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Tuesday, January 11, 2011

Outlook and rants for 2011

Aloha!  I apologize for the lapse in blogs.  It has been quite a hectic 4th quarter of 2010 and an exciting beginning to 2011. 


Let me start by sending a big MAHALO to all our loyal clients and friends who made 2010 one of the best years ever for our business despite the economic uncertainties!  I am equally grateful for our exceptional agents who continue to display their outstanding professionalism and steadfast duty to their clientele. 


As we begin the New Year one of my tasks is to re-examine the marketplace and try to position our clients to benefit from what we believe will be the long term movement of the real estate and financing markets.  This is one part art, and one part science.


That being said, one of the first observations that comes from the past month has been the marked upwards move in the stock market.  This, coupled with the large movement of investors out of the bond market, signifies an important change in consumer sentiment and likely means the end to the recession.  It also may signal the possibility of mortgage interest rates rising.  Without getting into details that would have the quants out there roast me… suffice it to say that there are forces at work that could push interest rates higher.  (Remember that interest rates have been artificially low for sometime from the stimulus, etc.)


So what does this mean?  In my opinion there is generally an inverse relationship between real estate prices and interest rates.  As interest rates rise, the Buyer’s buying power diminishes and they can afford to pay less for their purchase.  When this happens the Sellers must meet the Buyer’s expectation level by reducing their price. Couple this with a somewhat unknown amount of pending foreclosures or “shadow inventory,” as it is being widely referred to, and we are faced with another possible period of pricing pressure right?


Not so fast.  Here’s the rub if you live in my neck of the woods.  In case you didn’t know, Oahu is an island.  So, inventory is much more finite than other parts of the US and we have an organic need for housing units as the adult children finally move out of grandma and grandpa’s house!  We will never have the issues we are seeing in markets like Nevada or Florida, for example, simply due to our inability to find more developable dirt and our less mobile residents (i.e. we can’t get in a car and go to the next town where land is cheaper). 


But what does that really mean in plain English?  In my humble opinion we are in the middle of a flat line.  How do I know this?  Because if you look at median prices on Oahu for both condos and single family homes from 2006 and 2010, it is largely unchanged (which is to say the difference over that period is between 3-8 percent downward, which, to me, falls under the category of “who cares”).  So, what happened to the doom and gloom of the mainland?  The 20-40% price declines?  It really never came…unless you were buying condo-hotels in Waikiki (for which financing dried up) or homes on the Ewa Plain (for which foreclosures and short sales hit the hardest).


So enough already…tell me what to do?  If you are a Buyer…buy now.  You have extremely low interest rates historically so even if the market moves down a bit it’s not as significant as an interest rate hike.  AND, as I stated before, nothing is a better inflation hedge than a 30 year fixed mortgage at some ridiculously low rate.  If you are a Seller…sell now.  You can still get a very fair price on your property and upsize or downsize from there.  If you are an investor…well, here is where it gets interesting.  I think you have to buy prudently.  Rental yields are still pretty anemic so you have to look for distressed assets or other interesting low-hanging fruit.  Some of those very assets I mentioned in the previous paragraph as being hit the hardest are some of the best poised to recover back to the mean!


Aloha to all,
Trevor.


** Disclaimer:  These are the opinions of Trevor Benn and may or may not have any basis in reality.  You are advised to form your own opinions and seek advice from people smarter than Trevor.  No investment decisions should be made based solely on what you read here… one should always consult the oldest member of the village first.


*** Real disclaimer:  DISCLAIMER

Posted by Trevor Benn on January 11, 2011 at 09:21 AM
Real Estate News • (55) CommentsPermalink
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