mid-year real estate review · 1. uhero (may 2014)*: “incremental [tourism] gains for 2014 will...

Copyright 2014Copyright 2014Paul H. Brewbaker, Ph.D.Paul H. Brewbaker, Ph.D.

Oahu housing: extending economic expansion?Oahu housing: extending economic expansion?

slides prepared for a presentation to theslides prepared for a presentation to the

Distinctive Homes Hawaii, Honolulu Distinctive Homes Hawaii, Honolulu HomeLoansHomeLoans,,Old Republic Title & Escrow of HawaiiOld Republic Title & Escrow of Hawaii

MidMid--Year Real Estate ReviewYear Real Estate ReviewWaialaeWaialae Country ClubCountry Clubbyby Paul H. Brewbaker, Ph.D.Paul H. Brewbaker, Ph.D.TZ Economics, Kailua, HawaiiTZ Economics, Kailua, HawaiiJuly 31, 2014July 31, 2014

11

Slide copyright 2014

1. Near-term: extending the current economic expansionThe recession ended in June 2009, the expansion now is five years oldAverage expansion duration, post-1982: eight years (longest: ten (1990s))

2. Hawaii still growing, but several sectors experienced “sudden stop” in 2013

3. Long-term: relieving capacity constraintsPopulation growth slowed, but homebuilding still inadequateTourism footprint hasn’t changed in two decades

4. Challenge: will investors bet on Hawaii’s future if tourism is capacity-constrainedand federal government is shrinking?

Framing the outlook: if the economy is growing, Framing the outlook: if the economy is growing, then why haventhen why haven’’t General Fund Revenues? t General Fund Revenues?

22


in months Mean Median Max Mean Median Max

1857-1928 25.5 22 46 20.5 18 65 *1929-1982 46.2 39 106 ** 13.8 11 43 †

1983-2010 95.0 92 120 ● 11.3 8 18 ∆

*The Panic (Oct. 1873 - Mar. 1879)†The Great Depression (Aug. 1929 - Mar. 1933)**Camelot (Feb. 1961 - Dec. 1969)●dot.com (Mar. 1991 - Mar. 2001)∆The Great Recession (Dec. 2007 - Jun. 2009)

Expansions Contractions

Duration of economic expansions and contractionsfrom NBER troughs to peaks and back again

U.S. economic cycles: five years of expansion, U.S. economic cycles: five years of expansion, past the halfway point?past the halfway point?

Source: National Bureau of Economic Research (http://www.nber.org/cycles.html)

33


-8

-4

0

4

8

2002 2004 2006 2008 2010 2012 2014

U.S. real GDP growth through midU.S. real GDP growth through mid--20142014

2.1% p.a. since mid-2009

Per

cent

Sources: BEA (http://bea.gov/national/index.htm#gdp)

U.S. recession shaded

Polar Vortex

SandyTohoku

Preliminary data released July 30)

44


44

48

52

56

60

64

68

72

2000 2005 2010 2015 2020

Hawaii quarterly real personal incomeHawaii quarterly real personal income——short of the short of the 22--3% growth rates forecast by DBEDT, UHERO3% growth rates forecast by DBEDT, UHERO

@1.25%

@3.2.%

Billion 2013$ (s.a., logs) Percent change, y-o-y

U.S. recession shaded U.S. recession shaded

Real growth

Real income

Annualized real growth rates are based on trend regressions 1998:1-2005:1 and 2010.3-2014.1

-4

-2

0

2

4

6

8

2000 2005 2010 2015

Source: BEA, BLS; deflation and seasonal adjustment by TZ Economics; for forecasts see Hawaii DBEDT (May 8, 2014) and UHERO (May 23, 2014) (http://dbedt.hawaii.gov/economic/qser/outlook-economy/ and http://www.uhero.hawaii.edu/assets/14Q2CountyForecast-PublicSummary.pdf)

55


Employment trends to characterize the expansionEmployment trends to characterize the expansion

[This page intentionally left blank]

66


0

2

4

6

8

10

02 04 06 08 10 12 14

Hawaii unemployment rates starting to settle?Hawaii unemployment rates starting to settle?

OahuMon

thly

, per

cent

, s.a

.


Neighbor Islands

Source: Data through June 2014(P) from Hawaii DLIR, DBEDT; seasonal adjustment by TZ Economics

4.0 %

5.1 %No Aloha

77


380

400

420

440

460

480

130

140

150

160

170

180

2002 2004 2006 2008 2010 2012 2014

Oahu(left scale)

Thou

sand

jobs

(log

sca

le)

Oahu and Neighbor Isle nonOahu and Neighbor Isle non--agricultural job counts: agricultural job counts: parallel recovery, somewhat asynchronousparallel recovery, somewhat asynchronous


Neighbor Islands(right scale)

Thousand jobs (log scale)

Source: Hawaii DLIR, DBEDT; seasonal adjustment, trend extractions using Hodrick-Prescott filter by TZ Economics

88


380

400

420

440

460

480

130

140

150

160

170

180

2002 2004 2006 2008 2010 2012 2014

Oahu(left scale)

Thou

sand

jobs

(log

sca

le)

Trend components of nonTrend components of non--agricultural job counts: agricultural job counts: Oahu was leading, is it decelerating?Oahu was leading, is it decelerating?


