1st Quarter Kauai Real Estate Update

Spring is finally here which for many of you couldn’t be more encouraging. All is well here on the Garden Island. As the 1st quarter comes to a close, I want to update you on several things I think you will find interesting and useful.


Status of Kauai’s real estate market Sales volume is down year to date (YTD) compared to 2007 but median sales prices are holding up pretty well. Kauai’s property values have fared better than the other 3 major islands in not only maintaining but increasing the median value of single family homes, condos and land. Here is a look at the 1st quarter YTD activity through March vs. the same period in 2007.

Another interesting note is that Kauai was the only island in Hawaii in 2007 with increased visitor arrivals a 5.7% increase over 2006. Listing inventory remains high in all areas, and we are starting to see a sprinkling of foreclosures and short sales along with price reductions for properties currently listed on the market. Qualified buyers are benefitting from sub 6% mortgage interest rates and the newly adjusted maximum conforming loan limits on Kauai of $773,750. There are also many programs for jumbo loans as well. Coupled with higher inventory and increasingly motivated sellers, 2008 promises to offer incredible windows of opportunity for the opportunistic buyer.

Vacation rentals On March 10th, the mayor signed off on county council approved legislation that will stop new Kauai vacation rentals in any area outside those zones designated in the county's 20-year-old master plan known as as "Visitor Destination Areas" (VDAs). A vacation rental is considered a residence. This legislation came about because of many unhappy residents dissatisfied by the expansion of vacation rentals in their neighborhoods. This issue was much debated for several years and required 4 drafts before Mayor Brian Baptiste and the County Council approved it. Approved VDAs are located in Princeville (not including Phase II), parts of Kapaa, parts of Lihue and parts of Poipu Beach. Property owners who were lawfully operating vacation rentals prior to March 7, 2008 outside these areas (except ag zoned properties) and paying all state taxes will be grandfathered in under the new law. Applications must have been submitted to the county by March 30, 2008 and must be approved by March 30, 2009 for properties outside the VDA’s. No approval shall be issued to any property zoned agricultural use that was built prior to June 4, 1976. If you are considering a purchase of a second home or investment property, buying a property in the VDA designated areas could benefit you in 2 ways:

1. Rental income: With the supply of vacation rentals diminishing, the demand for rental units and nightly rates could increase.
2. Resale: Having a property in a VDA will enhance the property value.

Clarification of the relationship between Federal reserve short-term rates and long-term mortgage rates Given the volatility we have been seeing in mortgage rates of late and confusion of why mortgage rates don’t go down when the Fed drops its short term lending rate, let me shed some light on this. Simply put, mortgage rates are tied to Fed policy decisions about as much as they are tied to the price of coconuts! Most people believe there is a direct relationship between the raising or lowering of rates by the Federal Reserve and long-term mortgage interest rates. Almost all mortgage rates are in direct relationship with the yields of Mortgage Backed Securities (MBS). MBS are basically bonds: when the price goes up, the yield goes down. Their yields vary directly with mortgage rates and they are responsive to other economic forces in a similar way to other types of bonds. So don't be surprised when the Fed cuts rates and mortgages hold steady or even go up temporarily. As long as inflation is a concern and the quality of MBS as an investment is in question, there will not be a direct relationship. At the time of this writing, 30 year fixed rates for conventional loans are 5.875% and 0.000 points! I hope this helps.

Jobless rates Hawaii had the lowest unemployment rate in the United States for the second year in a row. In 2007 the jobless rate was 2.6%. The Bureau of Labor Statistics announced in February the annual average U.S. jobless rate was 4.6% in 2007, unchanged from 2006. Hawaii was followed closely by Idaho and Utah, at 2.7% each. Michigan had the highest unemployment rate for the year, at 7.2%, followed by Mississippi, at 6.3%, and Alaska, 6.2%. In 2006, Hawaii also had the lowest rate, 2.4%. Low unemployment rates create more stability in the housing markets. Predictions are that Hawaii will experience fewer foreclosures than the rest of the nation.

Princeville Update bits and pieces The Princeville Hotel is expected to start its $60 million upgrade into a St. Regis Hotel sometime in September. The 27 hole Makai golf course is also scheduled to undergo a major reconstruction beginning beginning sometime towards the end of the year…a firm start date has not been announced. When Oahu developer Jeff Stone and financial partner Morgan Stanley purchased Princeville from Japanese owner Suntori 3 years ago, the clearly stated plan was to go “high end” with future development. Additionally a 122-acre parcel of land adjacent to the Princeville Hotel and overlooking Hanalei Bay (formerly the site of Club Med in the 70’s) was sold to an affiliate of Las Vegas-based Montage Hotels & Resorts for an undisclosed price. Montage, was started in 2002 by Alan Fuertsman and has a distinguished history of owning and successfully operating luxurious resorts. The company has not stated its plans for the site yet. The money received for the sale of this fabulous property along with the shopping center, hotel and golf courses will certainly help fuel Jeff Stone’s high end plans along with the strong financial backing of Morgan Stanley. When these plans are implemented, it will only increase future values of existing homes in Princeville.

Aloha Airlines shuts down inter island and trans Pacific flights For the second time in three years, Aloha Airlines in mid March filed for Chapter 11 bankruptcy protection, citing rising fuel costs and predatory pricing by competitor go! Airlines (a subsidiary of Mesa Air Group). The company announced March 30th that March 31st will be its last day of operation, a decision that Aloha Airlines President and Chief Executive Officer David A. Banmiller said would affect an estimated 1,900 employees statewide. Aloha also announced that its air cargo and aviation services units will continue to operate as usual while the U.S. Bankruptcy Court seeks bids from potential buyers. Go! Airlines entered the Hawai‘i market in 2006 with tickets starting at $39, and last year offered discounted one-way fares as low as $1 for brief periods. Many believe that go! Airlines’ intent was to eliminate either Aloha Airlines or Hawaiian Airlines as a competitor for inter island air travel. Mesa Air Group, go’s! parent company, may have the staying power to make it happen. In their 1st 16 months of operation, go! Airlines reported a $20 million operating loss. Both Aloha and Hawaiian, which emerged from bankruptcy in June 2005, sued Mesa Air Group in 2006, alleging it misused confidential financial information to gain an unfair advantage. Hawaiian won its lawsuit last October and was awarded $80 million in damages. Go! Airlines is appealing the decision. Aloha’s case is still pending. Aloha Airlines is the state’s #2 carrier and has been in business in Hawaii for 61 years. All inter island travelers have benefitted from go! Airlines low pricing policy. Go! Airlines created a price war forcing Hawaiian Airlines and Aloha Airlines to match fares.


I welcome your comments as to specific information you would like to see in future updates. Feel free to contact me at any time. You may also visit my website www.kauai-realestate.com for other useful information. I look forward to hearing from you.

Aloha,
Larry


April 2008

Larry Barton, RA, CENTURY 21 All Islands Kauai
P.O. Box 223700, Princeville, HI 96722
(808) 639-7532 Cell   /   (808) 240-2417 Direct line   /   (808) 826-9884 Fax   /   Email Larry