Economist Paul Brewbaker On Hawaii’s Real Estate Market

Economist Paul Brewbaker spoke at the first installment of Hawaii Life’s “Worthshop Series”, hosted at the Four Seasons Hotel at the Hualalai Resort on the Big Island.

Presentation Slides

For those of you interested in complex economic models, be sure to check out Brewbaker’s slides from the presentation. Some of the slides speak for themselves, others might not make any sense unless you were in attendance. Click the link below to see them (along with a couple of new ones):

Brewbaker’s Slides – Hawaii Life Worthshop, Hualalai, May 18 2012 (PDF)

Additional Comments

Paul offers these two additional points about the attached (the emphasis is mine):

1. One comment I received leads me to note for the West Hawaii Realtor® audience, specifically, that Hawaii Information Service (HIS) has actually been quite generous with Big Island data, going farther than it has in my work with them on Kauai, for example. I mistakenly gave audience members the impression that HIS was not nearly so cooperative, for which I apologize. Note that the Big Island presents a daunting challenge, in that it is essentially three islands (Kona, Hilo, and Ka’u) which, were I to tackle it the way I have Kauai, Maui and Oahu would take years to dig through the data set. Notwithstanding that challenge and to “make up” for my unfair characterization of HIS support for my research, I include additional materials at the end of the presentation regarding higher-order moments of the West Hawaii (Kona) single-family home price distributions that resonate with the data presented at the Worthshop for Maui (and to a lesser extent, Kauai).  In particular, jumps in higher-order moments of the Kona single-family home price distributions marked both the “start” (circa 1998) and “end” (two years after 2005) of the last home price cycle in a way that is not customarily displayed by movements in the first moment of the price distribution, the mean price, and is also not obvious from its first cousin the median price of existing single-family home sales.  This is important because the median is often cited instead of the mean “because the distribution of home prices is skewed.”  Indeed, if one instead pays attention to skewness and its first cousin, kurtosis—the third and fourth moments of the home price distribution—there is information about the valuation cycle.  In Kona’s case, it confirms that the really smart investors jumped in and bought something in West Hawaii at a time—in 1998—when most people were not thinking conditions were ripe for real estate investing there.  (For context, Hawaii Governor Cayetano had attempted to push legislative recommendations of his Economic Revitalization Task Force during the 1998 legislative session precisely because people did not think conditions were ripe for real estate investment.  The Asian Financial Crisis was underway, Russia defaulted on its sovereign debt, Malaysia closed its capital window, and the hedge fund Long Term Capital Management collapsed, all during 1998.  To be buying at house at Hualalai that year took some courage and, as it turns out, some acuity of foresight.)  Examination of Kona higher-order moments also confirms, at least theoretically, that at their next break-out in 2006-2007 one should have interpreted the corresponding surge in high-end sales as smart investors bailing out.  Of course, for every seller there is a buyer, so it’s not entirely clear if the happy people in each instance outweighed the sad.  At any rate, hindsight is 20-20, but examining the higher-order moments adds a clarity to the interpretation of the West Hawaii single-family home valuation cycle the way reading glasses do to those of us older than age 50.  (In the presentation I used Maui as the canonical example of these phenomena, but my new Kona analytics—and you are the first to see them—provide a certain confirmation, along a slightly different timeline, which itself is interesting.)
2. Somebody asked about how long the economic expansion should be expected to last, and for that I append U.S. GDP data and analytics to illustrate the lengthening of U.S. economic expansions and shortening of U.S. economic contractions during the last 150 years.  I include a slide illustrating a phenomenon known as The Great Moderation in the macroeconomics literature, a period of reduced U.S. real GDP volatility (I calculate conditional quarterly real GDP volatility at annualized rates).  Past performance is no guarantee of future returns, however, so it’s not clear what can be projected from the very deep and unusually long (for the modern period) Great Recession of December 2007 – June 2009.  I would note that, in the 35 months of economic expansion extant since the end of the Great Recession, the recovery is already longer than most entire expansions in the pre-Great Depression era, and is almost as long already as the average expansion in the half century up until the early-1980s.  That would imply that any clown like the ones you see routinely on CNBC telling you that there is going to be another recession would be correct—on average—if this were sometime before the 1980s just based on the odds.  The 20-teens are not, so far, a throwback to the pre-1980s macroeconomy, however.  For one thing, Facebook just did its IPO, and before the 1980s there weren’t even personal computers, I mean, not really.  I see no reason to think that it is even interesting to listen to those clowns routinely getting Talking Head air time in the financial media, telling you that The End Is Near.  For Kona, my guess is that we will look back on 2012 the way we look back on 1998, the year we should have bought something in Kona.  I’m pretty sure that the same people telling us not to do so this year are the same people who were saying the same thing in 1998.

Many thanks to Paul for speaking at the Worthshop, and his candid assessment of the reality of Hawaii’s economic condition.