Neighbor Islands(right scale)

Thousand jobs (log scale)


99


540

560

580

600

620

640

02 03 04 05 06 07 08 09 10 11 12 13 14 15

Thou

sand

jobs

(log

sca

le)

NonNon--agricultural payroll employment in Hawaii:agricultural payroll employment in Hawaii:statewide statewide decelerationdeceleration of job growth since 2012of job growth since 2012



SARS

1010


Normalized employment trends: U.S. has grown Normalized employment trends: U.S. has grown faster, farther from a deeper trough; Hawaii boggedfaster, farther from a deeper trough; Hawaii bogged

-2

-1

0

1

2

-2

-1

0

1

2

2004 2006 2008 2010 2012 2014

U.S.Hawaii

Scales are standard deviations from means for the period June 2003 (i.e. post-SARS) through June 2014, for seasonally-adjusted payroll employment



1111


Recap macro conditionsRecap macro conditions

Economy passed 5th anniversary of official end of U.S. recession in June

Hawaii economic growth has proceeded slowly, 1-2% since 2009 (2-3% 2000s)

Job growth has slowed recently, falling behind pace of mainland

Economic growth forecasts predicated on housing-led second-half of expansion1. UHERO (May 2014)*: “Incremental [tourism] gains for 2014 will be slight. Beyond this year,

available capacity will limit further visitor industry growth.”2. DBEDT (May 2014)‡: “Visitor expenditures are expected to increase 4.6 percent in 2016

and 4.5 percent in 2017.”3. UHERO (May 2014)*: “The construction expansion has proceeded further on Oahu..., but it

is also poised to contribute growth momentum to all counties going forward.”4. DBEDT (June 2014)†: “Change the mindset from controlling growth to generating growth.”

*UHERO (May 23, 2014) (http://www.uhero.hawaii.edu/assets/14Q2CountyForecast-PublicSummary.pdf)‡Hawaii DBEDT (May 8, 2014) (http://dbedt.hawaii.gov/economic/qser/outlook-economy/) †Richard Lim, Director Hawaii DBEDT (June 20, 2014) “Hawaii’s Economic Future,” presentation to The Counselors of Real Estate

1212


Last yearLast year’’s avg. singles avg. single--family sales volumes, pricesfamily sales volumes, prices

0

1

2

3

4

5

260 280 300 320

June 2013 - June 2014Observations 13 months

Mean sales 280.782Median 277.1351Maximum 313.2524Minimum 258.0491Std. Dev. 18.10645Skewness 0.731100Kurtosis 2.386102

0

1

2

3

4

5

640 660 680

June 2013 - June 2014Observations 13 months

Mean price $665.843Median 666.6329Maximum 685.7504Minimum 640.6926Std. Dev. 15.28883Skewness -0.311829Kurtosis 1.748943

Monthly volumes Prices (thousand $)

No. of months

No. of months

1313


Trends in Oahu existing home sales volumesTrends in Oahu existing home sales volumes


1414


Oahu existing singleOahu existing single--family home sales volumes family home sales volumes

100

200

400

1990 1995 2000 2005 2010 2015

Seasonally-adjusted

Mon

thly

clo

sing

s, s

.a. (

log

scal

e)

U.S. recessions shaded

Source: Honolulu Board of Realtors; seasonal adjustment by TZ Economics

Not seasonally-adjusted

1515


Oahu existing singleOahu existing single--family home sales volumesfamily home sales volumes

100

200

400

1990 1995 2000 2005 2010 2015

Trend component

Mon

thly

clo

sing

s, s

.a. (

log

scal

e)


Source: Honolulu Board of Realtors; seasonal adjustment, trend extraction using Hodrick-Prescott filter by TZ Economics

1616


SingleSingle--family sales recovery has come in 2 stagesfamily sales recovery has come in 2 stages——seasonallyseasonally--adjusted sales flat since last summeradjusted sales flat since last summer

150

200

250

300

350

400

2006 2008 2010 2012 2014

c.280 / month

Mon

thly

clo

sing

s, s

.a. (

log

scal

e)


Lehman Brothers


1717


Oahu existing residential condominium sales:Oahu existing residential condominium sales:monthly trading volume around 400; prices to $370kmonthly trading volume around 400; prices to $370k

100

200

400

800

1990 1995 2000 2005 2010 2015

± 400 / month

Mon

thly

clo

sing

s, s

.a. (

log

scal

e)


Source: Honolulu Board of Realtors; seasonal adjustment TZ Economics

1818


Trends in Oahu existing home sales pricesTrends in Oahu existing home sales prices


1919


100

200

400

800

1995 2000 2005 2010 2015

Oahu monthly existing home sales prices:Oahu monthly existing home sales prices:this is not the 90s; this is not the housing bubblethis is not the 90s; this is not the housing bubble

Thou

sand

$, s

.a. (

log

scal

e)

Sources: data through June 2014 from Honolulu board of Realtors; seasonal adjustment by TZ Economics

SingleSingle--familyfamily

CondominiumCondominium


2020


Oahu existing singleOahu existing single--family home prices family home prices ratcheting upward slowlyratcheting upward slowly

200

400

800

00 02 04 06 08 10 12 14

Thou

sand

$, s

.a. (

log

scal

e)



2121


When $700k isnWhen $700k isn’’t quite $700k: seasonallyt quite $700k: seasonally--adjustedadjustedOahu singleOahu single--family home prices breaking out?family home prices breaking out?

520

560

600

640

680

720

06 07 08 09 10 11 12 13 14 15

Thou

sand

$, s

.a. (

log

scal

e)


Lehman Brothers


2222


600

620

640

660

680

700

13:3 13:4 14:1 14:2600

620

640

660

680

700

12:1 12:2 12:3 12:4 13:1

YR:QTR YR:QTR

Two distinct levels for Oahu singleTwo distinct levels for Oahu single--family home family home prices over the last two years (thousand $, prices over the last two years (thousand $, s.as.a.).)

Two years agoTwo years ago

The last yearThe last year

June 2014$685,750

Source: Honolulu Board of Realtors; seasonal adjustment by TZ Economics

2323


600

620

640

660

680

700

13:3 13:4 14:1 14:2600

620

640

660

680

700

12:1 12:2 12:3 12:4 13:1

YR:QTR YR:QTR

Two distinct levels for Oahu singleTwo distinct levels for Oahu single--family home family home prices over the last two years (thousand $, prices over the last two years (thousand $, s.as.a.).)

