Rising risk shows home market is turning

A new report indicates Honolulu's housing market may head south

While mortgage risk is in decline nationwide, Honolulu is bucking the trend with a 29 percent increase in risk in October from a year earlier, according to a report released yesterday by a consumer Web site.

Mortgage risk measures the likelihood that homeowners in a given area will not make mortgage payments on time.

Researchers at HomeSmartReports.com reported that their nationwide mortgage risk index dropped 13 percent in October, the 23rd monthly decrease in a row. The index, which is published monthly, dropped in 207 metropolitan statistical areas, most noticeably in Texas and other western states.

Honolulu, which ranked the 100th lowest in mortgage risk out of 379 metropolitan statistical areas surveyed, was among the 172 regions where the index rose, said Michael T. Ela, president of HomeSmartReports.com.

Honolulu's risk index was 1.56 in October as opposed to 1.21 the previous year, indicating that volatility has increased, Ela said.

"The market risk in Honolulu is trending up. It's not a huge risk at this time, but it's notable," Ela said. "Consumers and investors may want to keep their eye on this market because the upward shift is an indicator that the market is turning."

The report assessed the risk for thousands of Honolulu properties and averaged them to get a blended rate for the region, Ela said.

The company looks at several components such as the volume of sales transactions, the number of foreclosures, flipping activity, appreciation and depreciation rates, property histories and other factors such as proximity to freeways and landfills or ocean views and golf courses, he said.

Honolulu-based real estate analyst and appraiser Stephany Sofos said statistics aside, she already has seen anecdotal evidence that Oahu is on a downward cycle.

"If you read between the lines of that report, it means that we are about to start a downward cycle," Sofos said. "There are more pre-foreclosures going into effect and mortgage brokers are starting to see a lot more people trying to refinance out of their adjustable-rate mortgages."

While Honolulu's home values are up year over year, in many local regions prices have dropped, Sofos said.

"I'm seen prices come down anywhere from 10 to 30 percent in Waianae," she said. "When primary and ancillary markets start dropping, that is a sign that most others will soon follow suit."

There are many signs that Oahu's market is in transition, said John Riggins, owner of John Riggins Real Estate.

"We are in the process of seeing a market correction," Riggins said. "It's normal. After every run-up since World War II, we have seen market adjustments of approximately 10 to 15 percent off the high sales price."

Greater volatility in the marketplace also impacts financial markets because it causes investors and lenders to become more cautious, Ela said.

"Several factors are at play here, one of which is that lenders are more cautious now than they were a year ago," Ela said. "In areas where risk is rising, it could become more difficult to get a loan or at least one with terms that are as attractive as they were in the past."

In Honolulu, more buyers are being asked to prequalify for loans, Sofos said. Buyers also are likely to see more lenders asking for higher interest rates and/or larger down payments, Ela said.

"Buyers should be more alert to local market risk conditions before buying a home. It will save them money down the line," Ela said.

On the other hand, sellers have to make sure that they list properties "in range" of what a changing market will bear, he said.

"Properties that are priced too high in a volatile market will sit for longer periods," Ela said.

However, risk in the Aloha State is still low compared to other hot markets, Ela said.

"Hawaii still looks really good," he said.

"The risk index in Detroit, Mich., is 28.77 and Honolulu is still below 2."

Risk and volatility are historically higher in inland and rural regions with lower home prices. While San Diego is still seeing a rise in risk, the rate is still much lower than in California's Inland Empire or the Central Valley, according to HomeSmartReports.

Strong demand for Honolulu from off-shore and foreign investors, as well as locals, has made it a different market altogether, Ela said.

"Hawaii has a more cosmopolitan investment community," he said. "People invest in Hawaii from all over the world."