February 2019 E-Mail Update

Here is our 02/11/2019 e-mail update. It is sent after the statistics for the preceding month have been posted on the Board of Realtors website. You can find previous newsletters by visiting www.stott.com/news.

The January median sales price for single-family homes was $767,500 for single-family homes (0.6% lower than January 2018) and for condos was $399,000 (7.2% lower than January 2018). Demand continues to slide in the number of sales and the number of pending sales while the supply of available property has been rising steadily. There is currently a 3.0-month inventory of single-family homes on the market and a 3.4-month inventory of condos. While supply is growing, it is still below the levels that economists consider a balanced market where neither seller nor buyer has the negotiating advantage.

Tim and Tracey just returned from a business development seminar and listened to a speaker named Steve Harney who cautioned against getting too caught up in the current real estate market news and to keep recent figures in perspective. While the supply of homes has been increasing, most economists predict that median sales prices will continue to rise moderately in 2019 in every state. Even though interest rates are currently higher than 2018, they are still lower than interest rates in previous decades and homes are still more affordable in terms of the percentage of household income than they were in 2007 when the last housing peak occurred. What does this mean for sellers and buyers? Sellers must price their homes competitively in order to receive offers. Gone are the days when a seller could test the market and price it higher than previous sales and expect an offer quickly. Buyers have more time to find the right home and don’t have to worry about being priced out of the market if they don’t act immediately. They are also more likely to receive some concessions from sellers if a home inspection identifies issues that the buyer would like resolved. In a nutshell, sellers will have to be more realistic about their asking price in order to get an offer and may have to agree to some concessions to actually get their property sold.

9.95 million people visited Hawaii in 2018, a new record. An eight percent rise in available airline seats helped bring 6% more visitors compared to the previous year. Visitor spending grew 7% generating more than $2 billion in tax revenue for the state. Headwinds in the second half of the year including the volcanic activity at fissure eight and the disruptive Waikiki hotel strike resulted in a weaker second half of the year and that appears to be carrying into the first quarter of 2019. Hotel occupancy rates were down 2.9 percent in December compared to December 2017. While there is not prediction of a dire downturn, first half tourism numbers will be carefully scrutinized.

A Japanese tax law has resulted in a number of sales recently at townhouse complexes like Puu Alii, and Haiku Point 2 in Kaneohe. Investors can fully depreciate the building portion of a wood structure property that is 22 years or older. Japanese investors prefer that the building portion of the market value be 70% of the market value or more. Stott Real Estate, Inc. recently sold a townhouse to a Japanese investor for this very reason. If you are thinking of selling an older wood-framed townhouse, Tracey can investigate if your complex meets the criteria. E-mail us at [email protected] or call us at (800) 922-6811.

The recent purchase of a 269-unit rental development in Hawaii Kai highlights the difficulty of making investment residential real estate work for the long term on Oahu while tenants struggle to afford the high rents. 7000 Hawaii Kai Drive was completed in Summer 2016 with 213 luxury units and 54 units designated as affordable housing. The company that purchased the development has converted the 213 luxury units into condos, sold 106 units to investors, and has put the remaining 107 up for sale to owner-occupants. The 56 units in the second building will remain as rentals to meet the states affordable housing requirements. Prices for the two to four bedroom units range from $515,000 to $790,000. The new owners tried to minimize the displacement of existing tenants by offering them the chance to buy their units first, discounting the prices 3%, and refunding 15% of rent paid over the previous two years.

Airbnb is fighting against the state’s attempt to find tax dodgers by subpoenaing ten years worth of invoices, receipts, and other records from the home-sharing platforms island host calling it an intrusion that violates state and federal law. A U.S. judge in New York recently shelved a city law that would require home-sharing platforms to reveal the hosts’ names and other information so that New York City could crack down on illegal listings and impose fines. The district judge ruled that forcing home-sharing platforms to reveal a “breathtaking” amount of information about their business appeared unconstitutional. Airbnb attorneys in Hawaii argue that the subpoena would be equivalent to the state going door-to-door in search of violators, which is unconstitutional.

The state of Hawaii’s pension deficit reached a record $13.41 billion last year and is expected to keep rising over the next five years. The state currently does not project to having fully funding the state’s pension commitments until 2043. While taxpayers are going to take a major hit, state employees are also going to feel their wallets get lighter. Employee contributions from firefighters and police will be increased from 28% of their current pay to 31% next year, 36% in 2020, and a staggering 41% in fiscal year 2021. All other employees will see their contributions climb from 18% to 19% next year, 22% in 2020, and 24% in fiscal year 2021. The contribution rates will then stay the same until the pension fund is fully funded. State and city employees may think twice about their overly generous pensions if they can’t afford to make ends meet until they retire. It appears that the current employees are also stuck paying the tab for currently retired employees who were not required to contribute more towards their pensions. It will be interesting to see what future contract negotiations hold since the pension bill has now come due. Taxpayers can be forgiven for thinking that ultimately they will get stuck with paying the majority of the retiree pensions.

