Rates would have to
climb sharply to stall
Hawaii home market

Rising interest rates cut consumers'
buying power, but a small increase
won't 'stop the race' here


Hawaii consumers may find it's going to take more money to make that drive down Easy Street as the Federal Open Market Committee contemplates raising its key rate.

But not to worry, said Bank of Hawaii chief economist Paul Brewbaker, any rate tightening is likely to be gradual.

"It's not one of these death-blow things," said Brewbaker, who expects no increase at Tuesday's FOMC gathering but possible action at either the June or August meetings.

"In NASCAR racing, they have those restricter plates in the race-car engines so the cars can't go faster than 200 miles per hour or something like that. And that's what rising interest rates are going to do. They're not going to stop the race, but it's like tuning down the engine to where there's an upper limit on the speed that can be achieved."

In Hawaii, where housing prices already are at all-time highs, higher interest rates are going to make those homes even less affordable to those who needs financing. On the upside, the state's many retirees on fixed incomes will see higher yields from money market accounts and bonds.

"It's really a question of how much sensitivity there is at present to a rate increase, and I'm inclined to think there's not as much sensitivity as there was, say, in 1994, when the Fed (was beginning a cycle of rate hikes)," Brewbaker said. "There's a much lower inflation backdrop, so rates in the end aren't going to rise that much."

But whether rates rise a little or a lot, consumers' dollars won't have as much buying power as before.

John Gray, executive vice president and division manager of mortgage banking at Bank of Hawaii, said short-term interest rate movements already may be partially reflected in the 10-year Treasury notes, which are linked to mortgage rates.

Rates on 30-year mortgages, which were about 5 1/2 percent two months ago, recently have been hovering between 6 and 6 1/4 percent. A single-family home in Honolulu, meanwhile, had a median sales price in March of $439,000, according to the Honolulu Board of Realtors.

Gray said that an individual taking out a 30-year, 6 1/4 percent fixed-rate loan of $350,000 on a $450,000 house would have monthly payments of interest and principal of $2,143. That's up $156, he said, from $1,987 on a 5 1/2 percent rate available a couple months ago.

If rates move to 7 percent from 6 1/4 percent, Gray said the monthly payment would rise $185 a month to $2,328. An interest rate of 8 percent would increase monthly payments to $2,568.

"Interest rate increases will have an impact because it will cost more money for the same mortgage loan, the same car loan," Gray said. "But there are other things people can do instead of getting a 30-year fixed rate. They can get a five-year adjustable rate loan for the same dollar amount from a monthly payment."

Bank of Hawaii's five-year ARM, which recently was at 478 percent, is fixed for five years and then switches to a one-year adjustable that rolls over each year and has a 2 percent annual rate-change cap and a 6 percent lifetime cap.

"I think traditionally the Hawaii market -- because of the real estate values here -- is a more conservative population and is a fixed-rate market," Gray said. "I think now we're seeing more acceptance of the ARM products as the real estate values increase."

Mary Begier, president of the Honolulu Board of Realtors, said real estate activity in the state continues to be brisk. She said economists that she listens to have indicated the Hawaii and West Coast markets will not recognize any change until interest rates exceed 8 percent.

"In the past few weeks, where we've seen rates go up a quarter or eighth of a point, that's caused people who might have been waiting to see if rates would go up or down to quit waiting and get in," Begier said. "We've had a whole new surge of activity."

While some consumers may be able to absorb incremental rate increases, Begier said the people who would be hurt the most by rising rates are those with lower incomes.

"That's unfortunate because they need the most help," Begier said.

Consumers who take out home-equity loans currently pay interest from 4 1/4 percent to 5 1/4 percent, according to Peter Biggs, executive vice president of consumer products for Bank of Hawaii.

"If the Fed raises interest rates by a quarter point, then we would expect prime rate to go up by a quarter point," Biggs said. "And since our home-equity lines of credit are tied to prime rate, you would see the home-equity lines of credit rates also increase by a quarter point."

Consumers could see their monthly payments on home-equity loans increase anywhere from $1 to $15 a month depending upon the amount borrowed and the amount that interest rates increase, Biggs said.

Consumers who rely on credit cards or who consolidated debt into adjustable rate mortgages could face mounting woes if rates rise, according to Wendy Burkholder, executive director for Consumer Credit Counseling Service of Hawaii. She said debt holders would be on the hook for even higher interest payments if they did not close their credit cards and continued to pile up debt after consolidating their previous debt.

"I expect to see that because a lot of people refinanced with the intent of consolidating debt with their mortgage but didn't close their credit accounts," Burkholder said. "It can kind of be a quiet buildup."

Credit card rates are often tied to the prime rate and will go up as it rises, and credit card rates did not fall as much to start with as long-term loan rates, Burkholder said.

"They're usually always in excess of 16-plus percent. Credit cards did not come down with the market that we're dealing with, which is your average consumer."


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