June 2014$685,750

Two years agoTwo years ago

The last yearThe last year


2424


Quarterly existing singleQuarterly existing single--family home sales prices:family home sales prices:Oahu being outpaced by California reboundOahu being outpaced by California rebound

50

100

200

400

800

1980 1985 1990 1995 2000 2005 2010 2015

OahuSan Francisco, Oakland, FremontAnaheim, Santa Ana, Irvine

Sources: National Association of Realtors, Prudential Locations, UHERO, Honolulu Board of Realtors; seasonal adjustment by TZE


Thou

sand

dol

lars

, s.a

. (lo

g sc

ale)

2525


100

200

400

00 02 04 06 08 10 12 14

Oahu existing residential condominium prices Oahu existing residential condominium prices exhibiting smoother appreciationexhibiting smoother appreciation

Thou

sand

$, s

.a. (

log

scal

e)



2626


260

280

300

320

340

360

380

06 07 08 09 10 11 12 13 14

Oahu condo prices pushing harder upward in the Oahu condo prices pushing harder upward in the last 12 months (small pause in June) last 12 months (small pause in June)

Thou

sand

$, s

.a. (

log

scal

e)


Lehman Brothers


2727


Trends in Oahu existing home sales inventoriesTrends in Oahu existing home sales inventories


2828


0

2

4

6

8

10

12

14

00 02 04 06 08 10 12 14

Single-familyCondominium

Oahu months of inventory remainingOahu months of inventory remaining(inventory/sales ratio)(inventory/sales ratio)

Mon

ths

rem

aini

ng, s

.a.

Source: Data through June 2014 from Honolulu Board of Realtors; seasonal adjustment by TZE


Lehman Brothers

2929


Historical relationship (1994Historical relationship (1994--2014): 10% appreciation 2014): 10% appreciation with the current 3 months of inventory remainingwith the current 3 months of inventory remaining

Source: Data through June 2014 from Honolulu Board of Realtors; regressions on seasonally-adjusted data by TZE

Single-family Condominium

-20

-10

0

10

20

30

40

0 4 8 12 16 20 24

Monthsof inventory remaining

Pric

eap

prec

iatio

n(%

)

-20

-10

0

10

20

30

40

0 4 8 12 16 20 24


Pric

eap

prec

iatio

n(%

)

3030


-10

-5

0

5

10

15

20

0 2 4 6 8 10


Pric

ea p

prec

iatio

n(%

)-10

-5

0

5

10

15

20

0 2 4 6 8 10


Pric

ea p

prec

iatio

n(%

)Data since 2010: lower than predicted appreciationData since 2010: lower than predicted appreciation——at 3 monthsat 3 months’’ inventory, appreciation inventory, appreciation ““below the linebelow the line””

Single-family Condominium

Source: Data through June 2014 from Honolulu Board of Realtors; regressions on seasonally-adjusted data by TZE

3131


Recap Oahu housing market conditionsRecap Oahu housing market conditions

Ratcheting upward, existing homes have settled into steady sales pace

Approximately 280 single-family, 400 unit condominium monthly sales

Condo prices have enjoyed more recent breakout than single-family prices

Listings, absorption balanced; slower appreciation than in past with 3 months inventory remaining

3232


Mysteries of monetary policy and interest ratesMysteries of monetary policy and interest rates


QE1QE1Le Havre (1952)Le Havre (1952)

QE2QE2Honolulu (1992)Honolulu (1992)

QE3QE3Honolulu (2014)Honolulu (2014)

3636


Federal Reserve securities holdings, monthly changesFederal Reserve securities holdings, monthly changes

-100

-50

0

50

100

150

200

250

2008 2009 2010 2011 2012 2013 2014 2015 2016

Treasury notes, bonds, TIPSMortgage-backed securitiesFederal agency debt

Billio

n do

llars

per

mon

th

Source: Federal Reserve Board (H.4.1 Factors Affecting Reserve Balances of Depository Institutions); average monthly changes in U.S. Treasury notes and bonds (including TIPS), federal agency debt securities, and mortgage-backed securities (http://www.federalreserve.gov/releases/h41/)

Actual Projected

QE1QE1

QE2QE2 QE3QE3

Operation Twist

3737


0

1

2

3

4

Aug-07 Aug-08 Aug-09 Aug-10 Aug-11 Aug-12 Aug-13 Aug-14

Deposits at the FedU.S. Treasury balanceCurrency in circulation

0

1

2

3

4

Aug-07 Aug-08 Aug-09 Aug-10 Aug-11 Aug-12 Aug-13 Aug-14

SecuritiesOther assetsMaiden LaneTALFTerm AuctionCP fundingCurrency swaps

Federal Reserve balance sheetFederal Reserve balance sheet

Assets Liabilities

Source: Federal Reserve Board (http://www.federalreserve.gov/monetarypolicy/bst_recenttrends.htm)

LehmanBrothers

Trillion U.S. dollars

LehmanBrothers

QE1QE1

QE2QE2QE3QE3

QE1QE1

QE2QE2QE3QE3

3838


““Printing money?Printing money?”” Link from bank reserves to money Link from bank reserves to money stockstock——the multiplierthe multiplier——now now halfhalf its starting valueits starting value

Initially (post-Lehman; September 2008) the Fed’s response—quantitative easing—to an autonomous increase in liquidity demand reflected collapse of interbank funding and flight from risky asset classes; the Fed’s response supplied financial markets’ increasing “liquidity preference” U.S. recession

shaded

Collapse of Lehman Brothers

Source for graph: Federal Reserve Bank of St. Louis (http://research.stlouisfed.org/fred2/series/MULT)

cer

cm++

+=

1 money multiplier

=c currency/deposit ratio =e excess reserves/deposit ratio =r required reserves/deposit ratio

3939


0 5 10 150 5 10 150 5 10 150 5 10 15

FOMC forecasts for the fed funds target rate and FOMC forecasts for the fed funds target rate and weighted averages: June 18, 2014weighted averages: June 18, 2014

2014 2015 Longer-run

Perc

ent

Number of observations (FOMC participants, total = 16)

0.30%

2.53%

3.78%

2016

1.20%

5

4

3

2

1

0

Source: Figure 2. Overview of FOMC participants’ assessments of appropriate monetary policy released with June 18, 2014 projections (http://www.federalreserve.gov/monetarypolicy/files/fomcprojtabl20140618.pdf)

