July – September 2011 Quarterly Newsletter

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In September, sales of both houses and condos on Oahu improved compared to a year ago. Sales of houses increased to 284 compared to 273 a year ago while sales of condos increased to 364 compared to 306 a year ago. Year-to-date sales (January through September) have steadied out over the nine-month period. Sales of houses were at 2,200 compared to 2,252 a year ago while sales of condos were at 3,030 compared to 2,898 a year ago. Total sales (houses plus condos) were at 5,150 compared to 5,230 a year ago.

Sales prices, though, have continued to decline. The median (midway) sales price of houses for the month of September was $570,000 compared to $620,000 a year ago (-8.1%) while the median sales price of houses for the nine-month, year-to-date period was $570,000 compared to $598,000 a year ago (-4.7%). For condos the median sales price for September was $316,600 compared to $330,000 a year ago (-4.1%) while the median sales price for the year-to-date was $302,500 compared to $305,000 a year ago (-0.8%). On page four of this newsletter is a discussion of the use of the median sales price for comparisons versus the arithmetical average (mean) sales price.

The Housing Affordability Index is a measure of the affordability of an area comparing the median priced home to the median priced household income. An index of 120% means the median household income was 120% of what is necessary to qualify for the median-priced home under prevailing interest rates. A higher number means greater affordability. The figures are year-to-date for the past three years for both houses and condos: 2011: 131 condos; 74 houses; 2010: 121 condos; 66 houses; 2009: 115 condo; 64 houses. Looking at the first nine months of the past three years, housing has become increasingly more affordable on Oahu for both condos and houses.

Asia-Pacific Economic Conference

The annual Asia-Pacific Economic Conference (APEC) is the premier forum for Asia-Pacific economies to cooperate on regional trade and investment issues. The annual meeting is held in a different country each year. The 2011 meeting is being held in the United States for the first time since 1993. President Obama selected Honolulu to be the host city. The APEC meeting involves economies that account for 54% of the global gross domestic product, 44% of world trade and 61% of U.S. exports.

Some 20,000 people are expected including at least 19 heads of state and double or triple that number of ministers and cabinet officials. Both President Obama and Secretary of State Hillary Clinton will be here as well as an estimated 2,000 journalists. Local officials have been planning this event for over two years. This will be a huge opportunity for Hawaii to put its best foot forward and garner favorable worldwide publicity. More than $137 million is being spent in public and private funds on a host of upgrades and makeovers. The event is expected to boost Hawaii’s economy by $120 million and even more if attendees return home with favorable impressions of Hawaii.

Those of you that may have been caught up in a travel gridlock created by a President visiting Hawaii may be wondering how they’re going to handle 19 heads of state, all coming and going at the same time. However, that may be of minor concern compared to what they’re going to do with the homeless and protestors in high visible areas like adjacent to the Hawaii Convention Center. Part of Gov. Abercrombie’s plan has been to encourage churches and other groups to stop feeding the homeless in high visibility areas to get them out of those areas. However, this plan has met with only limited success.

As for gridlock, the 19 leaders will attend a Nov 12th (Saturday) reception and dinner at the Koa Hotel in Waikiki. On Nov 13th (Sunday) the leaders will attend a meeting hosted by President Obama at the JW Marriott Ihilani Resort & Spa at the Ko Olina Resort & Marina. Other meetings will be held at the Hawaii Convention Center. The various meetings of leaders will be relatively small in terms of participants, but will obviously involve the heaviest security measures.

Problems With Heirs

Many absentee owners hold on to Oahu real estate so that they can pass the property to their heirs and be able to avoid capital gains taxes. The acquisition basis for the heirs is the value of the property at time of death of the decedent.* Most heirs sell the inherited property shortly after acquisition; therefore, there is little if any gain that will be subject to capital gains taxes. A good portion of our business results from working with heirs. In most cases the decedent is a parent that had been receiving our newsletter for years.

