by Edwin Quinabo
Being priced out of paradise due to the high cost of living and real estate has been responsible for Hawaii’s consistent outmigration since the early 2000s and keeps growing. Close to 30,000 Hawaii residents left for the mainland from 2020 to 2022.
Hawaii’s current real estate market has gone down slightly in property prices and activity. The median price of a single-family home for April 2023 is $1,000,000 and for a condominium $499,000. In March 2023 it was $1,096,250 (single-family) and $535,000 (condominium).
But the median price for both is still high for the average income earner and even above average income-earner if they don’t already have an existing property to sell off and apply the capital gain towards a downpayment on their dream home.
What would financing look like for a Hawaii property in today’s current real estate market? Roland Casamina, President/CEO of House of Finance, Inc. said “It could be as little as 3% down payment if their credit is good. In the case of a $1 million purchase, it equates to a $30,000 down payment, plus closing costs. Generally, closing costs can equate to as much as 3% also, which means you may need to come up with as much as $60,000 in total cash to close. But many lenders probably can live with lower closing costs, so if you have at least $50,000 in total cash we can make it work.
“Secondly, with a loan amount of $970,000, plus mortgage insurance since the down payment is less than 20%, property tax and property insurance, we may need as much as $15,000 per month income to qualify,” Casamina told the Filipino Chronicle.
If buyers are not making a down payment of 20% (which used to be the standard), for many income-earners the monthly mortgage could be too high.
As the baby boom generation ages, typically what realtors are seeing more often is their children either inheriting the home and living in it or selling their parents’ home and using some of that money to use towards a down payment on their Hawaii dream home. That’s one route keeping the younger generation of locals from leaving Hawaii. Still, some who sell their parents’ property choose to leave for another state where their money has stronger buying power.
For many Hawaii millennials, this scenario isn’t an option – either their parents don’t have property or are still in their late middle-aged years. For these millennials who already have their own families, if they’re not able to buy a home in Hawaii they’re also choosing to leave the state.
The University of Hawaii Economics Research Organization (UHERO) said in a report that Hawaii has the highest level of regulation in the country, resulting in a median resale value that is two and a half times the national average.
Justin Tyndall, UHERO Assistant Professor of Economics, said “When it comes to new housing in the state, we see some single-family homes and large condo towers, but little in between,” Tyndall explained. “It’s not a coincidence that across the state, it’s illegal to build anything other than single-family homes.”
Honolulu Mayor Rick Blangiardi said he wants to tackle the affordable housing problem by promoting the construction of low-rise apartments. This would expand inventory and inventory specifically that is lower priced than what’s mostly currently available, single-family homes and high-rise condos.
Dr. Valerie Tan bought her Hawaii property in 2021 for $990,000. Like most Hawaii parents, she thinks about the possibility of her children leaving due to Hawaii’s high real estate market. “I’m concerned that children won’t be able to buy, maybe even rent, a property on their own which will force them to leave Hawaii for a state with lower real estate costs, especially if they have a family and children of their own,” Dr. Tan told the Filipino Chronicle.
She said, “A condo that’ll comfortably fit a family can cost $500K and a single-family home costs $1-2 million. Housing is the biggest monthly expense, and it is difficult and heartbreaking to think a family may have to put in most of their monthly income on housing alone and then must triage other necessities.”
Hawaii’s current real estate market: high prices and high interest rates
Hawaii’s current slow market is due in part to both high prices and high-interest rates.
Michael Yoshino, realtor-associate, Locations Hawaii, explains “The main challenge facing Hawaii homebuyers [currently] is the low inventory of homes. Inventory controls prices of homes and low inventory keeps prices on the higher side. With rising high-interest rates, buying activity has decreased which normally would lower home prices. However, home prices have lowered but have not crashed, so in many cases, Hawaii homebuyers face a double whammy of high prices and high-interest rates. But don’t panic, devise a plan with your loan officer and realtor and go out there and you will eventually find the right property to fit your needs and budget.
“Being an island with limited space, prices will always be higher than what you would like to pay. However, talk to a realtor and loan officer to see exactly where you stand. Either way, you’ll either end up with a great home or you will be able to create a plan of action so that you’ll be ready to buy when the time is right for you,” Yoshino told the Filipino Chronicle.
On financing a home today
Casamina said before going out to look for a property, get pre-qualified. “Good for you to bring your 2021 and 2022 tax returns and your latest pay stubs. In the case of House of Finance, we would check your credit to see how we can improve your credit score. This determines what kind of interest rate and mortgage insurance you may pay.”
On purchasing a home in this high-interest rate market, Yoshino said “Buyers are in a difficult spot because their monthly payment is much higher now than it was a year ago or their buying power decreased significantly for the same monthly payment.”
He said one way to get a lower interest rate is to ask your lender about an adjustable-rate mortgage (ARM) loan. “ARMS have a lower interest rate for a specific term, say maybe 5, 7, 10 years, and then the interest rate adjusts to a higher rate after the specific term. Most buyers refinance or sell their property within 10 years. If you think this is a highly likely option for you, give this loan some consideration after obtaining guidance from your loan officer or financial advisor who knows your finances well.”