4040


0

1

2

3

4

5

6

07 08 09 10 11 12 13 14 15 16 17 18

U.S. Treasury yields: interest rate normalizationU.S. Treasury yields: interest rate normalization

QE1 QE2 QE3

Lehman Brothers

Operation Twist

Recession NormalizationNormalization

AnticipationAnticipation

30 yr20

10

7

5

3

2

Per

cent

June 2014 June 2014 FOMC fed funds rate FOMC fed funds rate

target average forecasttarget average forecast

Source: Federal Reserve Board (H.15) and Chairman’s FOMC Press Conference Projections Materials, June 18, 2014 (http://www.federalreserve.gov/monetarypolicy/files/fomcprojtabl20140618.pdf)

3.78%

4141


Approaching Fed monetary policy normalization:Approaching Fed monetary policy normalization:the yield curve is rotatingthe yield curve is rotating——flatteningflattening

Yields on U.S. Treasury Securities (adjusted to constant maturities)

July 2013

Source: Federal Reserve Board (http://www.federalreserve.gov/releases/h15/)

Per

cent

July 2012

0

1

2

3

4

5

FF1-y

r2-y

r3-y

r5-y

r7-y

r

10-yr

20-yr

30-yr

Jul 06

Jul 12

Jul 07

Jul 08

Jul 09 Jul 10 Jul 11

July 2014

Jul 13

4242


Implied longImplied long--run inflation expectations wellrun inflation expectations well--anchored,* anchored,* but keep your eyes on the 5but keep your eyes on the 5--year breakyear break--even rateeven rate

Source: Federal Reserve Board (http://www.federalreserve.gov/releases/h15/), calculations by TZE

Per

cent

*Expected inflation or the “break-even”inflation rate is calculated as the difference between constant-maturity U.S. Treasury yields and corresponding TIPS yields

2% FOMC goal

Post-Lehman Brothers

-2

-1

0

1

2

3

FF1-y

r2-y

r3-y

r5-y

r7-y

r

10-yr

20-yr

30-yr

July 2014

Nov 2008

Feb 2009

Jul 2006-2013

4343


How can the economy grow and taxes not grow?How can the economy grow and taxes not grow?A mystery for the gubernatorial candidatesA mystery for the gubernatorial candidates


4444


200

300

400

500

600

02 04 06 08 10 12 14

Mon

thly

, milli

on 2

013$

, s.a

. (lo

g sc

ale)

Sudden stop: Hawaii real General Fund tax revenueSudden stop: Hawaii real General Fund tax revenue

Real revenues stopped rising at the end of 2012


Source: Raw monthly data through May 2014 from Hawaii DoTAX; deflation using U.S. personal consumption expenditure deflator, seasonal adjustment using Census X-12 ARIMA filter, and trend extraction using Hodrick-Prescott filter through November 2012 by TZE

4545


2.4

2.6

2.8

3.0

3.2

28

29

30

31

32

2004 2006 2008 2010 2012 2014

000 s.a. 3.4 33 000 s.a.

Hawaii civilian federal payroll employment droppedHawaii civilian federal payroll employment dropped

FY2013

−−5.75.7%%Percent change in seasonally-adjusted Hawaii federal civilian monthly payroll employment, October 2012 – February 2014 (also: no earmarks, and no Inouye)


Source: Hawaii DLIR, Hawaii DBEDT; monthly averages through May 2014, seasonal adjustment by TZE

Decennial census

Oahu(right scale)

Neighbor Isles(left scale)

4646


300

400

500

600

700

800

900

04 05 06 07 08 09 10 11 12 13 14

Statewide real Hawaii Statewide real Hawaii contracting receipts contracting receipts decliningdeclining

Milli

on 2

013$

, s.a

. (lo

g sc

ale)

Sources: Hawaii Department of Taxation, Hawaii DBEDT, U.S. Bureau of the Census; seasonal adjustment, deflation using construction cost deflator and trend extraction by TZE, tax base data through February 2014, building permit data (inset) through April 2014


This surge (no pun intended) partly was just a transitory impulse of photovoltaic panel installation—that was never really construction anyway, it was equipmentinvestment, not capital formation in new structures: panels are not buildings.

0

50

100

150

2012 2013 2014

Photovoltaic

Other**

Oahu PV permits ($mil)

*Additions and alterations

4747


450

500

550

600

650

700

750

04 06 08 10 12 14

Recent revisions donRecent revisions don’’t change sideways movement t change sideways movement of recent tourism aggregates (all of recent tourism aggregates (all s.as.a., log scales)., log scales)

Visitor expenditure(billion 2013$)

Visitor days(million)

Visitor arrivals(thousand)

4.0

4.5

5.0

5.5

6.0

6.5

7.0

04 06 08 10 12 140.7

0.8

0.9

1.0

1.1

1.2

1.3

1.4

04 06 08 10 12 14

H1N1-A

Tohoku

TohokuTohoku

H1N1-A H1N1-A

Source: Hawaii Tourism Authority, Hawaii DBEDT, includes 2013-2014(Apr) revisions; seasonal adjustment and deflation by TZ Economics

U.S. recession shaded U.S. recession shaded U.S. recession shaded

4848


Oahu has no more lodging than 25 years agoOahu has no more lodging than 25 years ago——capacity capacity is constrainedis constrained——so, real room rates at allso, real room rates at all--time highstime highs

0

5

10

15

20

25

30

35

40

45

70 80 90 00 1060

65

70

75

80

85

90

2005 2010 2015

120

140

160

180

200

220

2005 2010 2015

Oahu visitor plant inventory

(including vacation rentals)

Thousand rooms Percent, s.a. 2013$, s.a.

Oahu hotel occupancy Oahu real average daily room rates

Source: HTA, Hawaii DBEDT, Hospitality Advisors LLC, BLS; seasonal adjustment using Census X-12 ARIMA filter and deflation by TZE

Recession shaded Recession shaded

4949


190

200

210

220

230

240

250

260

270

280

2005 2010 201555

60

65

70

75

80

2005 2010 2015

Neighbor Isle lodging has compressedNeighbor Isle lodging has compressed——capacity is capacity is constrainedconstrained——again, real room rates near highsagain, real room rates near highs

Neighbor Isle visitor plant inventory

(including vacation rentals)

Thousand rooms Percent, s.a. 2013$, s.a.

