Maui Real Estate Market: What to Watch for in 2018
We are a few weeks into the New Year and the Maui real estate market appears to be following similar dynamics to what we have experienced over the last couple of years.
That is a continuation of price appreciation and relatively limited inventory. For the most part, it remains a seller’s market. That said, there will be a couple of things in particular to keep a close eye on this year.
This is something of a no brainer as the lack of affordable housing isn’t exactly something new on Maui. That said, I expect the conversation on affordability to heighten for a number of reasons. A considerable part of the local population is priced out of the housing market. With middle class wages relatively flat, a steady increase in prices and relatively slow pace of new construction, the situation is worsening.
As of Jan. 22, there were 502 homes listed as active on the island. Only 16 are priced below $500,000. That is a pretty shocking number. Buyers may find their buying power diminishing as the year progresses with the Federal Reserve expected to raise interest rates more this year. The increase in borrowing costs may push additional buyers out of the market who are already stretching to qualify for loans. Depending on how much rates increase, that could slow the rate of appreciation for property values at the entry levels of the market.
This is a big election year locally with a lot of state and county level offices being contested. I suspect that there will be considerable discussion of affordable housing in the race for the mayor and county council seats. Candidates will be challenged to come up with solutions that incentivize more affordable and work force housing while also addressing growing anti-growth sentiments. With high land costs, material costs and labor costs making new construction expensive, the solutions won’t be easy.
The Impact of Tax Reform
The implications of the changes in the tax code on the Maui real estate market are not entirely clear. Anecdotally, it does not appear that many buyers have been deterred by the decreased real estate deductions in the new tax code.
That said, a month of sales activity doesn’t give us a very complete picture. It may be the better part of a year or more before we know exactly how our market is impacted. New caps on mortgage interest deductions and the cap on deductions for state income and local property taxes have many economists thinking that higher priced real estate markets are likely to take a hit from the change in tax code. The thought is that the previous deductions were baked into pricing in higher priced real estate markets. Taking away from those deductions may cause prices to recalibrate due to the higher cost of ownership.
The change in tax code won’t just impact local buyers buying more expensive properties, it will also have an impact on second home buyers. If they have a larger mortgage already on their primary residence, they may not be able to write off any of the mortgage for their second home. Some of Maui’s biggest feeder markets for second home buyers come from the West Coast. Many of these buyers are more likely to see their net taxes go up due to changes in deductions on state and local property taxes. Will that be enough to deter some of them from purchasing the vacation rental condo on Maui that they were thinking about buying?
The one part of the market that may see a boost is the ultra luxury home market. The highest income earners were some of the biggest beneficiaries of the recent changes in the tax code. I could see sales of homes and condos priced $2 million or above boosted if they deploy their additional wealth into discretionary purchases like a second home.
With many of these properties being purchased as cash transactions, that will likely limit the impact of mortgage deductions.
I also expect that there could be a couple of indirect effects on the real estate market via the tax bill. We have already discussed the potential for increased interest rates this year. Some economists are suggesting that the tax cuts could lead towards inflation as an already strong economy overheats with additional stimulus. If the Federal Reserve sees too much inflationary pressure, the pace of interest rate increases could accelerate. The cut in corporate tax rates may also have an indirect impact on the market. A lot of economists expect that a good portion of the corporate tax savings will go into stock buy backs. The stock buy backs combined with a strong overall global economic picture have some economists projecting a continuation of the bull market that has been going on for the last nine years.
I have argued that there is a correlation between the stock market and second home buyers on Maui. The better the stock market does, the more likely people are to purchase a second home on the island. The strong stock market enables prospective to cash out on a portion of their earnings and make a discretionary purchase. The strength of the market may also just be enough to provide the psychological boost to make a large discretionary purchase like a second home.
As you can see, the dynamics of the local real estate market remain complicated. On a fundamental level, we have limited supply and a strong economy. The supply issues alone may be enough to keep prices going up. Affordability issues, the potential for increased borrowing costs, higher taxes for some buyers and decreased tax incentives could lead to an erosion of some of the demand we have seen. It is unclear how the push and pull of these dynamics will ultimately impact the market throughout 2018 and the years beyond.
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