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January to March 2017 Quarterly Newsletter

P r i n t  |  R e p l i c a

Median sales prices continue to hover in record territory as demand continues to be strong with limited supply. March’s median sales price for single family homes was $752,000 (3.7% higher than March 2016) and for condos was $400,000 (3.9% higher than March 2016). The number of closed sales grew modestly and there are currently only 2.7 months of remaining inventory for both single family homes and condos. Demand will likely remain strong since the number of pending sales (properties under contract that have not yet closed) is 30% higher for houses and 24% higher for condos in March 2017 as compared to March 2016.

In a sign of flattening economic activity, Young Brothers Ltd. reported shipments between interisland ports dropped 0.6% in 2016. The announcement lends support to the University of Hawaii Economic Research Organization’s (UHERO) that economic deceleration is underway after seven years of sustained economic growth. Tourism revenue has been essentially flat when compared to the decade before the Great Recession despite Hawaii hosting significantly more visitors now than a decade ago. The amount of revenue generated per visitor has steadily declined, partly due to the strong dollar. Oahu, which receives most of the visitors, saw spending decline 3% when compared to 2015 while the neighbor islands, which are more dependent on domestic visitors, have seen gains between 4% and 9%. Construction and health care are expected to moderate after strong gains over the past two years. The biggest economic uncertainty comes from federal spending. 55% of federal dollars spent in Hawaii is associated with the Department of Defense. Hawaii has recently seen a net migration of military and support personnel leaving the islands. A federal hiring freeze and shifting priorities could have a negative impact on Hawaii’s economy. Falling energy costs have recently kept a lid on inflation. That trend is ending and inflation is expected to pick up due to rising home prices and rents. The forecast through the end of the decade predicts slowing economic growth.

A Mixed Plate of Talk Story

A study by local housing analyst, Ricky Cassiday, concluded that online booking site Airbnb has had no material impact on Hawaii’s housing market in contrast to claims made by some local politicians. Homes booked through the website represented only 1.53 percent of the statewide housing stock and 88 percent of those homes were booked less than half the year. Cassiday concluded that Airbnb listings represent a miniscule amount of the housing stock in Hawaii and it is clear that owners are using these homes most of the time. Cassiday stresses that the supplemental income provided by renting out rooms is equivalent to a 12 percent raise for the median local household and serves as a vital economic lifeline to many hosts. He notes that housing availability and affordability are not impacted by the number of short-term rentals, but are impacted by complex housing regulations and zoning laws, limited supply, and a lack of infrastructure.

The number of Airbnb listings on Oahu has nearly tripled over the past two years with the majority of active listings consisting of single bedrooms in houses and condos. The average daily rate has also jumped 24% from 2015 to $237 per day. The Hawaii Tourism Authority chimed in that they are concerned that the lack of regulation in the vacation rental market could take away years of quality control built by the hotels despite 95% of Airbnb listings having four-and-a-half or five star ratings. The comment speaks volumes to the state’s protection of the hotel industry at the expense of the island entrepreneur. Hawaii will always be an expensive place to live. It may be time to recognize that those living on the islands should be able to open up their homes to visitors so that they can afford to live in one of the most expensive places in the country. Local and state politicians remain focused on a continuous failed effort to provide government funded or mandated affordable housing. Tim and Tracey have very different views concerning vacation rentals in residential neighborhoods and vigorously debate the issue constantly.

In related news, The University of Hawaii Economic Research Organization (UHERO) posted two excellent articles regarding tourism in Hawaii and transient rentals in Hawaii neighborhoods. The blog posts are titled “How Many Tourists is Too Many” and “Regulating Home-Share Rentals in Hawaii.” You can find the articles at UHERO’s website:

Foreclosure activity in Hawaii grew 29% in 2016 compared to 2015 while foreclosures at the national level dropped 14%. About 55% of the foreclosures in Hawaii are from loans that were originated between 2004 and 2008. The Hawaii legislature passed bills that Governor Neil Abercrombie signed back in 2011 that essentially eliminated non-judicial foreclosures in the state with the advertised goal of improving consumer protection. All that the changes in the law have really done is delay the inevitable. Lenders are finally working through the legal mess that the legislature created and the courts are working through the backlog of cases.