Neighbor Isle hotel occupancy

Neighbor Isle real average daily room rates

Source: HTA, Hawaii DBEDT, Hospitality Advisors LLC, BLS; seasonal adjustment using Census X-12 ARIMA filter and deflation by TZE

Recession shaded Recession shaded0

5

10

15

20

25

30

35

40

45

1975 2000

5050


NearNear--term economic recapterm economic recap

DBEDT, UHERO forecasts for 2-3 percent real economic growth at odds with recent outcomes: no real state general fund revenue growth since 2012

In 2013 Hawaii hit the Trifecta:1. Federal government down (civilian and defense are 15% of Hawaii GDP)2. Construction spending falling (mostly PV equipment, not buildings)3. Tourism no growth (another 15% of Hawaii GDP)

Hawaii tourism supply-constrained, homebuilding suppressed, for 20+ years

5151


LongerLonger--run population and housing trendsrun population and housing trends


5252


Is Hawaii population going to grow or are we done?Is Hawaii population going to grow or are we done?

10,000

100,000

1,000,000

1850 1900 1950 2000

976,370 (Oahu)

415,940 (N. Isles)

1,404,054 Statewide983,429 Oahu190,821 Big Island160,292 Maui69,512 Kauai

Population by County*

*July 1, 2013

Sources: Robert C. Schmitt, Historical Statistics of Hawaii (1976), University of Hawaii Press; Bureau of the Census, U.S. Department of Commerce; Hawaii DBEDT (http://files.hawaii.gov/dbedt/census/popestimate/2013_county_char_hi_file/2013_popest_sumtab.xls)

Per

sons

, log

sca

le

Oahu

Neighbor Islands

5353


100 200100 200

Hawaii population by age cohortHawaii population by age cohort

HawaiiHawaii’’s legacy of declining fertility + aging:s legacy of declining fertility + aging:more even distribution of population across cohortsmore even distribution of population across cohorts

Sources: Hawaii DBEDT, U.S. Bureau of the Census (decennial enumerations compiled by TZ Economics)

Thousands

0-1515-2425-3435-4445-5455-6465+

100 200 100 200 100 200 100 200 100 200 100 200 100 200 100 200 100 200

1910 1920 1930 1940 1950 1960 1970 1980 1990 2000 2010

5454


40 20 0 20 40Under 5

5 to 910 to 1415 to 1920 to 2425 to 2930 to 3435 to 3940 to 4445 to 4950 to 5455 to 5960 to 6465 to 6970 to 7475 to 7980 to 84

85 +

Oahu population by 5Oahu population by 5--year age cohort, 2012 year age cohort, 2012 →→ 2030:2030:substantial expansion of elderly sharesubstantial expansion of elderly share

Thousands by 5-year cohort

FemaleFemale MaleMale

Sources: Hawaii DBEDT (http://hawaii.gov/dbedt/info/census/population-estimate); graphic by TZE

40 20 0 20 40Under 5

5 to 910 to 1415 to 1920 to 2425 to 2930 to 3435 to 3940 to 4445 to 4950 to 5455 to 5960 to 6465 to 6970 to 7475 to 7980 to 84

85 +

Thousands by 5-year cohort

2012 2030

5555


Hawaii actual and projected population growth rates Hawaii actual and projected population growth rates by age group from 2010 through 2025by age group from 2010 through 2025

Source: Hawaii DBEDT compilation from U.S. Census Bureau, Population Division, "Annual Estimates of the Resident Population by Single Year of Age and Sex Population for the United States, States, and Puerto Rico Commonwealth: April 1, 2010 to July 1, 2013 - Hawaii" (PEPSYASEX) (June 26, 2014) (http://www.census.gov/popest/data/datasets.html), Hawaii DBEDT (March 2012) Population and Economic Projections for the State of Hawaii to 2040: DBEDT 2040 Series (http://files.hawaii.gov/dbedt/economic/data_reports/2040-long-range-forecast/2040-long-range-forecast.pdf)

(Growth rates in percent or as noted) Under 60 60+ Multiple

2010-2013 (actual) 0.4% 3.1 7.2x

2015-2025 (projected) 0.3 2.5 8.3x

2010-2025 (projected) 0.2 2.8 13.6x

5656


Oahu population growth rate in recent decades Oahu population growth rate in recent decades outstripped net new housing formationoutstripped net new housing formation

Source: U.S. Bureau of the Census, Hawaii DBEDT (various), Robert C. Schmitt Historical Statistics of Hawaii (1976) UH Press

-2.0

0.0

2.0

4.0

6.0

8.0

1930s 1950s 1970s 1990s 20-teens

Housing stock Housing stock growth rate (%) growth rate (%) ((ΔΔKKtt/K/Ktt--11))

Population Population growth rate growth rate

(%)(%)

Per

cent

at a

nnua

l rat

es

Mid-20th century construction boom transformed the housing stock for demographic transition to larger share of younger families

5757


-4.0

-2.0

0.0

2.0

4.0

6.0

8.0

10.0

1930s 1950s 1970s 1990s 20-teens

Sources: Robert C. Schmitt Historical Statistics of Hawaii, Hawaii DBEDT (http://dbedt.hawaii.gov/economic/county_report/), Bank ofHawaii Annual Economic Report (various), annual TZE data through 2012

Neighbor Isles: population growth > housing formationNeighbor Isles: population growth > housing formation

Housing stock Housing stock growth rate (%) growth rate (%) ((ΔΔKKtt/K/Ktt--11))

Population Population growth rate (%)growth rate (%)

Per

cent

at a

nnua

l rat

es

Falling behind in the 21st century

5858


Homebuilding on Oahu now recovering, but last five Homebuilding on Oahu now recovering, but last five yearsyears’’ new units still lowest production since WWIInew units still lowest production since WWII

