By January 8, 2019

Buy Luxury Home in a Buyers' Market

Knowledge is Wealth!

So would be luxury homes on elastic rubber bands that actually fell in price in economic downturns (bust cycle) and snapped back upwards during economic upturns (boom cycles such as we are in now). After all, this is how the normal world works in free and fair markets. The same rules would also apply to almost all real estate EXCEPT luxury homes which is a market that seems to exist in a parallel universe encumbered with different laws of market physics. 

When Economists speak of “elasticity (think rubber band) of demand/supply” it simply means how quickly and how far prices react to overall demand and supply. It is also influenced by substitute products and services – all predicated on a free and fair market (no monopolies, colluding oligopolies and government price controls). For example, in the short term gas (petrol) is very inelastic in that you need to get to work no matter the price per gallon (litre). In the longer term though, people may buy more fuel efficient or electric cars thus possibly showing some longer term elasticity of demand. Other examples would be vacation airline tickets (lots of airline and destination choices) which are fairly elastic. However, concert tickets for some (think about your favorite musician) can be inelastic – you have to go no matter the price.  

Sticky at the top luxury home neighborhoods
Sticky at the top luxury home neighborhoods!

Real estate in general is fairly elastic. When most people move they figuratively pick up their home and take it with them – literally speaking, move the equity in it by selling and buying elsewhere. Most people do not have the luxury of owning more than one property -at least not until later in life. If you get transferred, change or lose your job etc. you have to sell – no matter what. If you are fortunate to be selling in a Sellers’ Market (less than 5 months of inventory) with relatively low interest rates where buyers can easily and inexpensively get loans –  you will get top dollar. If you are unfortunate and selling in a bust cycle you could face lowering prices and a glut of similar homes on the market. Regardless, you have to sell – no matter what. 

True Value of the This View
What's the True Value of This View

Luxury homes, on the other hand, are another matter altogether. Most wealthier people, at the end of the day, do not really need to sell – especially if it is their 2nd or vacation home – think Hawaii Loa Ridge, Diamond Head, Lanikai etc. Currently the supply of homes over $1.9M (luxury homes) is at a whopping 14.7 months (see statistics section at the bottom of this newsletter). To put it into perspective, a neutral market – neither Buyers’ nor Sellers’ markets – is approximately 5 to 6 months inventory. There is nearly 3 times this amount of luxury home inventory on Oahu. In median neighborhoods (where people have to buy or sell – no matter what) such a high amount of inventory would see the market and prices crashing into a black hole. It is not just luxury homes but also condos. In my last newsletter, Kakaako Update, I described ultra luxury condo buildings with dizzyingly lofty inventories of 17 months and prices not falling – or not by much. I surmised in July’s Kakaako Update that the reason Ward Village canceled their newest “Gateway” ultra luxury project is that inventories would have eventually hit critical mass of around 20 to 25 months which would then result in an ensuing black hole price crash event. Yes, it is quite “sticky at the top” as in the cheeky graphic above. Wealthier individuals have the means to just “wait it out.” What about the foreign buyers of luxury properties in Hawaii? For example, if you are a Japanese corporation and bought a nice company retreat home on Hawaii Loa Ridge that was 25 years or older, what is the hurry? You are still taking the yearly large % depreciation credit (for the home but not the land) against your corporate taxes in Japan.

What is Inelastic Value?
What is Inelastic Value?

Is there anything on the horizon which could change this inelasticity of demand for luxury homes and condos in Hawaii? If I am a Buyer what can I do to get a great price on one of these luxury homes or condos – regardless of the price inelasticity? What if I am a somewhat desperate luxury home seller and I really do need to sell – now!? I will answer all 3 of these below and the short answer to the 2nd question is to find the person asking the 3rd question! If you are asking the 3rd question then please do not despair, I have a great video for you.

