Paradise Lost

Although I talk ad nauseam about the short-term rental infestation, I don’t often get a chance to talk about the cultural destruction that accompanies it and what it does to local communities. When someone asks me if I think short-term rentals should be allowed, I say “where” and “how much” matters.

All those orange dots you see above are short-term rentals. Does Hawaii really need 36,125 of them when there are only 572,781 housing units in Hawaii per the American Community Survey? Interestingly, when looking at number of households in Hawaii, the number is 488,991 which would mean there are almost 100K more housing units than households. And what of the nurses, doctors, teachers and locals who also need shelter there? The median listing price in Hawaii is $770,000 and the median household income is $98,317. A household making $100K a year could safely afford a mortgage for a home priced around $400K assuming a 20% downpayment and relatively low outstanding debt, using the Fannie Mae affordability calculator. We know that unless our first-time home buyers are getting help from their parents it is unlikely they have such a downpayment or low debt levels. Perhaps this is why a state that many call Paradise is experiencing net negative migration.

Side rant: I find it a bit galling that Fannie Mae states on the main page hosting the affordability calculator that “the cost of housing should be 25% – 30% of your gross (pre-tax) income.” Ahem. So, explain this to me?

Source: FHFA/Fannie Mae

In Q4 2024, debt-to-income levels for the Fannie Mae portfolio are at 38%, just about where they were in Q4 2006. For those out there still doing credit quality gospel singing despite what we’ve seen happening to credit scores after the reporting of delinquent student loans resumed, I say wake up. But, what of those lower delinquency levels today versus 2006?

That’s because Fannie Mae and Freddie Mac have been doing non-performing loan sales since 2015 to push those delinquent loans to the shadows where often they are not reported to credit. And guess what kind of haircut the agencies are taking? This last pool sold at around 43% of the Brokers Price Opinion. I’ve heard through the grapevine that non-performing loans in most states trade around 60-65% (not so much for NYC due to difficulty in foreclosure there). I don’t have the details of the deals, but that discount is hefty. Things that make you go hmmmm.

But back to the topic at hand and our location focus for this post: Hawaii, the one and only state in the United States I have never visited. I’m not exactly sure why I’ve never gone. Time and money are definitely part of it, but it being a huge tourist spot was probably the biggest turnoff for me. I like quiet and there is nothing quiet about tourists. Every time I saw pics they featured hotel sprawl that made me a bit queasy. Over the years folks would tell me about the hidden spots and how to avoid the traps, but I never quite made it there. The Lahaina fires and resulting heartbreak drew my attention, and over the past couple of years I have befriended several accounts on xTwitter who are either locals, or avid market watchers, to gain critical intel on the housing market there. I get by with a little help from my friends, so today you will be hearing from them as well with a focus on just how destructive the speculation has been.

For those not paying attention, what’s happening (and happening quickly) in Hawaii should be a wake-up call and an object lesson in the danger of stimulus and speculation gone wild. Like many destination spots, Hawaii featured large in our COVID fever dreams. Recently, one of my colleagues who has been researching Paycheck Protection Program (PPP) loan forgiveness and home purchases to uncover potential fraud, dove into Maui. This colleague has been working with authorities uncovering fraud in other locales across the country through elbow grease and data analysis. This is no small feat as each county does things a little differently and often the technology is abysmal. What was shared is concerning and similar to what has been found in other cities - evidence that home purchases were made using funds meant to pay employees. And, even if the funds themselves were not directly used for the purchase, these folks certainly were not hurting, calling in to question why the $757 billion in PPP loans were forgiven if they could have been paid back. And, if the loans were paid back how many home purchases would not have been made and would home prices have had such a meteoric rise?

For today’s post, I will share some anonymized examples of potential fraud as well as aggregate numbers in Maui of these suspicious purchases. Additionally, we will hear from three very knowledgeable Hawaii commentators and market watchers, one of which is an appraiser, about the current state of things in Hawaii, how we got here and where the market is headed. The mayor of Maui, for instance, is doing his level-best to save his community and limit the number of short-term rentals there. Much can be learned from his efforts, and his impassioned pleas and plight could provide critical insights for other communities who are dealing with a similar infestation. Meanwhile the equity already lost in Hawaii is concerning and the worst in the nation, according to Cotality, formerly known as CoreLogic. Superprime trouble is also evident with multiple, recent foreclosures on homes priced above $8M.

There is indeed much Hawaii can tell us about our current crisis.

E ho'omaka kākou…