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» On the bubble? » Community property laws vary
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ILLUSTRATION BY DAVID SWANN / DSWANN@STARBULLETIN.COM
Hawaii's real estate has bubbled
and popped but the islands should
be safe for several years
In a recent speech delivered by Robert McTeer, chief executive of the Federal Reserve Bank of Dallas, Hawaii Rotarians were told they may be living in a real estate bubble. We don't agree at all with McTeer's assessment of the Hawaii real estate market.
First off, rarely does real estate exhibit the "bubble" behavior that we've come to associate with the stock market. True, the Hawaii market experienced a speculative bubble that drove prices significantly higher than normal in the late 1980s. This was spurred by a Japanese buying spree and it took nearly eight years after that experience for the market to reach equilibrium again. On the mainland, Palo Alto, Saratoga and Hillsborough in the San Francisco bay area market also recently experienced bubble-like implosions driven by dot com mania. As in the Aloha State, prices got way ahead of themselves and came down about 30 percent from their 2000 peak.
In these instances one could make the case that the bubble did burst, but historically this is very unusual and applies only to a specific areas. Other locales on the Mainland such as Buffalo and Trenton are undervalued by more than 9 percent according to our data and markets such as Rochester or St. Louis have been flat for years and may remain that way for quite a while.
While it may be fashionable to describe the emergence of speculative real estate bubbles in particular areas, one simply cannot characterize the entire U.S. housing market as being anywhere near bubble status. With the nation consisting of literally hundreds of independent housing markets (we currently track 350), it's more accurate to visualize the United States as a giant patchwork quilt consisting of tiny feudal real estate kingdoms all marching to their own laws of supply and demand. This disparate set of domains are all subject to different economic influences such as population and job growth, employment and household incomes, and the availability of zoning permits and the like.
There also are mitigating factors in the real estate market that preclude a 1929 or 1987 style stock market crash. Real estate by nature is illiquid compared to the equity and commodity markets. You don't just bail out of a house overnight the way you'd dump WorldCom shares. Unlike stocks and commodities, there are no margin calls in real estate. If prices go down there is no call by the lender for additional equity for loan pay down as long as you continue making your mortgage payments.
The upshot is that home prices have historically been "sticky" on the downside. Prices may have moved up rapidly and now are slowing or even declining, but typical owners will continue to stay in their houses.
A pure investor can move out of markets that are less appealing and into more attractive markets, but consumers still need a place to live and can not separate the investment strategy from the consumption decision.
Our research, which includes more than 100 years of data in some instances, tells us that rather than a sharp decline, even significantly overvalued markets will tend to move sideways for a number of years. In the case of Honolulu, which according to historical data and our models, is slightly undervalued at the present time, our forecasts point to median prices rising by about 20 percent over the next five years. It is worth noting that city or state median prices as commonly reported by most organizations can be very misleading.
The reality is that there will be large differences in the performance of individual neighborhoods, with many of the lagging markets such as Central and West Oahu doing much better, while markets that have already have had large upmoves such as East and Windward Oahu, experiencing slower rates of appreciation.
Our conclusion is that there is no current Hawaii real estate bubble.
If you're worried about a serious downturn in the Aloha State, look for a sharp decline in employment or a significant amount of new construction and unsold inventory of new and existing homes. This might foretell a more precarious market condition.
This state of affairs certainly does not exist in Hawaii where inventory of both new and existing homes for sale is at historically low levels. This, coupled with the fact that on Oahu there is a limited amount of land on which to build and the expectation that interest rates will remain favorable for the foreseeable future should buffer Hawaii from a meaningful decline in home prices over the next several years. If you're planning on living in your current home for the foreseeable future, don't lose any sleep over its value. There are plenty of more important things to worry about than a Hawaii real estate bubble.
Michael Sklarz, a resident of Honolulu, is the chief valuation officer for Fidelity National Information Solutions and a consulting economist to The Federal Reserve Bank of San Francisco. Norm Miller is holder of the West Shell Jr. Professorship of Real Estate at the University of Cincinnati.
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YOUR ESTATE MATTERS
Community property laws
bear watching as they
differ among states
In estate planning, the nature of the property involved can make a significant difference in determining the best way to plan for its disposition.
Community property, in states recognizing it, is a form of marital property derived from the labor of either party to a marriage.
States that have broad laws recognizing community property are Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington and Wisconsin.
These states are considered community property states. Hawaii is not a community property state. However, property owned in a community property state may be recognized as community property in other states. In Hawaii, real property owned in a community property state by Hawaii residents and held as community property will be recognized as community property in Hawaii.
In a community property state, if a husband or wife receives a paycheck, it is community property. As such, it is really owned one-half by each of the members of the "community," i.e., the marriage. This is the case even though the check may have been issued only to the person who earned the pay and is sent to a checking account in that person's individual name.
This unique form of property can raise interesting opportunities and potential pitfalls when doing estate planning.
Upon your death, the "basis" in your property changes or "steps up" to the fair market value of the property at that date. "Basis" is the benchmark for income taxation for the property. If the property is sold above that mark, there would be tax on that gain. In a non-community property state, a typical couple would hold property separately or as joint tenants with rights of survivorship. Either way, with rare exceptions, only one-half of the couple's property qualifies for the favorable "step up" in basis. This is fair because only one-half is included in the estate of the spouse that has died.
However, with community property, the entire value of the property receives a step up in basis, even though only one-half of the property is included in the estate of the pre-deceasing spouse. This is a windfall for spouses in community property states. Hawaii will recognize community property created in another state. Accordingly, you should think twice, from a tax perspective, before severing community property.
If a person gives away some of their assets and retains certain powers over the property, it will still be taxed in his or her estate. When community property is involved, it can sometimes be confusing to identify whose property is whose.
In our earlier example, one-half of the wife's paycheck is really the husband's property, even though it is in an account with only the wife's name on it. Thus, when the couple decides to give away an asset, they must be quite careful to determine whose property it really is. If the wife gives her property to a trust she has set up and the husband is trustee, it would not be included in either spouse's estate if properly drafted. However, if husband's property is placed in the same trust, it is likely it will be included in husband's estate because he has control as trustee. So, if wife contributes her paycheck, there will be inclusion in husband's estate because it is really one-half his!
As you have seen, community property can be a powerful tool but also can be quite tricky. A qualified estate planning attorney can help you determine if you have any community property and the best way to deal with that property. If you have moved to Hawaii from a community property state, special planning techniques exist that could save taxes.
Attorneys Judith Sterling and Michelle Tucker are partners in the Honolulu law firm of Sterling & Tucker. Reach them through www.sterlingandtucker.com or www.hawaiielderlaw.com, or by calling 531-5391.
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