Uni

ts a

utho

rized

by b

uild

ing

perm

it

0

4000

8000

12000

1930 1940 1950 1960 1970 1980 1990 2000 2010 2020

WWII

5959


Projection assumes that existing home sales prices rise 15% annually 2014-2017 to approximately $1 million (SF), $530k (condo), long-term Treasury bond yields rise to 4% by 2015, production of 5,500 high-rise condominium units in Kakaako is completed but absorption reduces notional annual production amounts at Koa Ridge (300 units) and Ho’opili (500 units) by one-third in 2017 and two-thirds in 2018 at the end of a U.S. economic expansion of average duration for the post-1970s era (eight years)

Ann

ual i

n th

ousa

nds,

s.a

. (lo

g sc

ale)

My residential construction forecast midMy residential construction forecast mid--2013: 2013: Oahu new housing units authorized by building permitOahu new housing units authorized by building permit

Sources: County building departments, Hawaii DBEDT, TZE database; trend extraction by TZE

1.0

2.0

4.0

8.0

80 85 90 95 00 05 10 15 20

Actual/projectedTrend/cycle

ProjectedProjected

You are You are herehere

6060


100

1000

1980 1985 1990 1995 2000 2005 2010 2015

Reality: Oahu homebuilding upswing falteringReality: Oahu homebuilding upswing faltering

Sources: County building departments, Hawaii DBEDT, quarterly data through first quarter 2014; seasonal adjustment, trend extraction by TZE

Thou

sand

new

uni

ts, s

.a. (

log

scal

e)


First quarter 2014 is lowest since the 1940s

6161


0.2

0.4

0.8

1.6

3.2

75 80 85 90 95 00 05 10 15

Reality: Neighbor Island quarterly new housing Reality: Neighbor Island quarterly new housing units authorized by building permit also weakunits authorized by building permit also weak

2014Q1 (259 units)

Sources: Hawaii DBEDT (http://dbedt.hawaii.gov/economic/qser/selected-county-tables); seasonal adjustment and cycle/trend extraction by TZE


Thou

sand

uni

ts, s

.a. (

log

scal

e)

6262


SummarizingSummarizing

Stop counting cranes, nobody even knows what “a lot” is, any more1. “So much” Oahu homebuilding only WWII was worse than the last five years2. New household formation has outstripped homebuilding for two decades3. There are fewer tourist lodging units on Oahu than twenty years ago

Housing market conditions are balanced, but appreciation is less than expected1. Local economy hit the wall in 2013, home prices reflected momentum loss2. Installing PV or buying a diesel generator at Lowes is not construction

Extending local economic expansion requires an investment resurgence1. New homebuilding should be leading, but it isn’t—not yet anyway2. Public infrastructure investment was absolutely larger 50 years ago3. Economic outlook is less robust than is widely perceived


Slides available from:Paul H. Brewbaker, Ph.D.Principal, TZ Economics606 Ululani St.Kailua, Hawaii [email protected]

MahaloMahalo!!

6464


Appendix 1. more construction detailsAppendix 1. more construction details


6565


Falling incrementalFalling incremental--capital ratios: annual private capital ratios: annual private and public construction as a percent of Hawaii GDPand public construction as a percent of Hawaii GDP

0

2

4

6

8

10

1960 1970 1980 1990 2000 2010 20200

2

4

6

8

10

Source: TZE database, county building departments, Hawaii DBEDT, U.S. Bureau of the Census; deflation and trend/cycle extraction by TZE

Private building permit values

Government construction contracts

6666


Hawaii real per capita personal income: decline in Hawaii real per capita personal income: decline in incrementalincremental--capital ratio matches growth slowdowncapital ratio matches growth slowdown

20

40

1950 1960 1970 1980 1990 2000 2010 2020

Thou

sand

201

3$ (l

og s

cale

)

Source: BEA, BLS; deflation and interval trend regressions on natural logs of real per capita income by TZE

$45,000

Faster growth

Slower growth

6767


Real private building permit values: as economy Real private building permit values: as economy slows, slows, ““buildingbuilding”” shifts to renovationsshifts to renovations

40

80

160

320

640

85 90 95 00 05 10 1540

80

160

320

640

85 90 95 00 05 10 15

New buildings Additions and alterations

Mon

thly

, mill

ion

2013

$, s

.a. (

log

scal

e)

Sources: Hawaii DBEDT, TZE database, Census Bureau; seasonal adjustment, deflation, and trend extraction by TZE

6868


Residential, 47.5

Commercial,25.5

Commercial, 15.3

Addn, Altn, 25.1 Addn, Altn,

37.3

Residential, 52.2

0%

25%

50%

75%

100%

Shifting shares of Hawaii private construction going Shifting shares of Hawaii private construction going from a high growth to a low growth economyfrom a high growth to a low growth economy

1983-2003 2003-present

Shares of total private building Shares of total private building permit estimated construction costspermit estimated construction costs

% of total1983-2003

2003-present

Residential 52.2 47.5

Commercial 25.5 15.3Additions,Additions,AlterationsAlterations 25.125.1 37.337.3

Source: TZE database, county building departments, Hawaii DBEDT, U.S. Bureau of the Census; share calculations by TZE

6969


Going from a high growth to a low growth economyGoing from a high growth to a low growth economy

0

2

4

6

8

10

60 70 80 90 00 10 20

20

40

60 70 80 90 00 10 20

Percent of Hawaii GDP

Private construction

Public construction

Low growth

High growth

Real per capita personal incomeReal per capita personal income

Thousand 2013$ (log scale)

$45k

Sources: BEA, BLS, Bureau of the Census, TZE database, county building departments, Hawaii DBEDT; deflation and trend/cycle extraction by TZE; deflation and interval trend regressions on natural logs of real per capita income by TZE

7070


Real Hawaii new residentialReal Hawaii new residentialbuilding permit valuesbuilding permit values

40

80

160

1980 1985 1990 1995 2000 2005 2010 2015 2020

11 2 3 4 55

1 Volcker interest rate rise2 Operation Desert Shield (HFDC initiates The Villages of Kapolei (http://www.villagesofkapolei.com/wp-content/uploads/2011/02/ArticlesInc-3.pdf)) 3 Operation Desert Storm4 9/115 Lehman Brothers collapse


