It is an obvious understatement to say it has been a turbulent few years for the U.S. mortgage industry. However, looking at the big picture, we may have reached a perfect storm for the savvy investor looking to buy in
It is an obvious understatement to say it has been a turbulent few years for the U.S. mortgage industry. However, looking at the big picture, we may have reached a perfect storm for the savvy investor looking to buy in Hawai‘i.
Many factors contribute to the decision to buy real estate, including:
1) Market prices and mortgage interest rates;
2) Demographics and market conditions;
3) The buyer’s personal objectives and financial situation.
Market Prices and
Mortgage Interest Rates
If you are financing a property, it is the interest rate that ultimately determines what you pay. A buyer needs to scrutinize the trends in both real estate prices and interest rates.
For example, let’s say buyer “A” purchases a home today for $500,000 puts 20 percent down and mortgages $400,000 at today’s rate of 4.125 percent on a 30 year fixed rate. Buyer “B” decides prices are still dropping and waits six months to a year to purchase that same home. If the price drops 10 percent over that wait period, buyer B would be able to get that same home for $450,000. However, during that same time, if the interest rate goes up by only 1.5 percent to 5.625 percent, even with 20 percent down and mortgaging only $360,000, Buyer B would actually be paying $8,157 more for that same house.
This means that although buyer “B” saved $50,000 on the purchase price, he paid $58,157 more for his financing. Ironically, the buyer who bought sooner and paid more saves a considerable amount on the monthly mortgage payment. A small 1.5 percent increase in interest rate can more than offset a 10 percent reduction in purchase price.
Some experts say we are at or near the bottom of the market while others predict the bottom could be out another one to two years. No one has a crystal ball. However it is more than clear that interest rates are at an all time historic low.
Demographics and
Market Conditions
A buyer must also analyze the fundamental trends and changes that affect the real estate market. For nearly three years the U.S. media has made the housing market and mortgage industry appear to be universally abysmal. This has fed into the dumping and foreclosure frenzy which has significantly lowered home prices. In other words, abysmal news leads to a buying opportunity for those who don’t follow the herd.
Even with the lenders tightening up these days, the type of buyer looking for a second home in Hawai‘i won’t be requiring a sub prime mortgage at 100 percent financing. These buyers tend to put 20 percent down at a minimum, have great credit, and the documents to back up their income.
Finally, the basic rules of supply and demand apply. Land in Hawai‘i is scarce when compared to the U.S. mainland and abroad. Virtually all land that can be developed in Hawai‘i has been purchased. There isn’t much left. The early baby boomers are just starting to retire now, and there are a lot more of them who want a beautiful, sunny and safe place to retire. Hawai‘i fits the bill on all fronts.
So, with interest rates still low, prices down, more buyers coming in from abroad, the scarcity of property in Hawai‘i and the government doing everything in its power to prop up the faltering mortgage industry, we are experiencing the likes of a perfect storm for the savvy investor who is ready to enter the Hawai‘i real estate market. It may not be the thrilling roller coaster ride we have seen in the past, but it is going to be a much safer ride this time around.
• For more information on residential lending, contact Sharon Gerber at Island Pacific Mortgage located in Lihu‘e, at 246-2500 or 635-7283.