Experts say ARMS could work for buyers wanting to sell in the near future, but if you plan to keep the property long-term and are banking on refinancing later, there could be some complications. Your ARM loan terms, and interest rate may at first be more lenient because of the lower monthly payments, but, if you want to refinance down the line into a fixed rate, it could be difficult to get approved for the same size mortgage loan. When it comes to refinancing in the future, your financial situation may change, your credit score may change and the property you purchased its value may be lower. All of these could affect your ability to get out of the original loan with a higher interest rate. Remember ARM rates go up after a specified time and your monthly payment could increase and you may not be able to get a fixed-interest rate loan for the same size.
But typically, whether the loan is an ARM or fixed, as soon as interest rates drop, homeowners will refinance an existing mortgage (assuming no major changes have occurred) and reduce their monthly payments. The savings could be dramatic, so experts recommend homeowners pay attention to interest rates even after buying their home. For example, if a mortgage rate just 2% lower than your existing rate, it could be possible to refinance your 30-year mortgage to 15-year mortgage and essentially have the same monthly payment.
If a reason you are paying for a high mortgage rate is due to poor credit score, it’s also possible that as soon as your credit improves, you could refinance your mortgage at a lower rate. Lenders penalize borrowers with credit scores below 680 in the form of interest rates currently 1.5% higher than borrowers with credit scores above 780. The good news is that paying your mortgage consistently on time will raise your credit score eventually.
Experts say there are pros and cons to the multiple types of loans available. They warn that it’s not just about qualifying for a loan at the maximum amount to enable you to buy your dream home, it’s about getting the right loan for you, even if it means buying a property for a lesser price. They recommend before signing for a loan that you fully understand the terms of that loan.
Buying tips: 1) look for property sitting on market for a while, 2) consider the neighborhood you’re buying into
Yoshino, who has been in the real estate industry for two decades, says buyers should consider homes or condos that have been sitting on the market for a while. “Often some of these properties are great properties that were over-priced or just need some minor renovations. You may be able to get the property at a nice discount if the seller really needs to sell or you can ask the seller for a credit to buy down your interest rate to lower your monthly payment to a reasonable amount,” he said.
“Looking ahead to the summer, when home sales and prices typically rise, prospective buyers can expect to see decreased competition and more options in neighborhoods with greater inventory. Sellers in higher-inventory neighborhoods will need to price their homes accordingly to ensure a successful sale. It’s important to note that local market statistics can vary greatly from neighborhood to neighborhood,” Yoshino said.
Challenges that could affect your ability to buy a home
Besides the typical income threshold and credit history that affect all buyers, Casamina said there are some spending patterns he’s noticed among his Filipino clients that could hurt their ability to buy a home in Hawaii.
“For many of us, the first thing that we do when we get a job, is to buy a brand-new car. The monthly payment is so large that it hinders our ability to qualify for the mortgage loan and save money for down payment. Second most common problem that we encounter is we fix our home in the Philippines while we struggle to pay rent here in Hawaii. For many who do this, they have one of the best houses in their hometown in the Philippines yet continue to pay rent in Hawaii [because they cannot get a loan to buy property in Hawaii.]”
Filipinos and homeownership in Hawaii
The national average of homeownership rate for occupied housing units is 64.4%. In Hawaii, that rate is 60.3%
Researchers at the Department of Business, Economic Development and Tourism (DBEDT) using data from the U.S. Census Bureau, 2011-2015, showed homeownership in Hawaii by Household Race. Filipinos came in third behind Japanese and Chinese, but ahead of Whites, Native Hawaiians, Koreans, and others.
The percentage breakdown: Japanese 73.6% (and Okinawan Japanese 77.3%), Chinese 64.1%, Filipinos 57.8%, Native Hawaiian 55.7%, Whites 51.2%, Korean 52%, and others.
State economist Eugene Tian says long-time immigrants such as Japanese, Korean, Chinese and Filipino communities have relatively higher homeownership rates, which are strongly correlated to income and better economic well-being.
In comparison, newer immigrant groups like Marshallese, Tongans and Samoans are struggling with higher poverty, unemployment and overcrowding rates.
Filipinos cultural advantage to buying a home
Estrella Aquino, Waipahu, has been a homeowner since the 1990s and plans to stay put. The value of her home has skyrocketed from the original price. But she knows selling high but staying in the same market means also buying high.
“I think homeownership in Hawaii among Filipinos is relatively high because Filipinos value owning a home. We feel more secure and have a sense of pride in owning one. Besides having better jobs today than in the past, I think Filipinos save more so that they can put a big downpayment and qualify to buy a house. We’re able to save more by living with our parents for a while and paying them a small rent. After a couple of years, we have sizeable savings. This process can work to our advantage. But it can only work if children are ambitious and disciplined to save money and not just go out and have a good time.”
She said if the younger generation today can be patient, not rush off to be independent and save money by staying home, it’s still possible for many Filipinos to get their dream home in Hawaii. “But, of course, the younger generation must also work hard and get good jobs,” Aquino said.
“It’s sad that so many of our local-born children in Hawaii, including some nieces and nephews of mine, have already left for the mainland. Some left for school and never came back because they like it there. It’s good for them. But some who love Hawaii and would have liked to stay if they could buy a house but couldn’t, these are the ones I feel sad for. The result is many of our families in Hawaii are separated. We miss our loved ones who are not here, and life is not the same without them around.”
by Edwin Quinabo