A disturbing trend has been occurring over the past decade as another state infrastructure project has experienced significant delays and has blown the budget. The Halawa Correctional Facility upgrades were supposed to begin in February 2016, take eleven months to complete, and cost $9.75 million. The project started six months late, is now expected to cost $12.3 million, and may take longer than 34 months to complete. The state has had to pay a private prison in Arizona an additional $11 million so far to house the displaced inmates as the construction drags on. The Department of Accounting and General Services (DAGS) was unable to confirm that the project will be completed in June 2019 as currently forecast. This fiasco comes on the heels of the Department of Transportations failure to build the maintenance hanger at Daniel K. Inouye Airport that Hawaiian Airlines had to take over management and complete.

State officials recently agreed to sell some low-income housing projects for $40 million less than the original $170 million sale price after inspections of the 1,200 units revealed the need for substantially more renovations than initially advertised. The 24% price reduction is symptomatic of how poorly the state maintains its infrastructure and further illustrates the need to remove local and state government from the business of providing housing to the public. The buyer discovered during the due diligence period that all 1221 residences must be fully renovated as a result of undisclosed deferred maintenance and incomplete inadequate renovations of some units.

Iolani Palace State Monument has joined a number of parks to close at night due to nighttime vandalism and vagrancy. Starting February 1, 2019, the palace grounds will close at 6:00 pm (5 hours earlier than the current 11:00 pm closing). The changes hope to eliminate the vandalism and reduce the amount of drug paraphernalia left on the grounds.

The Hawaii Supreme Court invalidated Trevor Ozawa’s 22-vote victory over Tommy Waters for the Eighth District’s seat on the city council. The Supreme Court ruled that the election officials erred in counting 350 ballots collected by the City Clerk after the 6:00 pm deadline. A special election must be held in the next four months to fill the now vacant seat on the nine-member city council.

The corruption probe concerning the Kealohas continues to spread and the City of Honolulu’s Corporate Counsel, Donna Leong, was placed on paid leave once she received a target letter from the U.S. Department of Justice. The FBI is looking into Leong’s role in an agreement that allowed Police Chief Louis Kealoha to retire with full benefits and a $250,000 severance check. This is the first time a member of Mayor Kirk Caldwell’s cabinet has become the target of a federal grand jury investigation. She joins several city prosecutors who are also under investigation.

A recent city audit of the Honolulu rail project simply confirms what most people on the island have already learned. An audit by Hawaii State Auditor essentially points out that Mufi Hannemann’s administration low-balled the initial cost of the project at $5.12 billion to sell it to the public, claimed the project was “shovel-ready” and awarded its first contract to Kiewit-Pacific Co. to design and build the first rail segment in Kapolei in 2009 even though the environment impact study for the project was not completed until mid-2010. The city proceeded to award over $2 billion in rail construction, design, and operations contracts in 2010 and 2011 before it obtained the necessary federal clearances to proceed with the construction. The constant change orders and delays from the poorly conceived, planned, and executed project have resulted in projected cost overruns of over $4 billion. The project is projected to cost $8.3 billion to complete with the total rising to $9.2 billion when financing the project is considered. It does not appear that anyone will be held accountable. Past Honolulu Authority for Rapid Transit (HART) CEO Dan Grabauskas negotiated with the city that his job performance could not be discussed as part of his severance agreement, then Mayor Mufi Hannemann is currently the president and CEO of the Hawaii Lodging and Tourism Association, and then chief of staff Kirk Caldwell is the current mayor of the City and County of Honolulu. Mayor Kirk Caldwell stated that the findings serve as a call to action for HART to implement the necessary changes to prevent any more cost overruns. He failed to mention that he helped create the mess in the first place.

Scientists at the U.S. Geological Survey’s Hawaiian Volcano Observatory have called the end of the 35-year Puu OO eruption on Kilauea Volcano after a quiet seven months. The latest report mentioned that volcanic activity at Puu OO was extremely unlikely resulting in a concluding milestone for the volcanic event. Scientists believe the collapse of the Halemaumau crater at Kilauea’s summit was connected to the eruptions of two dozen fissures in Kilauea’s lower East Rift Zone and the spectacular lava flows from Fissure Eight that covered 13.7 square miles of land and destroyed 716 homes. The Puu OO eruption was continuously active with the exception of a few pauses lasting from a few hours to two months. Scientists are warning that Kilauea is still a very active volcano and deformation data is showing evidence of magma refilling the Middle East Rift Zone. The question is not if Kilauea will erupt again but when and where.