This year the state of Hawaii radically changed the property tax structure which leaves most home owners unaffected but could really take a bite out of wealthier individuals and owners of vacation or 2nd home properties in the ultra luxury range ($3M and higher) – enough to even make Bill Gates say, “ouch.” Let’s take the example of a $4M Kakaako luxury vacation condo buyer (same math would apply for a Hawaii Loa vacation home). On the 1st $1M the tax would only be .45% or $4,500. Not so bad (one of the lowest property tax rates in the US), yeah! However, after $1M in value the tax rockets to .9%. The blended rate on a $2M luxury condo or home would be $4.5K + $9K = $13,500. OK, this is not so bad. However when you do the math on the $4M vacation home or condo that would be $4.5K + (3 X $3X9K) = $31,500 in yearly property taxes – OUCH! Enough to make Bill Gates or even our Japanese corporation described above cringe. Unless your other home is a $10M property in the Hamptons, you would really need to plan on turning your Hawaii luxury vacation home/condo into your primary residence (thus spending more time in Hawaii) with a much lower tax rate – please do not hesitate to contact me for details. These new ultra luxury property taxes, in theory, should lessen the demand for ultra luxury and soften prices. However, as mentioned above – prices are sticky at the top!

As for the 2nd question above, let me paint a picture for you. On multiple occasions I have met ultra luxury home sellers of, say, homes worth $5M (for example) who claim, “The market is hot now – prices are going up everywhere!” and “I want to sell my home now for $10M!” I have to politely explain the news he/she is watching on TV is for $1M homes in median neighborhoods on other parts of Oahu and that he/she would be – in actuality – selling in a Buyers’ Market with 15 months of inventory. “I don’t care, I am not desperate and my home is so unique someone will for surely pay $10M for it!” – quite a typical response! For those who are asking question 2 above, the seller described here is definitely not your guy/gal. Sifting through the large inventory of luxury home sellers to find the ones that are really motivated to sell (as opposed to just letting it sit on the market for a very long time at the same price) is an art in and of itself. It would be too much to talk about in this month’s newsletter but, needless to say, motivated luxury home sellers are out there. First finding and then teasing them out with strategic negotiations and offers is a specialty of mine so please do not hesitate to contact me.

“Won’t luxury homes really start to decrease in price when the economy eventually slides into a down cycle-recession again?” The answer to this is probably very little if at all at the luxury level (below $3M) while ultra luxury (above $3M) will continue to soften (but not crash) due to the new property taxes. We’ll also no doubt see some strategic primary residence shuffling with property owners making Hawaii their official residence (so as to avoid paying the higher property taxes). Counterbalancing, the next recession will probably be mild and most ultra luxury home & condo buyers (especially above $3M) will not be getting loans to buy properties thus interest rates will not factor much into the equation. On the contrary, when the stock market turns bear, wealthy individuals start looking for other places to park their money e.g. real estate, precious metals etc. Also, Japan always plays a major factor in luxury homes and condos in Hawaii as any downturn the US economy will wll most likely be delayed in Japan – when the US stock market goes down gold and Japanese Yen tend to increase in value which could ultimately cause higher demand for luxury homes and condos in Hawaii for Japanese nationals – even during a US recession.

“What if I am a somewhat desperate luxury home seller and I really do need to sell – now!?” For you I have a special “Do Not Despair” video tailor made for you. It is possible to get a fair market price for your home in a reasonable amount of time. Our company, Sachi Hawaii, specializes in successfully selling luxury properties in today’s market. You can find the video thumbnail in this newsletter (above if reading this from a computer or below if from a smartphone) or click the link here. Please do not let the “floating in the clouds” background distract you from the important points and saliency of the overall message I am making in the video (it was one of my first videos – getting much better now and I plan to redo this particular video in the near future). Again, please do not hesitate to contact me.

Though I am busy, if you have taken the time to read this and my other newsletters, I would definitely make a priority to work with you – no matter your price range – Buyer or Seller.

Knowledge is Wealth!


Damon Rhys

*Disclaimer: Any opinions expressed in this newsletter are that of Damon Rhys only and do not necessarily reflect the views of his brokerage firm, Sachi Hawaii Pacific Century Properties. Though knowledgeable including Management Science / Quantitative Economic Decision Science & Master (MPIA) Degrees from the University of California, Damon Rhys is a licensed Realtor in the state of Hawaii. He is not a licensed Financial Advisor. For any specific investment decisions, it is advised that one consults with a licensed financial advisor.