*Note: Special rules apply to owners that passed away in 2010

While it is desirable to avoid unnecessary taxes, problems frequently arise when there are several heirs that have an equal interest in an inherited property. Our experience indicates that when there are three or more heirs, about half the time a conflict will exist concerning what to do with the inherited property. The most common problem is a lack of agreement as to whether the heirs should continue to hold on to the property as an investment or sell it and use their tax-free proceeds elsewhere. Most of the time, the heirs are siblings with very different opinions. Often, one or more of them is cash-short and wants to sell the property immediately while one or more of the others may want to hold on to it.

It is not unusual for there also to be disagreements between the heirs that are separate from viewing the property as a long-term investment. Three examples follow: (1) One or more of the heirs may want to hold on to the home so they can use it on a future Hawaiian vacation. This particularly applies if the home has been used in this regard in the past by some but not all of the heirs. (2) If the property is a former family home, there may be widespread emotional differences between the heirs when it comes to selling. One or more of the heirs may want to hold on to the property so they can have future access to it for themselves and/or their children. (3) One or more of the heirs may be living in the property, often either rent-free or at a rent that is well under market rent.

There are legal steps that heirs can take to force a sale; however, legal actions between family members usually create major discord. Most of the time, the heirs decide on a compromise that normally involves continuing to hold the property for a period of time. On several occasions, we have waited for several years to be able to sell such a property. Our experience indicates that one strong-willed family member often blocks what the majority of heirs favor.

Many absentee owners opt to avoid the possibility of such an intra-family problem by selling their Oahu property, paying the applicable capital gains taxes, and then leaving easily divided cash or securities to their heirs. Every few years I put an article similar to this in the newsletter. Occasionally, an owner will refer to it and add something like, “I love all my siblings but they would have difficulty agreeing on almost anything.”

Average Sales Prices

Price comparisons are usually done by comparing a given period in the current year, usually either a month or the year-to-date, to the same period in the preceding year. This is done to remove cyclic biases. The assumption is made that a cyclic pattern of sales will remain reasonably constant from year to year. Median (midway) sales prices are normally used for comparison purposes rather than the arithmetical average (mean), as the mean is biased by unusually high or low sales prices. For example, if there were 100 sales at an average sales price (mean) of $500,000 and a $10,000,000 sale were added, it would raise the average sales price (mean) to almost $600,000 while the median sales price would be essentially unchanged.

The problem with using a median sale price is that it assumes the distribution of sales remains reasonably constant. That hasn’t been the case on Oahu since subprime lending problems were first identified in March 2008. The subprime lending problems resulted in stricter qualification criteria for borrowers. This had the greatest impact upon first-time homebuyers who often lack the funds for a down payment. As a result, sales of starter or less expensive homes were negatively impacted which caused the median sales price to increase; i.e., the distribution of sales was skewed towards higher prices compared to the same period the previous year.

A second problem unrelated to the mean/median is the fact that the housing market changes over time. A few years ago, it was a Sellers’ Market with multiple offers on new listings being relatively common. Today, it is a Buyers’ Market with buyers having far more negotiating power than they did previously. Today, a buyer spending $500,000 gets a better home than what they would have gotten a year or two ago for a similar $500,000 sales price. Or, from the sellers’ viewpoint, a seller who paid $500,000 for a home a few years ago, would be unlikely to be able to sell it for the same price today even though the median sales price may be unchanged.

Elevated rail project leads Oahu in wrong direction

Extracts from an editorial in the August 26th Pacific Business News (PBN) and an essay in the August 21st Honolulu Star Advertiser

The PBN is in favor of mass transit for Honolulu; however, in their most recent editorial they have taken the position that they no longer can support the Honolulu steel-on-steel, elevated rail project. They are not saying, “Don’t build something.” They are saying, “Don’t build an elevated rail project and don’t build anything as it is currently proposed.” The PBN editorial is based largely on an essay in the August 21st Honolulu Star Advertiser prepared by former Gov. Ben Cayetano, former judge and Office of Hawaiian Affairs trustee Walter Heen, Maui Divers founder and mass-transit critic Cliff Slater, and UH law professor Randall Roth. The four of them carry immense local credibility and are plaintiffs in a lawsuit challenging the process by which the city chose elevated heavy rail over alternatives that would reduce traffic and protect the environment. Key features in the two articles follow:

