AN "A" FOR MAUI’S ECONOMY AGAIN IN ‘05
Is This a Housing Bubble – Or Not?
(Kahului, Hawaii, September 9, 2005) – The economic report card for Maui continues to be an "A" on practically every major front again this year, First Hawaiian Bank economics consultant Leroy Laney said today. "But Eden does have a few thorns, as is always the case when growth heats up in an island environment. The biggest one on Maui is concern over the price of housing," Laney said at the 31st Annual First Hawaiian Bank Economic Outlook Forum at the Maui Beach Hotel.
"The median price of a single-family home on Maui averaged $672,100 over the first six months of this year, up 25 percent from the same period in 2004. One wonders about the future of an economy in which those who make it run can't afford to relocate or stay here," Laney said.
He said the situation is "especially painful for new entrants to the market and those considering relocation here. Even more, it extends well beyond working-class families into the professional ranks. An economy cannot continue to function without many of these positions.
"Eventually affordability will bring the current real estate cycle to an end, hopefully with a soft landing," Laney said. "Because Maui's desirable real estate is so inextricably linked to Mainland demand and prices, the run-up here may ease only when other desirable but inflated pockets there cool, also.
"Speculation, buying not for use or income but just to take advantage of expected higher prices in the future, contributes to a bubble that pops at some point. As with any sharp run-up in prices in any market, there comes a time when we begin to question the sustainability of the rise. We are beginning to ask that question with the housing market now in Hawaii."
Unlike booms in the stock market, the bursting of real estate bubbles usually is not as dramatic as the end of booms in the stock market, Laney said. "But in the 1990s, those who bought at the top of Hawaii's previous real estate boom were punished, contributing to the worst decade of our modern economy," he added.
The bubble that began in the late 1980s peaked in 1992 with a median single-family home price of $290,000 on Maui, Laney said, then prices dipped 20 percent to a median of $232,000 in 1997. "As is usually the case in real estate, and unlike some financial markets, the downward correction after the boom was not as sharp and it didn't last as long as the original run-up. But it was enough to be felt," Laney said.
Current prices have risen 190 percent since that trough in 1997, he said.
Many forecasters expect an adjustment in overpriced housing markets on the Mainland, Laney said, and that "would almost surely have some sympathetic effect here."
"Economics 101 teaches that the only way to effectively bring down the now exorbitant home prices is to increase supply," Laney said.
He made these points about major sectors of the Maui County economy:
Labor market: Maui’s unemployment rate (average of 2.6 percent through the first half of 2005) has actually fallen below the statewide rate (2.8 percent), a reversal of usual trends. "The local labor supply can't meet the demand, and increasing costs of living (especially housing) keep a lid on in-migration," he said. Because of the lack of available labor, job growth is slowing on Maui and all sectors are having trouble finding qualified people to hire.
Tourism: "Maui tourism has continued to be very healthy in 2005 on all fronts -- hotels, time share, rentals, activities, restaurants and retail. Maui Island arrivals this year were up 2.7 percent through June." He said hotel room inventory "may be a concern for Maui in coming years. Trends in the industry have been toward time share, but diversity is still important and Maui only has two possible new hotels that are even being talked about, neither of them imminent."
Construction: The construction industry on Maui remains hot thanks to strong external and local demand, continued low interest rates, and a strong economy – and the near-term future looks strong as well, thanks to a growth in building permits. "Last year, 1,177 residential building permits were issued for 1,521 single and multi-family housing units in Maui County," he said.
Sugar: HC&S, the Alexander & Baldwin subsidiary that is Hawaii's largest remaining sugar plantation, expects sugar production to fall below 200,000 tons this year due to drought and fires set by vandals. "One prospect is ethanol production to augment fossil fuels. HC&S is partnering with Maui Ethanol LLC to produce ethanol from molasses. The goal is to have permits and construction in 2005, with ethanol produced by 2006," Laney said. HC&S believes that it can produce enough ethanol to satisfy the state's 10 percent ethanol requirement for fuel across Maui, Laney said.
Harbors: "One hot topic on all of Hawaii's islands is harbor infrastructure. The urgency comes from the two 2,000-passenger, 1,000-crew Norwegian Cruise Line ships that now operate on the inter-island circuit, plus another one on the way," Laney said. He said the planned inter-island Superferry "would offer a competing mode of transportation for locals -- especially those with families, tourists, autos, and perishable goods. Its contribution to our economy could be major. But Kahului Harbor on Maui may present the biggest challenges statewide for accommodating these vessels, simply because it lacks pier space and room to expand," he said.
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