The contested case hearing for the Thirty Meter Telescope project (TMT) concluded in March after 44 days of witness testimony. 71 people testified in the case and it is estimated that it could take court reporters five to six weeks to complete the written transcripts. Once the written transcripts have been completed, the parties in the case have 30 days to submit their proposed decisions, followed by a two-week period in which the parties can object to the other party’s proposal. After the process is completed, the hearings officer will make the decision on whether TMT will receive the permit to begin construction. Even if the hearings officer approves the permit, another judge ruled that another contested case hearing should have been held over the project’s sublease with the University of Hawaii. TMT is taking concurrent steps to build the telescope in the Canary Islands on the same time scale. TMT’s international board is making the case that the mountain in the Canary Islands would be an excellent alternative and Spanish lawmakers have embraced the project. TMT officials have reached an agreement to build their giant telescope on the island of La Palma in case they are unable to begin construction on Mauna Kea next year. It would be a shame if Hawaii’s governments’ focus on bureaucratically driven, politically correct processes once again get in the way of a project that receives strong support from a majority of the residents. Remember the SuperFerry?

A UHERO report criticizes the state for keeping 10% of the General Excise Tax (GET) surcharge for the island of Oahu as being excessive. Act 247 suggests that the costs recouped by the state should reflect the additional burden imposed by collecting and administering the surcharge. However, the fee collected by the state for the surcharge has exceeded the entire budget for the State Department of Taxation each and every year the surcharge has been collected. UHERO calculates that it costs the state 0.35% of the GET surcharge revenue to administer the additional tax. In other words, the state pocketed 9.65% of Oahu taxpayers’ money for spending other than rail. The report highlights the hypocrisy of state lawmakers who rail against the much-maligned elevated train project while reaching into the pockets of Oahu taxpayers. The City and County of Honolulu is now asking the state to make the GET surcharge permanent in order to complete the Honolulu Authority for Rapid Transit’s rail project to Ala Moana Center.

House Finance Chairwoman Silvia Luke has demanded that financial and computer experts investigate the $59 million project to replace the computer systems at the state Tax Department. Luke said she had difficulty registering on the new tax system and that a security code that was supposed to be sent to her phone never arrived. Even when she finally did successfully register, she struggled to make the new system work. Stott Property Management has been working since August to register their clients into the new system. One glitch is that the new system does not currently allow you to specify the period being filed. That issue has already resulted in one letter from the tax office claiming that the payment was late. In other cases, state tax employees have assigned incorrect federal Tax IDs to the new state Tax IDs and are requiring letters from the IRS before correcting their errors. State officials agreed to look into the issues and see what progress the Tax Department is making.

The wheels of progress may finally be starting to grind now that the state agency that oversees Aloha Stadium has approved a plan to build a new 30,000 to 40,000-seat facility that would ultimately replace the rusting Aloha Stadium. It appears that the departure of the Pro Bowl and rejection by the U.S. Women’s Soccer Team may have finally woken up complacent state officials to one example of the state’s neglected infrastructure. The resolution comes at a time when both city and federal deed restrictions may be lifted which would allow more development of the 100 acres of land at the stadium. A HART rail transit station will be built on the site. Hopefully some of the new development will include adequate parking. The Honolulu Star-Advertiser reports that a consultant has warned in a report that the 43-year-old Aloha Stadium has “served its useful life and is now a liability for fan experiences, a potential danger to public health and safety and a financial burden for maintenance and operations.” The report notes that inspections have identified pieces of the building that have fallen into public areas of the facility highlighting the risks to the public. The appointed nine-member authority is not bound by the reports. Can you imagine what would happen to a rental property owner if they received a report from a structural engineer citing immediate risks to a tenant’s health and well-being? Stott Property Management has seen the City and County of Honolulu withhold rent payments for arbitrary and minor inspection deficiencies. It appears that there is a double standard.

