan with mortgage lenders.
   
   
7. FEWER BUT LARGER BROKERAGE FIRMS Competition will shrink toward monopolies in some areas, and a few corporations will control various aspects of the real estate industry nationwide. This will limit consumer choices as the little guys find it difficult to stay in business. Kauai will always have a higher % of smaller firms. Century 21 is the largest brokerage company nationally, worldwide and on Kauai and will always be there for you.
   
   
8. PRICE DRIVEN MARKET Unless a home is truly unique, the homes with the most aggressive prices will be the ones selling. Everyone is looking for a deal in this market – no deal, no sale!
   
   

My hope and prayer is that 2009 proves to be a happy, healthy and prosperous year for all of us. As always, feel free to contact me if you or someone you know is interested in buying or selling real estate here on Kauai. It would be my pleasure to help you find your little piece of paradise.

Larry Barton, RA, CENTURY 21 All Islands Kauai
P.O. Box 223700, Princeville, HI 96722
(808) 639-7532 Cell   /   (808) 240-2417 Direct line   /   (808) 826-9884 Fax   /   Email Larry