1. Wayne Yoshioka, recruited from a rail consultant company to head the city’s Department of Transportation Services says, “Traffic congestion will be worse in the future with rail than it is today without rail.” Building a rail system will not solve our traffic congestion problems. The congestion problems will be worse than they would be without a rail system; however, the rail system will not be a panacea.

2. U.S. Department of Energy data shows that except in heavily populated urban centers, rail uses more energy per rider than do automobiles. The smallest urban center with a rail project that is actually energy efficient is four times the size of Honolulu.

3. The city planned a construction cost of $5.3 billion. A Federal Transit Administration study concluded that costs are now likely to be at least $7 billion for the project.

4. The city says that it will need to find another $100 million a year to keep the trains operational once the system is built. This means higher fares and/or higher taxes. Likely adding to operational costs, government data reflects that cities with rail systems typically overestimate ridership by 41%.

5. Renderings by various architects show the stations will be ugly (my opinion). The 20-mile railway will be at least three stories tall, held aloft by 720 large concrete columns. Some of the stations would be 10 stories high. One architect described the stations as “aircraft carriers in the sky.” Plus it will be noisy; imagine the sound of each 72,000-pound steel-on-steel car accelerating to 60 mph then decelerating to a stop every three minutes.

6. The city has revised its job-creation forecast from 17,000 to 10,166. The plaintiffs in their lawsuit maintain that the new number is “pure fiction.”

7. Congress has not approved funding for the project. With all the attention that will be focused on the November deadline facing the debt “Super Committee,” Congressional support for the Honolulu system is certainly not guaranteed.

8. The rail consultant company hired by the city does not have a stellar track record. One audit stated the complaints of “inadequate planning, weak oversight, and lax contract management.”

9. Not mentioned in either the PBN editorial or the essay, the rail stations do not include a stop in either Waikiki or adjacent to the University of Hawaii.

A Mixed Plate of Talk Story

More than 100,000 military members and their dependents call Hawaii home. An ongoing issue has been whether they should be included in state election maps. Kansas and Hawaii have been the only recent states to continue to exclude the military in reapportionment plans. Defenders of this practice argue that very few military members and their dependents actually vote in state elections. For federal elections, military families normally vote in the state they claim as a home of record. Opponents argue that even if military members claim another state as their home of record, they are not visitors to Hawaii. The family pays state general excise taxes, attends school and uses other state facilities. If a non-military spouse works, they pay Hawaii income tax. Many military families are active in community groups. Moreover, it doesn’t make sense not to include them particularly when the defense sector adds $12 billion to the state economy (according to a Rand study) and they are included in federal population counts/redistricting. In June, Hawaii joined the rest of the country (except Kansas). The State Reapportionment Commission reversed the practice of excluding the military and their dependents from Hawaii population counts.

Hundreds of illegal vacation rentals on Oahu could be shut down under a proposed ordinance that would make it easier to enforce the law that bans short-term rentals. The proposed ordinance would require vacation rental owners to include their city permit numbers on any advertisements in an effort to deter illegal businesses. Under the plan, a vacation rental operator would face an initial fine of up to $1,000 for failing to post a permit number. If an advertisement without the number remains in place seven days after a warning, potential fines of $1,000 to $2,000 a day would kick in. The contentious debate over vacation rentals has long pitted neighbor against neighbor. Without a permit, a residence can be rented for no less than 30 days. A moratorium on issuing additional permits was instituted in 1989; however, effective enforcement of the law continues to be a problem.