The state Department of Transportation had awarded a contract to build a $73 million maintenance and cargo facility at the Honolulu Airport six years ago. The facility should have been finished in 2015 and is now languishing as the state, contractor, and sub-contractors sue each other over the construction debacle. The construction delays have effectively stalled other airport improvement projects that can’t begin until the maintenance and cargo airport project have been completed. In 2013, state officials predicted that the $739 million airport modernization project would be completed next year. Hawaiian Airlines is now being asked to take control of the project from the state to complete the project. Hawaiian Airlines has reported that the work completed so far has been pretty shoddy and they are most concerned about the significant cracks that have appeared in the hangar’s concrete flooring. The cracks could be the result of the foundation settling. Hawaiian Airline’s CEO estimates that the final bill for the hangar project will be about $120 million, about 65% over budget. The Honolulu Airport Modernization project was initially announced when Linda Lingle was Governor and the entire project was expected to take four years. Neil Abercrombie took office in 2010 and he ordered a pause in the plan for a review that delayed the project for a couple of years. It looks like Hawaii taxpayers will be footing the bill.

University of Hawaii’s iconic women’s volleyball coach, Dave Shoji, has announced his retirement after 42 years as the Rainbow Wahine’s head coach. Shoji’s legendary career includes the second most number of wins ever, 1,202, and four national championships. Robyn Ah Mow-Santos, a former All-American, Olympian, and assistant coach will try to continue the program’s success as only the third head coach for UH in the women’s volleyball program’s history. Ah Mow-Santos is considered one of the greatest players in school history. UH fans hope that she can continue her success as the head coach.

Aloha Beer Company opened a Honolulu tap room January 19th on Queen Street in Kakaako. The tap room offers a variety of beers brewed in-house and crafted cocktails and the menu includes smoked meats, pickles, salads, and sandwiches. The tap room is just another member of a vibrant microbrewery industry in Hawaii.

Maui Brewery Company quickly followed suit and opened their first brewpub on Oahu in a space at the Holiday Inn Resort Waikiki Beachcomber in Waikiki on January 31st. Tim is eagerly awaiting their second brewpub that is scheduled to open in downtown Kailua in early 2018.

If you’re looking for a caffeine fix and want to try something other than Starbucks, Island Brew offers a local alternative specializing in 100 percent Hawaiian grown coffee and espresso. Island Brew just opened its third Oahu store in Ala Moana Center next to Bloomingdale’s on the third level. Island Brew also has stores in the Hawaii Kai shopping center and Kaimuki Atrium.

Stott Real Estate Fun Fact: In apparent anticipation of the Chinese New Year, a rooster had taken up residence on the grounds outside of Stott Real Estate’s office. We received a daily reminder that it is the year of the rooster according to the Chinese calendar. The rooster eventually disappeared in March.

Odds & Ends

Private Mortgage Insurance: Many lenders require a borrower to purchase private mortgage insurance (PMI) if a borrower makes a down payment of less than 20% when buying a home. The policy protects the lender if the borrower defaults on the mortgage, the lender forecloses, and the lender has to sell the home at a value less than the loan principal. The borrower typically pays a monthly premium that is tacked onto the principal and interest payment at a rate that is based on the borrowers credit score. That monthly premium can be several hundreds of dollars on a Hawaii mortgage.

A lender is required to automatically cancel the PMI when your outstanding loan balance drops to 78% of the home’s original value. You can speed up the cancellation of mortgage insurance by keeping track of your loan balance and asking the lender to cancel the mortgage insurance when the loan balance reaches 80% of the home’s original value. The following criteria must be met for cancelling PMI:

  • The cancellation request must be in writing.
  • You must be current on your payments and have paid your mortgage on time.
  • You may have to prove you don’t have any other liens on the home (home equity loan for example).
  • You might have to obtain an appraisal to show your loan balance is 80% of the home’s current value.

You can reduce the amount of PMI you pay over the life of the loan by refinancing if the home’s value has increased enough. The new lender won’t require mortgage insurance and you may also lock in a lower interest rate. Even if the interest rate is slightly higher, the additional interest may still be lower than the monthly PMI premium payment.

You can also reduce your loan balance quicker by making additional principal payments every month. Principal payments are a small percentage of the monthly payment for the first few years of a mortgage. Modest additional month payments of $50 to $100 per month can significantly shorten the time that you must make the mortgage premium payments. Once the PMI is removed, you can then increase your additional principal payments by the amount of the insurance premium to more quickly pay off your mortgage.

Please note that recent FHA-insured loans require mortgage insurance premiums for the life of the loan. Therefore, you will have to refinance your mortgage to eliminate the FHA mortgage insurance premiums if you have a FHA-insured mortgage.

