When I picked up yesterda’s Maui News, I had to do something of a double take. Splashed across the front page headline was the statement Subprime Mortgage Crisis Bypasses Maui. Ahhhhh, the good old Maui News once again shows it is never afraid of sensationalistic headlines when it comes to real estate. The article itself discussed President Bush’s proposals to provide relief to the current subprime crisis and gathered the opinions of various mortgage professionals on the impact of the subprime collapse on the Maui market. Frankly, the article was a bad fluff piece. The subprime market and its fallout is a pretty complex topic. The implications of the subprime crisis go beyond foreclosures and its impact can not be assessed by the last month alone. In fact, most of the subprime fallout will not be felt until at least September and October as August sales and statistics represent transactions that most likely were initiated in May, June or July, prior to the crisis. I am not going to be able to break down all the issues and the current and future implications in a blog post, but there are a couple of points worth addressing.
On the most basic level, the subprime fallout is having and will continue to have an impact on the Maui market. The reason is the availability of mortgages. The securitization of loans over the past several years has enabled the mortgage industry to offer a menagerie of loan programs to home buyers. Many of those loans contained considerable risk both to buyer and lender. As home appreciation slowed / stopped and adjustable rate and teaser loans adjusted upwards the number of loan defaults has been increasing fairly dramatically. Many mortgage companies have gone out of business and the remaining banks and lenders have responded by revamping loan programs. Rates are higher for a number of programs, particularly jumbo loans which represent a sizable percentage of all Maui / Hawaii loans. Buyers are being asked to offer more documentation and the best programs require better credit scores. The net effect is that there are fewer potential buyers in the market now. It also means longer days on market, more challenging escrows and increasing inventory.
On the foreclosure side, Maui and Hawaii in general have experienced lower numbers of foreclosures to date. In 2006, Hawaii had the lowest foreclosure rate in the country. That numbers has been increasing at a modest rate over the last year. We are seeing more foreclosures listed in the local papers and more bank sales (REOs) on the MLS. Both within the greater U.S. and Hawaii, the number of foreclosures is expected to continue to go up with a number of adjustable rate mortgages resetting over the next 18 to 24 months. Will Maui see waves of foreclosures in the future? It does not appear likely but it is hard to say definitively. A number of the second home purchases on the island have been done with more conventional loans and or cash. Vacation rental condos generally require 25% or more for their down payments. These factors reduce the number of potential foreclosures. That being said, there were a number of island residents who did use subprime loans and 100% financing to get a foot in the door in the Maui market. These homeowners are vulnerable, particularly if they were planning on cashing in on appreciation which has slowed in some areas and stopped in others. We may also see some pain amongst the speculators or flippers in the market. Real Estate investors may feel more pain as they are forced to hold onto properties longer. If these investors are unable to weather their monthly mortgage payments as properties sit on the market longer, we may see some foreclosures out of this group of homeowners.
What does this all mean in terms of the long term or immediate future of the Maui Real Estate market? Honestly, your guess is as good as mine. There are a few things that potential buyers and sellers should be mindful of though. For the buyer, cash and credit are critical. It is an excellent time to be a cash buyer. Cash purchases remove the uncertainty for Sellers and may provide incentive for a seller to discount a price. If obtaining a loan, Buyers will need strong credit to receive the best rates. Obtaining a pre-approval with a reputable lender is a very important step to take early in your real estate acquisition process. Increasing your down payment will also bolster your mortgage options as banks are demanding higher rates on jumbo loans. Buyers, we would more than happy to discuss acquisition strategies with you. Sellers need to be mindful that the market is not what it was over the last few years. The number of potential buyers has diminished and you need to consider that in your marketing and pricing strategy. Contact the Jalbert brothers for a market analysis of your home and to discuss pricing strategies in this changing market.
We will continue to follow trends in the Maui Real Estate market on the blog.