Paul Brewbaker; Economy is going to get better, even if it doesnt feel like it…

Summary of Topics of his RAM Economy future forcast*

“Maui Housing: Out of the Abyss?” Paul Brewbaker spoke on Friday about the economy and Hawaii housing. Have we dug ourself into a deep enough hole? How high can it bounce? Those are some questions he spoke about as well as the following information;

If Maui real estate prices haven’t already hit rock bottom, they’re not going to get much lower, economist Paul Brewbaker said Friday.

He told the Realtors Association of Maui that his take-home message was that people shouldn’t wait too long to buy if they’re hoping to find bargains.

“It’s not worth looking for that last five dollars,” he said.

Several weeks ago, Brewbaker told another Maui audience that the recession was over, even in Hawaii.

On Friday, he spent much of his hour in front of 120 real estate professionals at the King Kamehameha Golf Club defending that pronouncement, trying to explain why the hard times are past, even if they don’t feel like it.

Sure, it is a jobless recovery, he said.

When a dip in the business cycle ends, “the last thing you do is hire somebody. First, you work your employees to death. Then you realize your buddy is going to steal them and pay them more.”

That’s when employers start hiring again, he said.

Brewbaker noted that the unemployment rate on Oahu, 5.5 percent, is about what has been considered “full employment” on the Mainland. The Neighbor Islands are lagging, but Brewbaker tried to explain that snapshots of statistics have to be interpreted in a longer time frame.

One Realtor worried about a large oversupply of housing for sale: about 3,000 listings today at the Realtors Association’s Multiple Listing Service, and probably another 1,500 in various forms of foreclosure and distress that are going to be piled on top of that.

But Brewbaker said that wasn’t so bad.

The backlog of foreclosures is more attributable to Maui’s distance from the bankers and brokers who are doing the paperwork to work out the problems than to any real increase in distress.

“I can’t tell you how many people have told me about sales on the courthouse steps being postponed,” he said.

On the Mainland, where the technocrats are, things are just moving faster, he said.

A couple of years ago, Maui’s proportion of housing in distress ranked it among the five best states. The proportion hasn’t changed much, but now Maui ranks in the middle of the pack. But that’s just because more of the Mainland’s problems have been disposed of.

The uptick in housing prices in California foretells an uptick here, since, as Brewbaker puts it, “Maui is the western edge of Orange County.”

Brewbaker also noted very little new housing is being built, creating additional pressure on supply that will drive prices up.

Building permits are running about 400 a year, only a fifth of past experience. For several decades, he said, the proportion of housing starts compared with the increase in population has been falling steadily, mostly due to government regulations.

Maui County’s snail’s pace in keeping up with demand for infrastructure is only further suppressing the development of new housing, he said.

“The Department of Water Supply looks more like the Department of Water non-Supply,” he said.

Put it all together, and it looks as if the fall in prices – around 30 percent on average since 2007 – probably is about over, he said.

Brewbaker acknowledged that agents are going to feel resistance from clients, who might still be wary.

The Federal Reserve has said it intends to keep interest rates very low. Brewbaker does not consider worries about a “double-dip” recession compelling.

Although the current recession was bigger than any of the previous six recessions – although at only about 3 percent contraction nationally, not even one-fifth as bad as the Great Depression – when graphed, it takes its place in the up and down curve of a business cycle.

It isn’t a double dip – that is, a new episode of the recession that ended in 2009 – that should concern people, Brewbaker said, but the occurrence of the next regular recession “in 2019 or whenever.”

He did note some oddities of the current Maui real estate situation. Prices of single-family houses and condominiums have converged, while they used to be further apart, the way they still are on Kauai.

Although, he said that there might be some structural changes (there was an explosion of condo building at the destination resorts, which aspired to more luxury), he expects the price gap to re-emerge.

Summary of Housing Market Outcomes:


􀂃 Hawaii proved to be less of “bubblicious” housing markets, although

Maui experience is more similar to California than Oahu

􀂃 “Overshoot” of house price declines after Lehman resulted in modest

bounce in winter/spring 2009—stabilization anticipated for some time

􀂃 Sales volumes, on the other hand, have clearly rebounded and probably

have begun a long period of growth through the mid-teens (2008-

20teens) similar to to 1998-2005 experience

􀂃 Notable anomaly, near equivalence of single-family and condominium

prices towards end of 2007, appears to have partly unwound

􀂃 Higher-order moments of underlying home price distribution are not

definitive, but suggestive regarding whether valuation turning point has

commenced—best guess is fairly stable valuations through 2012 as

bottom-fishing absorbs distressed properties

􀂃 Maui does not seem to have an inventory overhang like most distressedmainland markets, and home production is way too low for glut

Tourist Arrivals:

􀂃 Supply reduction from airline shutdowns (Aloha, ATA; March/April 2008)

preceded consumption and investor pullback before and after the

collapse of Lehman Brothers (September 2008)

􀂃 Domestic arrivals stayed at bottom of March-September 2008 drop

through spring 2008; international arrivals bounced back from the H2N1-

A shock (spring 2009)

􀂃 Maui and the Neighbor islands were exposed to greater losses from the

airline shutdowns than Oahu

􀂃 Maui less dependent on international arrivals than Oahu, so its exposure

to domestic arrivals declines cannot be “diversified away”

􀂃 Hotels now starting to stabilize as room rates have dropped enough to

start rebuilding occupancy, especially on Maui

􀂃 Lift commitments for summer 2010—after seasonal adjustment—point toincipient recovery in seasonally-adjusted volumes in second half 2010


It’s the economy, stupid?

􀂃 Recession “officially” started in December 2007

􀂃 But consumers did not “capitulate” until well after Aloha/ATA shutdown

􀂃 Remember—oil prices rose through summer 2008 (some “recession”)

􀂃 By the time Lehman Brothers collapsed, arrivals were finished falling

􀂃 Tourism for most of the remaining 18 months

Supply, demand, complements and cross-elasticities

􀂃 Aloha/ATA are a natural experiment: instantaneous travel supply drop

􀂃 Mixed with first rising, then falling oil prices (commodity bubble!)

􀂃 Travel demand fell with consumer demand generally, later in 2008

􀂃 Decrease in hotel room rates (complementary good) cushioned the fall

􀂃 Stabilization—through H1N1 event—established base for recovery

􀂃 Both supply and demand are necessary for recovery ⇒ expansion


􀂃 Macro prudential regulation

􀂃 Time-varying parameters (capital, liquidity, provisioning policies)

􀂃 Increase capital requirements to tamp down asset price “bubbliciousness”

􀂃 Form new regulator: Federal Reserve has its hands full

􀂃 Problem identifying bubbles: false positives

􀂃 Orderly resolution of systemically-embedded financial institutions

􀂃 More on varying capital requirements

􀂃 Excessive notional amounts of many securitization structures

􀂃 Excessive speed with which financial innovations proliferate

􀂃 Limit systemic exposure with higher capital requirements on CDOs, CDS

􀂃 Lower requirements in interest rate swaps, others with proven track records

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