Furnished versus Partially Furnished Rentals: Prospective rental property owners often ask us if they should rent their property furnished, partially furnished, or unfurnished. An unfurnished rental property implies that the tenant must also install appliances in the rental property in Hawaii. There are very few unfurnished rental properties in Hawaii and Stott Property Management recommends rental property owners provide the appliances. The decision to rent a property furnished versus partially furnished depends on a number of factors including the length of the lease offered, the location of the property, and the owners’ plans for the property.

In general, we recommend renting a condo or house partially furnished if the owner is offering to lease a property for a year or more. Most long-term tenants have their own furniture and want to move those furnishings into their new rental property. Additionally, once a tenant has moved into a property, they are less likely to move out of the rental property because they will have to move their furniture as well. Stott Property Management’s experience shows that fully furnished rentals have higher vacancy rates and similar rents compared to partially furnished rentals. The owner of a fully furnished rental property does not receive sufficient rental income to offset the wear and tear of the furnishings when renting long-term. In fact, worn out or dated furniture will make a rental property harder to rent even if the property is in good condition. Stott Property Management frequently recommends to clients with fully furnished units to throw away worn out furnishings and rent their property partially furnished if the association requires a minimum lease of at least three months.

We sometimes get asked if we could rent a partially furnished property for less than one year. Our experience has shown that most tenants want to sign a one-year lease if they are going to take the time, money, and effort to move their furnishings into a new home. Most tenants won’t sign a lease knowing that they will have to move again in the near future.

We recommend renting a property furnished if the owner plans on using the property for personal use during a specified period or periods every year. Stott Property Management has clients that live in the unit every year for a few months and then rent their unit during the remainder of the year. The rental income helps defer some of the costs associated with owning a second home.

We also recommend renting a property furnished if the condo is located in buildings that allows short-term rentals (less than one month). Most of the buildings are located in Waikiki, however, there is one building in Ko Olina that allows weekly rentals and there are condos and townhouses in Turtle Bay that also allow rental periods less than one month in duration. In most cases, the daily rental rate is significantly higher for a short-term rental than it is for a long-term rental and the annual net income is still higher even with higher vacancy rates and management fees. Please note that Stott Property Management does not manage vacation rental properties. Stott Property Management’s minimum lease period is three months.

Military Pops Cost of Living Bubble: The Department of Defense has reduced the cost of living allowance, known as the acronym BAH, in each of the last two years and it is having a noticeable effect on rents at the higher end of the scale. In 2015, an E6 (mid-level enlisted member) received a cost of living adjustment of $3,048 per month. That figure dropped to $2,904 per month in 2016 and rose slightly to $2,961 in 2017. In 2015, an O4 (mid-level military officer) received a cost of living allowance of $4,062 per month. That figure dropped to $3,786 in 2016 and dropped to $3,615 in 2017. I chose these two categories because several of our clients express their desire to rent to a military family. You can pull up all the BAH information by googling BAH rates for the given year and selecting the pdf file link on page 1 of the search.

Stott Property Management has had to significantly reduce asking rents for houses and condos that previously rented for more than $3,000 in late 2016 to early 2017 to attract paying tenants. Stott Property Management’s clients with properties in the higher rent category have experienced monthly reductions in rental revenue ranging from $200 to $500 per month, which directly corresponds to the reduction in Oahu military members BAH. This trend has been particular noticeable in neighborhoods near military bases like Kailua, Kaneohe, and Aiea.

The last two years would make an interesting case study for an economist or graduate student regarding the effects of government subsidies on housing affordability. The Department of Defense seems to have realized that it was competing against itself in the Oahu rental market as individual military families bid up market rents in neighborhoods with limited supply. By reducing BAH, the Department of Defense effectively reduced the amount of money a military family could spend on housing and the market rents in these neighborhoods fell accordingly.

Truth in Advertising: Many headlines have been written in the paper over the years when a large company is fined by the government or sued by customers for exaggerating the benefits of their products or services. Both landlords and sellers should carefully consider this concept when it comes to renting or selling a property.