Quarterly million 2013$

s.a. (logs)


7171


Combined federal, state, county government Combined federal, state, county government construction contractsconstruction contracts

100

200

400

800

1965 1970 1975 1980 1985 1990 1995 2000 2005 2010 2015


U.S. recessions shadedQuarterly

million 2013$s.a. (logs)

7272


Hawaii real construction spendingHawaii real construction spending1 and jobsand jobs2

(normalized)(normalized)3: so far, no construction : so far, no construction ““boomboom””

-2

-1

0

1

2

-2

-1

0

1

2

1990 1995 2000 2005 2010 2015

ContractingPayrolls

U.S. recessions shadedIniki6

“Japan”4

“Subprime”5

PV7

Boom (not)

Notes on next slide: contracting trend (dashed) is trend/cycle component from Hodrick-Prescott filter; sources are Hawaii Department of Taxation (contracting receipts), Hawaii DLIR, Hawaii DBEDT (payroll employment); seasonal adjustment, deflation by TZE

Scales are standard deviations from the means for each time series in real terms, seasonally-adjusted, for the period January 1990 – latest data 2014

7373


Notes to prior slideNotes to prior slide

1 General excise and use tax basis (Hawaii Department of Taxation) through February 2014, seasonally-adjusted, deflated using U.S. Census Bureau construction cost deflator (Fisher) for new single-family houses under construction.

2 Payroll employment in natural resources, mining, and construction (NAICS basis) through May 2014, seasonally adjusted (in Hawaii mining is primarily quarrying).

3 Monthly data are normalized to period averages (scale is in standard deviations).4 “Japan” denotes so-called Japan Bubble, a late-1980s/early-1990s period including construction of the last Class

A high-rise office towers in Honolulu: contracting receipts rose more than +1.5 standard deviations because high-rise buildings are a relatively capital-intensive construction process (replicating floors approximately weekly); construction employment did not rise as much.

5 “Sub-prime” denotes so-called Sub-prime Bubble, an early-2000s period distinctive in the excess of employment growth relative to contracting receipts reflecting a military housing privatization initiative during which approximately 17,000 base housing units on Oahu were renovated under exemption from building permits and general excise tax liability (numbers roughly equal to the contemporaneous, cumulative net increase in Oahu’s private housing stock, 16,843 units, 2002-2008.)

6 Hurricane Iniki produced a temporary increase in construction employment, associated with disaster relief, recovery, and reconstruction, without a comparable increase in contracting receipts.

7 State residential photovoltaic panel installation tax credits, complementing federal tax credits, and rising crude petroleum and electricity costs stimulated an early-20-teens surge in photovoltaic equipment investment without a commensurate increase in employment associated with new building (buildings).

7474


Appendix 2. more tourism detailsAppendix 2. more tourism details


7575


400

500

600

700

04 05 06 07 08 09 10 11 12 13 14

Neighbor IslesOahu

Real visitor expenditure stalled: Oahu was higher, Real visitor expenditure stalled: Oahu was higher, now, with Neighbor Islands, match last cyclical peaknow, with Neighbor Islands, match last cyclical peak

Mon

thly

, s.a

., m

illion

201

3$ (l

og s

cale

)

Neighbor Isles

Oahu

No Aloha

Tsunami

Source: Hawaii Tourism Authority, Hawaii DBEDT; BEA, U.S. Department of Commerce; deflation, seasonal adjustment by TZ Economics


7676


Total visitor arrivals stalled: Neighbor Islands Total visitor arrivals stalled: Neighbor Islands lower, Oahu higher than last cyclical peak; both flatlower, Oahu higher than last cyclical peak; both flat

250

300

350

400

450

500

04 05 06 07 08 09 10 11 12 13 14

Neighbor IslesOahu

Neighbor Isles

Oahu

No No AlohaAloha

Tsunami

Source: Hawaii Tourism Authority, Hawaii DBEDT; BEA, U.S. Department of Commerce; deflation, seasonal adjustment by TZ Economics

Mon

thly

, s.a

., 00

0 pe

rson

s (lo

g sc

ale)


7777


100

200

2000 2005 2010 2015

Hawaii visitor arrivals, Hawaii visitor arrivals, s.as.a., monthly, thousands: ., monthly, thousands: international and domestic offset; international and domestic offset; ““musical chairsmusical chairs””

300

350

400

450

500

2000 2005 2010 2015


SARS

9/11

9/11

H1N1-A

Tohoku

Y2KNo Aloha

Source: Hawaii Tourism Authority, Hawaii DBEDT, includes 2013-2014(Apr) revisions; seasonal adjustment, trend extraction by TZ Economics

Both depicted on logarithmic scales

7878


Visitor length of stay recently declined, via offsetting Visitor length of stay recently declined, via offsetting growth in international, decline in domestic arrivalsgrowth in international, decline in domestic arrivals

8.4

8.8

9.2

9.6

10.0

98 00 02 04 06 08 10 12 14

SARS9/11

Source: Hawaii Tourism Authority, Hawaii DBEDT, includes 2013-2014(Apr) revisions; seasonal adjustment, trend extraction by TZ Economics


Day

s pe

r vis

it

7979


Hawaii real hotel and retail receipts: each cycle, as Hawaii real hotel and retail receipts: each cycle, as room rates rise, hotel rentals steal from retail room rates rise, hotel rentals steal from retail

1.5

2.0

2.5

3.0

200

300

400

2004 2006 2008 2010 2012 2014

Hotel(right scale)

Retail(right scale)

Source: Hawaii Department of Taxation, BEA; seasonal adjustment, deflation using U.S. personal consumption expenditure deflator and trend extraction by TZ Economics

No Aloha

8080


If tourism, defense, and construction are shrinking, If tourism, defense, and construction are shrinking, in the longerin the longer--run (e.g. 25 years), what is growing? run (e.g. 25 years), what is growing?