Many Kailua residents, including Tim and Tracey, wondered what happened to John Cruz, a homeless Vietnam Veteran known as “Mango Man,” when he disappeared from his normal spot by the Kaiser Kailua Medical Clinic on Hamakua Drive. Many assumed he passed away. It turns out that police and firefighters found him in late 2016 with an infected wound from being hit by a car and was taken in by a Kahaluu man. Cruz receives $1,800 per month in veteran’s benefits, which pays for his room and board at the shoreline residence. Some residents have started a gofundme campaign because the aging landlord is experiencing early signs of dementia and may not be able to take care of Cruz for much longer.

The Kauai Island Utility Cooperative (KIUC) announced that a 28-megawatt solar PV system with a 100-megawatt-hour storage system became operation raising the electricity produced by renewable sources to over 50%. The renewable portfolio consists of roughly 60 megawatts from utility-scale solar fields, 20 megawatts from rooftop solar systems, 10 megawatts from hydropower, and eight megawatts from biomass. KIUC will purchase the power from the new facility at a cost of 11 cents per kilowatt-hour as part of the power purchase agreement that covers the next 25 years.

Maui Brewing Company has joined the renewable energy movement by investing over $9 million in a one-megawatt rooftop PV system with three Tesla battery storage systems and two biofuel generators. The company plans on operating independent of the grid in the third quarter of 2019. The initiative will make the company more cost competitive because the new system will produce the brewery’s electricity at a much cheaper rate than buying electricity from Maui Electric Company. Even though the Kihei facility has the capacity to brew 80,000 barrels of beer per year, the U.S. tax code will effectively cap Maui Brewing Company’s output to 60,000 barrels of beer due to the fact that the tax rate jumps from $3.50 in tax per barrel to $16 in tax per barrel at barrel #60,001. This is a perfect example of how “progressive” state and local tax codes limit small business growth and ultimately the number of paid employees a small business will hire.

More opportunity for drinking appears on tap at Lau Hala Shops in Kailua with the expected opening of D’Vine Kailua Wine Bar in March. The bar will offer 32 wine selections on an automatic dispensing system as well as a bar with wine tasting and classes. Food and desserts will be offered to pair with wines that will change seasonally. The wine bar will join recently opened Maui Brewing Company and Goen Dining and Bar as places to enjoy good food and beverages.

Hawaii’s unfriendly business climate continues to get in the way of the state’s attempt to grow and produce more food on the islands. Hawaii Dairy Farms is scuttling plans to build a dairy operation on Kauai because the company could not find a reasonable regulatory path forward after five years of trying to navigate Hawaii’s regulatory environment. The project funded by eBay founder Pierre Omidyar’s Ulupono Initiative will auction off all of the farm’s assets. Ulupono Initiative’s director of communications was quoted saying, “but rather than incentivizing local food production to meet our state’s food goals, Hawaii’s environmental regulations seem to unfairly place dairies and other similar animal agricultural operations in the same category as wastewater treatment plants.” Hawaii residents don’t need to look any farther than this example of why agricultural lands will continue to disappear and why the state fails to diversify its economy.

A landslide that took out a bridge on one of Kalaupapa Trail’s switchbacks has closed the trail indefinitely. The three-mile trail consisting of 26 switchbacks is the only way to get to the isolated peninsula on Molakai’s north coast. Kalaupapa is where Hawaii banished leprosy patients (known as Hansen’s disease) for about a century. The state stopped exiling patients in Kalaupapa in 1969. Only a few former patients still live in Kalaupapa even though they have been cured and are free to leave. The state Department of Health employs about 40 people at the site and they will be flown in until the trail is reopened. Supply deliveries come by barge and weekly flights, so those deliveries won’t be impacted by the trails closure.

Maui Brand pickled vegetables will soon disappear from store shelves after the 43-year old family business recently ceased production. Maui brand was the first pickled vegetables that did not contain preservatives when they were introduced in 1976. The pickled products received rave reviews from the likes of Frank Sinatra and Ronald Reagan. Unfortunately, many family businesses do close for the lack of a willing successor to take over the business.

Here are three videos that you might find interesting. The first is of a monk seal that visited Tim and Tracey while they were snorkeling, the second is a recent testimonial from a Stott Real Estate, Inc. client, and the third discusses the necessary Hawaii taxes that an out of state investor must file and pay.