I have witnessed both the boom and bust of Hawaii’s real estate market over my 25 years of providing mortgage financing. The issues are always the same, and yet this time, there are a couple of new wrinkles.

Hawaii’s real estate market is no different right now when compared to the mainland. There’s a frenzy taking place right now to take advantage of low mortgage rates which has triggered the masses to try and buy property. The report on sales of existing homes for May (reported in the news section below) clearly demonstrated that if not for the lack of available properties, sales would be even higher. This has caused home values to explode as they follow the rule of supply and demand.

Here are some of the negative side effects of this rapidly rising market:

Sellers are seeing multiple offers arrive – often before the property ever holds an open house. And most of these offers are coming in above the asking price. Many are also all-cash offers.

Why is this a negative side effect?

Because it is unhealthy, unsustainable, and doesn’t conform to how our industries (real estate and finance) work. Both real estate and finance work on a historical basis to deal with current values. In real estate, offers are usually based on what comparable sales have shown. Agents guide you with your offer based on prior sales of like properties. In finance, everything evolves around the appraisal. Appraisers take the same approach when determining the value of the subject property. The problem arises in the basis for the comps. The data used to determine the appraisal is based on historical data (properties that sold recently). Even if that data is just a couple of months old, in a quickly rising market, that could lead to a large differential.

Why not take the rising market conditions into consideration?

While is true that the real value of something is ultimately what someone is willing to pay for it, in the world of finance, banks don’t lend on speculation. Taking into account what something will be worth, is speculating. Lenders will gladly allow you to buy property for any amount you wish to offer, but they will only finance their portion based on what other like properties have recently sold for. After all, they have every right to set the rules when it comes to lending their money.

One change I have witnessed during this boom period I have not seen before is flat out greed by some sellers. They accept an offer and almost immediately regret not holding out for another higher offer. It becomes really apparent when we in lending are trying to meet contractual deadlines. As I have written recently, the mortgage lending system is overloaded with transactions. We don’t have the physical capacity to generate more loan volume. Appraisers can only inspect so many properties and write reports a day. Escrow and title people are doing their best to generate title documents and all the other items needed for a loan. And there’s only so many people working within each mortgage lending operation to handle the daily flow of transactions. We are truly seeing lending at its capacity. This is causing delays meeting those contractual deadlines. Normally if a few days were needed meet these deadlines, extensions were easy to obtain. Now, many sellers are using these issues as ways to get out of a contract. They either feel they can get more or have someone waiting as a backup. I recently had a transaction cancel because were going to be 4 days late in closing. The seller expressly stated they would not extend “a single day”. They had a backup in hand. I feel terrible for the buyer. They lost out for no fault of their own. In fact, no one did anything wrong. The delay was simply due to everything taking longer than expected.

For us in the industry, we need to better educate both buyers and sellers as to the challenges faced with a rapidly rising market. We as a community also need to remember to practice a little aloha.

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