Strategic (a.k.a. longStrategic (a.k.a. long--run) challenges for Hawaiirun) challenges for Hawaii

You get 2% productivity growth simply by downloading apps and upgrading software

In America—which in the 1940s had the Gini ratio of today’s Belgium, but now has the Gini ratio of Haiti*—95% of income growth went to the top 1% of the income distribution, 2009-2013.

Politics of NIMBY inhibits tourism’s ability to expand its capacity—no export growth possible

(Global lodging brands are delighted to exercise the market power gifted to them as a result)

Who would invest in an economy that is shrinking its principal exports, tourism and federal military?0

4

8

12

16

20

1925 1950 1975 2000 2025

Visitor arrivals

Real visitor expenditures

Billion 2013$ (statewide)Million tourists

Source: Hawaii Tourism Authority, Hawaii DBEDT; TZE database

*The Gini ratio is a measure of income inequality

8181


Some recent views from DBEDT and UHEROSome recent views from DBEDT and UHERO

UHERO (May 2014)*: “Incremental [tourism] gains for 2014 will be slight. Beyond this year, available capacity will limit further visitor industry growth.”

DBEDT (May 2014)‡: “Visitor arrivals are expected to increase 1.9 percent in 2016 and 1.8 percent in 2017. Visitor expenditures are expected to increase 4.6 percent in 2016 and 4.5 percent in 2017.”

UHERO (May 2014)*: “The construction expansion has proceeded further on Oahu than the elsewhere in the state, but it is also poised to contribute growth momentum to all counties going forward.”

DBEDT (June 2014)†: “Change the mindset from controlling growth to generating growth.”

Sounds good, but the last three are starting to sound increasingSounds good, but the last three are starting to sound increasingly implausiblely implausible

*UHERO (May 23, 2014) (http://www.uhero.hawaii.edu/assets/14Q2CountyForecast-PublicSummary.pdf)‡Hawaii DBEDT (May 8, 2014) (http://dbedt.hawaii.gov/economic/qser/outlook-economy/) †Richard Lim, Director Hawaii DBEDT (June 20, 2014) “Hawaii’s Economic Future,” presentation to The Counselors of Real Estate

8282


Appendix 3. urbanism and the services economyAppendix 3. urbanism and the services economy


8383


-6

-4

-2

0

2

4

6

8

1840 1870 1900 1930 1960 1990 2020

Oahu and Neighbor Island population growth rates Oahu and Neighbor Island population growth rates over decades and the midover decades and the mid--2020thth century migrationcentury migration

Per

cent

cha

nge

at a

nnua

l rat

es

Source: U.S. Bureau of the Census, Hawaii DBEDT (various), Robert C. Schmitt Historical Statistics of Hawaii (1976) UH Press

Neighbor Isles

Oahu

Now what?Net migration to Oahu

JetsPlantations

8484


Factors in Honolulu 20Factors in Honolulu 20thth century urbanizationcentury urbanization

Early 20th century plantations: centers of employment, communities1. Co-location of mills, canneries, harbors; people walked to work2. Mechanization led plantations to become increasingly capital-intensive

Mid-20th century Oahu population rose, Neighbor Islands declined1. Net migration from the Neighbor Islands to Oahu2. Affordable motor vehicles increased mobility ⇒ suburban spatial dispersion

1960s brought mass market tourism: statehood, commercial passenger jets

After 1970s Hawaii embraced “limits to growth” and “capacity constraints”1. Recent ordinance bans building heights in excess of Walter Dodds’ FHB tower 2. Proposed ordinance bans condominium conversions to timeshare (securitization)3. De facto cap on Oahu accommodations (10k (1965), 39k (1986), 35.75k (2013))

Source: Hawaii Tourism Authority, Visitor Plant Inventory (various)

8585


Fashionable to deride services as low-wage and presumptively less productive

Reality is the opposite during the last twenty years—skilled services ascendant

Rise of the service sector has reshaped economic and physical landscape*

Since the structural transformation shifts labor from high-productivity growth sectors to low-productivity growth sectors, Baumol (1967) feared that the economy was doomed to long-run stagnation. In our model this dismal prediction fails to materialize because it is exactly the structural transformation that makes the service sector concentrated enough for innovation to endogenously take off. This is consistent with the acceleration of services productivity growth in the mid-1990s, as well as with the increase in land rents and real wages around that period.

Services spatially concentrated to the point that innovation and productivity growth took off after the mid-1990s

Cities are where it’s at

Demographic transition alters patterns of housing Demographic transition alters patterns of housing demand; urbanization demand; urbanization bouyingbouying the services economythe services economy

*Klaus Desmet and Esteban Rossi-Hansberg (2014), “Spatial Development,” American Economic Review 104(4), pp. 1211-1243; William Baumol(1967), “Macroeconomics of Unbalanced Growth: The Anatomy of Urban Crisis,” American Economic Review 57(3), pp. 415-426..

8686


Agglomeration economies: Agglomeration economies: ““density is proximitydensity is proximity””

Agglomeration economies: one person’s productivity rises when near others 1. Externality—productivity rises learning from or imitating a neighbor2. Internalized—supplier and customer co-locate to reduce transportation cost

Explains urban density without appeal to external factors (ports, canneries)*

...the evidence suggests that these external factors are no longer that important. The older cities were generally built around harbors, and those harbors were significant, but there is no natural advantage that can explain Las Vegas…

Mechanism is partly combinatoric: larger numbers of productive interactions are possible the more people are gathered in related occupational pursuits†

(e.g.) When research effort is applied, new ideas arise out of existing ideas in some kind of cumulative interactive process that intuitively has a very different feel from prospecting for petroleum. To me, the research process has a sort of pattern-fitting or combinatoric feel about it.

* Edward L. Glaeser (2008) Cities, Agglomeration and Spatial Equilibrium, Oxford University Press; Paul Krugman (1991), Geography and Trade.Cambridge MA: MIT Press. †Martin L. Weitzman (1996), “Hybridizing Growth Theory,” American Economic Review Papers and Proceedings 86(2)

mid-year real estate review · 1. uhero (may 2014)*: “incremental [tourism] gains for 2014 will...

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