Off-Island, Local Buyers Not Competing for Same Homes

Title Guaranty of Hawaii graphic.

A recent report on housing sales in Hawai‘i showed that Maui had the distinction of being the only major Hawaiian island where sales to off-island buyers have outnumbered local buyers.

That report surprised, and in some cases upset, local residents and especially folks who are being heavily impacted by the current housing crisis.

We are truly in a housing crisis. Prices for homes and rents for basic accommodations are off the chart. I say “again.” because this is a cycle Maui goes through just about every 10 years.

But this particular cycle is tough on anyone who does not already own a home. So it is natural to look for the “bad guys” who are causing this to happen. As much as the study appears to point to offshore buyers as the culprits to some readers, a closer look shows a different story.

The study was the work of the state Department of Business and Economic Development and Tourism, the agency that conducts the state’s economic analyses. It studied the housing market for the period between 2008 and September 2015. It combined both condominiums and residential properties sold during that period, with a focus on how much was paid and who bought them, but, unfortunately, was silent on who sold them.

Title Guaranty of Hawaii graphic.

At first I thought the study was a stand-alone; that there was no previous similar report. But in the last week, I learned of another report put out by Title Guaranty of Hawaii, which takes a similar, annual snapshot of the same information (see article graphics). The TG report collaborates the pattern suggested in the statewide DBEDT report and gives more clarity to the Maui numbers.

So do off-shore buyers outnumber local buyers in the local housing market? Sort of, depending on what you consider to be “housing.” A large percentage of the off-shore sales are in the leeward resort markets—South and West Maui—according to both reports. Anyone associated with the Maui resort real estate market knows that most of those sales are of resort condominiums, which are really more like hotel suits than “homes.”

The study was correct to characterize most condominiums as “homes,” because that is what they mostly are on O‘ahu. That is not necessarily true on the Neighbor Islands. In fact, the DBEDT study shows the buyer patterns for the three major Neighbor Islands to be remarkably similar. Maui just happens to be the only one with more than 50% offshore buyers.

The DBEDT study shows out-of-state buyers outnumbering local buyers during this seven-year period: 48% local, 44.9% Mainland residents and 7.1% foreign. Maui also had the highest percentage of foreign buyers in the state. O‘ahu had the largest local buyer percentage at 84.7%.

Off-shore buyers have definitely penetrated every element of the Hawai‘i real estate market and that was particularly true during the 2008-11 period reviewed by the DBEDT study. Those years are known generally as the “great real estate meltdown,” a massive market correction during which millions of Americans lost their homes to foreclosure. That period is a statistical outlier—a market anomaly during which thousands of Hawai‘i foreclosures were picked up by offshore investors looking for a good deal.

Of course, you can find almost anything you want in a study like this. The bottom line problem is we have an acute housing shortage and most economists tell us that this is a problem of supply and demand, and the way to fix that is to build enough housing to meet the demand. So it is important to take a moment to consider this report and to put what it is saying into context:

• In response to the idea that it is futile to build more new homes because this study says that half of them will be sold to people from elsewhere: You can’t draw that conclusion from the DBEDT and the TG reports, because they do not distinguish between sales of new homes and re-sales. The DBEDT report does show the locations of the sales on Maui, with five general districts, and those numbers clearly show non-resident buyers are most active along the leeward resort coast—South and West Maui; less so Upcountry and not so much in Central Maui.
• By and large, what type of property do Maui visitors buy along the leeward coast? Shoreline condominiums that can be rented short-term. These properties sell like commodities and a number of these units probably sold more than once during the DBEDT report’s seven-year period.
• Do the reports demonstrate a trend towards greatly increased offshore acquisition of Maui homes? No. Taken together what the two reports show is the continuation of an economic pattern that Maui consciously chose follow in the 1960s and ’70s. Unlike O‘ahu, which protected its shoreline outside of Waikiki from resort development, Maui actively encouraged the resort development of its leeward coast. That development proved to be the economic engine and tax generator that was hoped for. It also resulted in perhaps as many as 8,000 condominium units that can be rented on a short-term basis and are frequently bought and sold by those seeking a “piece of paradise.” These resort units are not usually the first choice of local families seeking a home, but they count in this study as “housing units.”
• While Maui had the lowest local buyer participation rate in the DBEDT study at 48%, Kaua‘i (54.6%) and Hawai‘i Island (56.9%) shared the same pattern—just not to the same extent. Offshore buyers dominated the resort communities in Hanalei and Kona, just like they did in West and South Maui. Honolulu actually had the most buyers from the Mainland (5,327) in the state. But because they happened in the context of O‘ahu’s much larger local population, the percentage of transactions with local buyers was much larger (84.7%).
• The TG report shows local buyers of Maui homes to be at 53 percent for 2014. It did show that that offshore buyers dominated the West Maui housing sales 338 to 177 and locals just about broke even with the offshore buyers in South Maui with 284 off-shore to 264 local. Just like the DBEDT report, the TG report shows that local buyers dominated on the rest of Maui in 2014.
• The Neighbor Islands are demographically similar. Their de facto populations show that on any given day, about 20% of the people on the three main Neighbor Islands are from somewhere else. That number is only about 5% on O‘ahu.
• Offshore investors have definitely penetrated just about every segment of our housing market. And that was particularly true during the “meltdown” period, which provided great investment opportunities.
• It is unfortunate that the two studies do not have more detail. If they identified the sellers, it would be easier to take foreclosures into account and recognize how many of these transactions were between offshore buyers and sellers on both sides of the transaction.
• Maui also had the distinction of having the largest percentage of foreign buyers at 7.1 percent. At first that struck me as odd, until I remembered that Canadians are, technically, “foreigners.” Canadians made up the largest group (44.1%) of foreign buyers in the state and they have always have had a preference for South and West Maui. The DBEDT report said that Canadian buyers were particularly active in the 2010-12 period, when condo prices shrank and the Canadian-to-US-dollar exchange rate favored them. (About 25% better than now.)
• Nonetheless, the TG report shows that Canadian buyers still represented 4% of the total sales on Maui in 2014.
• The DBEDT study shows an unusual statewide spike in home sales in 2010, and especially on Hawai‘i Island. This was during the heart of the meltdown, when thousands of local folks lost their homes to foreclosure. As the “good deals” hit the market, they got scooped up, especially by non-resident investors. That unusual circumstance caused the scale to bend quite a bit more towards offshore investors than usual in the DBEDT study’s period.

Ultimately, the problem is one of supply and demand. Hawai‘i is renowned for having the tightest land-use regulations in the nation. That serves to protect the land from development at the cost of crippling the supply of housing our population requires. Less supply means higher values in an environment in which income growth has been stagnate. The end result is our population can no longer afford the shelter our market is producing.

The Realtor Association of Maui has been focused like a laser on this issue for over a year. Our chief finding is that government needs to get out of the way. Both Gov. David Ige and Maui County Mayor Arakawa have echoed that realization: government needs to facilitate the development of housing that our local residents can afford and quit being the impediment.

This is the first in a series of articles published on MauiNow.com in partnership with the Realtor Association of Maui.