Restaurants in Hawaii are adjusting to a total ban on shark fins, a pricey Chinese delicacy used in shark fin soup. The state law took effect July 1, 2010 but gave restaurants a year to use up any remaining inventory. Restaurants serving fins will now be fined $5,000 to $15,000 the first time they are caught. A third offense will result in up to a year in prison and a fine of $35,000 to $50,000. The new law replaces a prior law that banned the landing of shark fins at Hawaii ports. Now the aim is to choke-off demand for the product at restaurants. Shark finning, the act of cutting off shark fins and dumping the carcasses in the ocean has resulted in excessive over-fishing. The International Union for the Conservation of Nature says that about one-third of open-ocean shark species are in danger of becoming extinct due to over-fishing. A shark fin is essentially tasteless; the flavor comes from ingredients it’s cooked with, usually a rich savory sauce. Local restaurants are experimenting with imitation replacements that will be significantly less expensive for gourmet diners.

There are no snakes indigenous to Hawaii. Allowed to be loose in the wild, a pregnant female snake could create havoc, particularly to birds. The state has an amnesty program in which owners can turn in illegal animals with no penalty. Still, some owners let their pet snakes loose. Pig hunters in Wahiawa Gulch found a 9-foot-3-inch, 57-pound boa constrictor, on July 4th. Officials believe it was likely someone’s pet in view of its smooth skin and docile behavior. It was the third live snake captured on Oahu this year.

Since 2006, the following national retailers have opened one or more stores in Hawaii: Bath & Body Works, Bed, Bath & Beyond, Chico’s, David’s Bridal, Forever 21, Nordstrom, Petco, Target, Victoria’s Secret, Walgreen’s (11 stores), and Whole Foods Market. National retailers now searching for space include: Anthropologie, Applebee’s, The Capital Grill, H&M, Olive Garden, PetSmart, and Urban Outfitters.

The developer of a regional mall in East Kapolei, similar in size to Pearlridge Center, plans to open the first phase in 2014. The complex, to be named Ka Makana Alii, will be built in two phases and will consist of 1.1 million square feet of retail space, the same size as Pearlridge Center, and 200,000 square feet each of hotel and office buildings. The complex will be built between Renton Road and Kapolei Parkway. The first phase will be a relatively small, neighborhood retail center of about 200,000 square feet on 20 acres. The much larger second phase to be built on 47 acres is expected to open in 2015. Ka Makana Alii was first announced in 2006 and represents an ambitious goal to develop an open-air complex of 22 buildings in an area envisioned to accommodate most of Oahu’s population growth. The project is designed to have 4,500 parking spaces including 2,000 in an underground garage.

Hawaii is the most Democratic state in the nation while the GOP holds the most sway in Utah according to a Gallup Poll released in August. The poll ranked the states based on the difference in the state residents who identify as or lean Democratic and the percentage who identify as or lean Republican. Democrats had a 24-percentage-point advantage over Republicans in Hawaii. Nationwide, Democrats had a slight advantage in the first half of 2011 according to Gallup with 44 percent of Americans identifying as or leaning Democratic and 40 percent identifying as or leaning Republican. Democrats currently have a 43-8 majority in the Hawaii House and a 24-1 majority in the Hawaii Senate. The Governor of Hawaii, the Mayor of Honolulu and the four members of Congress are Democrats. When GOP Linda Lingle achieved her victory in the 2002 gubernatorial race; she became the first Republican governor of Hawaii in forty years, subsequently serving two four-year terms.

Hilo won the Senior League World Series (15 & 16 year-olds) going undefeated in the World Series. It was only the third time a team has gone undefeated. For Hilo, it was the second time they won the World Series, having also won it in 2003.

Seventeen gambling bills were submitted to the state this year with most of them designed to provide Hawaii some form of financial relief. Hawaii and Utah are hyped as the only states in the nation with no legalized gambling; however, this is not technically correct. One form of gambling that has thrived in Hawaii for decades is bingo played at military bases. Every night of the week, bingo games are held at one or more military facilities on Oahu. They are open to both military and non-military patrons. Most involve a buffet dinner where bingo sheets are provided to diners along with their meal. This may be coming to an end. The Navy Captain who has held command of Joint Base Pearl Harbor-Hickam since June has suspended the games at both the Hickam enlisted club and the Hickam officers club while conducting a review to ensure the current program is consistent with regulation and policy.