How does “truth in advertising” apply to rental properties? The state of Hawaii codifies the concept in the Residential Landlord-Tenant Code and failure to abide by the law can be costly to owners of investment property in Hawaii. One chapter of the code requires that, “landlord to supply and maintain fit premises.” The state goes further by specifying that the landlord shall “maintain all electrical, plumbing, and other facilities and appliances supplied by the landlord in good working order and condition, subject to reasonable wear and tear.” In practical terms, if a landlord does not want the responsibility of repairing a fixture in their rental property, then the fixture should be removed before showing the property to prospective tenants and signing a lease. Otherwise, the state allows the tenant to repair a fixture and reimbursing themselves by reducing future rent payments by the cost of the repair subject to certain limits. Therefore, landlords may not refuse a repair request to repair or replace an air conditioner, for example, even if the landlord writes a clause in the lease specifying that the air conditioner will not be repaired or replaced. Please note that wear and tear applies to the appearance of a fixture and not its functionality. The landlord is obligated to address function problems with any fixture or appliance if the fixture or appliance was present at the time the tenant checked in.

The concept applies to Sellers in the form of the Seller’s Real Property Disclosure Statement. The document is five pages long and may only be filled out and signed by the seller or sellers of a residential property. There are over 100 items pertaining to the condition of a property that the seller must consider and respond to. While the disclosure statement is not a warranty of any kind by the seller, it can be an effective defense if the buyer claims that the seller misled them regarding some perceived defect in the home and the seller can show that he or she documented it in the Seller’s Real Property Disclosure Statement.

Contractor Shortage: The Wall Street Journal published an article in their editorial section about the growing shortage of labor in both agriculture and construction. While food is a concern for most, the labor shortage in construction has been an issue on the islands for several years.

The Bureau of Labor Statistics reported that there are roughly 150,000 unfilled construction jobs across the country, double the number five years ago. One factor driving the issue is that the current construction workforce is graying (Hawaii’s median age is higher than the national average) and many of the workers that lost their jobs during the recession have simply retired or found other areas of employment.   A January survey of the Associated General Contractors of America found that 75% of the firms had a hard time finding qualified workers and that worker shortages were a bigger concern than government regulations. The problem is expected to get worse since most high schools have dropped vocational training and most colleges don’t teach technical skills.

Stott Property Management has seen the worker shortage manifest itself in many ways on Oahu. One client recently asked us to obtain an estimate from his contractor friend to replace kitchen and bathroom cabinetry. The contractor friend replied that he would not be able to inspect the condo and provide an estimate for five months because he is backed up with committed home improvement projects.

Stott Property Management uses a couple of plumbing companies that provides emergency after hour repair services. There have been two cases in the past two months where Stott Property Management authorized emergency repairs to be done over the weekend, but the companies did not have enough plumbers available to get to the property until the following Monday. Phone calls to other plumbers resulted in the same answer. Stott Property Management continues to contact and interview plumbers regarding 24-hour emergency service.

We are witnessing more and more cases of workers simply being unavailable. Try to be patient if you need repair work ranging from simple repairs to major remodels. You will likely have to wait much longer than you have previously.

The Price of Paradise: What is the price of paradise? A basic rule of thumb that seems to work reasonably well is add 40% to the cost of any item advertised in the Continental U.S. A recent example is the KFC promotion for their $5 Fill Ups promotion that is advertised in Hawaii as well. The Kailua KFC offers a $7 Fill Up menu. Even though this example supports the basic rule of thumb, recent home repair numbers suggest that 40% is a little low.

Stott Property Management recently received a complaint from a client regarding the replacement of a self-closing toilet seat. The client researched the cost of a similar toilet seat on Home Depot’s website and found that it was $32. The handyman that replaced the toilet seat provided a receipt from Home Depot showing the local store charged $55.26. A similar toilet seat in Hawaii ended up being 73% more expensive that the advertised price on Home Depot’s website.

Tim and Tracey own rental property in Texas and routinely review paid invoices submitted by the property managers. In Texas, one handyman charges a labor rate of $45 per hour. Stott Property Management routinely uses several handymen on Oahu and their labor rates vary from $75 per hour to $85 per hour. The labor rate for a basic, reliable, handyman is at least 67% higher on Hawaii than it is in Texas.

Therefore, if you are contemplating an investment property or second home on Oahu, factor in maintenance costs of at least 70% higher than comparable maintenance work elsewhere in the United States. Otherwise, your expensive Hawaii real estate asset could suffer from deferred maintenance over time due to a lack of funds.

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