Observations in Hawaii Real Estate - Part 2

Update to my post last month about the fixer-flipper influencer and his listed property on the market…

My guess last month was that he would drop the price two more times in July.

In fact, he has surpassed my estimate and dropped it a total of four more times in less than 30 days. In addition, he has also added a credit of $5,000 in closing costs.

As of July 25, the listing price is $1,115,000 with a credit of $5,000 at closing, so let’s say $1,100,000.

This tells me he is really DESPERATE to sell.

This also tells me that he doesn’t know what he is doing.

He is trying to maximize his sale price, understandably, but since he owns the property as well, he is not making smart, objective decisions.

If a property stays on the market for that long, dropping it $10k every other week for four months doesn’t work. It just shows impatience.

What was the definition of insanity, again?

Oh, wait… doing the same thing over and over…and over again, expecting different results… or something like that.

He drops the asking price by $10k every other week, and for the last month, he starts dropping it by $10k every week instead.

My suggestion

He needs to reduce the asking price by $50k-100k+ at once, and then negotiate with a buyer that brings in a reasonable offer. I mean, he has already reduced the price $185k from asking, and he had put up the listing when the market was still hot.

He’s not firm on his number and doesn’t know what he’s looking for or willing to settle for.

I’ve seen listings where the seller was firm on the number so it will stay on the market for eight months or more, waiting for the right buyer who was willing to buy it at the asking price. Experienced sellers and agents know when they have priced it right and are just waiting for the fish to bait, and what they’re not willing to settle for. No low ballers!

But, if this seller is already willing to reduce it by $185k, it just means the property has garnered very little interest. He’s looking for a quick sell at this point because he’s tired of sitting. In fact, he has so little patience, that he was only willing to wait a month, then he starts dropping his asking price little by little.

Unfortunately, he also bought when the market was hot. Interest rates were low at that time. The average 30-year fixed mortgage rate in February 2022 was hovering around 3.5-3.9%, but home prices were already high. Higher than the start of the pandemic anyway, when home prices were still “average”, but interest rates were low.

If he priced it to sell when he first listed it, maybe $1.1m, and just sold it quickly by willing to sell for less, he could have at least walked away with about $30-65k, which is a decent amount of money for a month or two’s worth of work.

This is of course, factoring about $40k in renovation costs. If his renovation did cost more than what I estimated, then he would end up making less than that.

But my guess is that he tried to make a quick $135k profit (after renovation costs), and thought the market could handle a listing of $1.3m.

It is an old house, in a small lot, with a weird floor plan. Remember, only the kitchen was on the first floor, and the living room and bedrooms were on the second.

The entrance to the home looked like it was on the 2nd floor, so imagine coming home from grocery shopping, carrying your groceries up the exterior stairs, then walking down the interior stairs to put them away.

Secondly, it is on a small lot, and the floor plan of each unit is divided in half. And each unit had two stories. It would actually be a better use of the space to have one unit take up the entire floor, then have the second unit on the second floor.

The advantage of the property is its location. It is zoned in A-2 apartment zoning, so these are 2 perfectly legal units. It might have made more sense to sell it cheap, to a developer who would tear down the old home, and rebuild with a more functional floor plan.

And in order to make the mortgage work, each unit would have to rent for $2,500/mo. This is still excluding any savings for CapEx, vacancy, repairs, insurance, annual property taxes, GET etc. This is just to break even on the $5,019/mo mortgage!

**Assuming a selling price of $1.1m and 20% down with a mortgage interest rate average of 5.54%

Doing small, cheap, cosmetic upgrades is not going to automatically command a $340,000 increase in value over a month’s span.

Simply put, he overpaid on the house, and was banking on Hawaii real estate being the typical “Hawaii real estate”, where home values just kept going up. You know what they say - hindsight is 20/20.

But now that the average 30-year fixed rate is now about 5.54%, homes prices will start to trend downward. I think this will happen as long as the average 30-year fixed keeps going up.

Will mortgage rates keep going up? I’m not an economist nor a fortune teller, so my guess is just as good as yours.

The Federal Reserve does not set mortgage rates. So mortgage rates are not directly impacted by the Fed’s actions like they are with certificate of deposit (CD) rates. However, mortgage rates are indirectly affected, when you think about what happens when the Fed increases the prime interest rate. The Fed raising the prime rate makes it more expensive for banks to borrow money, which in turn gets passed to their consumers. Interest rates on consumer borrowing, including mortgage rates, tend to go up. The key word is tend.

The Fed is expected to impose another hike this Wednesday in a continued effort to combat inflation.

I see mortgage rates increasing to 6-7% by the end of the 2022 year. Maybe even flirt to 8%, before coming down to stay steady around 4-5% in 2023. We will most likely not see the rock bottom rates that we saw in 2020 and 2021. Remember - the goal of low interest rates is to encourage spending.

When Covid-19 first hit, many people were laid off. People are not buying homes when they need to worry about keeping their current roof or providing food for their families. Many people also didn’t know what to expect - how long the pandemic was going to last, or even how long their job was going to last. People were more worried if they were going to have a job in the next few weeks or months.

At the onslaught of the pandemic, the Federal Reserve’s target rate dropped to near zero, encouraging banks to offer heavily discounted mortgage rates to those who could afford it.

Thus, the rest is history: Low mortgage rates did spur a new interest in home-buying. But low mortgage rates, with low inventory, not enough to keep up with demand, led to record high home prices. And other news about inflation, all around. Not just home, but food, rent, gas (another complicated topic). And it leads us back to a circle, where we are today.

What are your predictions for this featured listing next month? My guess was that it was going to sell for around $1m, but now, if that. Mortgage demand has dropped to record lows in 22 years so I only see buyers willing to pick up this property for the right terms and the right price.

I'll be keeping my eye on this one, and it'll be interesting to see how many of my wild guesses actually become true. What are your predictions on this listing, the housing market, and the economy? I'll be interested to read your thoughts.

A hui hou,