UH is studying hosting a regular-season football game in Japan. UH Athletic Director, Jim Donovan, met with officials in August at the Kyocera Dome in Osaka about playing a game as early as 2014. Without sponsorship, the cost would be $500,000 to $600,000 to rent the stadium, take care of the hotel and travel for UH and another team. However, Donovan is hopeful of securing sponsors for what would probably be a four-day trip. The UH opponent would likely come from the Mountain West Conference, which UH will join in 2012, or the Pac-12.

Aloha shirts will adorn five U.S. postage stamps next year. Two of the shirts showcase surfers and their boards; one shows fish, shells and starfish; another shows the bird of paradise flower; and one shows the Kilauea volcano. The stamps will be sold at 29 cents, the postcard rate, sometime next year . . . Canoe pavilions, a café, concession stands, a marina and an ocean activity center are among the activities the state is proposing in a master plan for Sand Island. The improvements would be paid for largely by private investors who would then be allowed to develop and operate a 400-500-slip marina on public land.

Admiral Chester Nimitz

Author: Unknown

Sunday, December 7th, 1941 . . . Admiral Chester Nimitz was attending a concert in Washington, D.C.  He was paged and told there was a phone call for him.  When he answered the phone, it was President Franklin Delano Roosevelt on the phone.  He told Admiral Nimitz that the Japanese had attacked us and that he (Nimitz) would now become the Commander of the Pacific Fleet.

Admiral Nimitz flew to Hawaii to assume command of the Pacific Fleet.  He landed at Pearl Harbor on Christmas Eve, 1941.  There was such a spirit of despair, dejection and defeat . . . you would have thought the Japanese had already won the war.  On Christmas Day, 1941, Admiral Nimitz was given a boat tour of the destruction wrought on Pearl Harbor by the Japanese.

Large sunken battleships and other Navy vessels cluttered the waters everywhere you looked. As the tour boat returned to dock, the young helmsman of the boat asked, “Well Admiral, what do you think after seeing all this destruction?”  Admiral Nimitz’s reply shocked everyone within the sound of his voice.

Admiral Nimitz said, “The Japanese made three of the biggest mistakes an attack force could ever make or God was really taking care of America.  Which do you think it was?” Shocked and surprised, the young helmsman asked, “What do mean by saying the Japanese made the three biggest mistakes an attack force ever made?”

Nimitz explained.  Mistake number one: the Japanese attacked on Sunday morning. Nine out of every ten crewmen of those ships were ashore on leave. If those same ships had been lured to sea and been sunk–we would have lost 38,000 men instead of 3,800.

Mistake number two: when the Japanese saw all those battleships lined in a row, they got so carried away sinking those battleships, they never once bombed our dry docks opposite those ships. If they had destroyed our dry docks, we would have had  to tow those battleships to America to be repaired.  As it stands now, the ships are in shallow water and can be raised. One tug can pull them over to the dry docks, and we can have them repaired and at sea by the time we could have towed them to the America. And, I already have crews ashore anxious to man those ships.

Mistake number three: every drop of fuel in the Pacific theater of war is in top of the ground storage tanks five miles away over that hill.  One attack plane could have strafed those tanks and destroyed our fuel supply.  That’s why I say the Japanese made three of the biggest mistakes an attack force could make or God was taking care of America.

Admiral Nimitz was able to see a silver lining in a situation and circumstance where everyone else saw only despair and defeatism.

President Roosevelt had chosen the right man for the right job.  We desperately needed a leader that could see silver linings in the midst of the clouds of dejection, despair and defeat.

There is a reason that our national motto is:

IN GOD WE TRUST.