Take advantage of low interest rates

Many potential buyers are uncertain as to whether to buy now or wait for real estate prices to decline further (assuming that prices will decrease). For those financing, I would suggest focusing on total cost of purchase rather than fixating on sales price. Today’s historically low interest rates play a critical part in the overall purchase and cannot be overemphasized.

Rather than discussing abstract economic principles, it would be more productive to illustrate this point by actual examples. Let’s say that Bob is interested in a condo currently priced for $200K but he believes prices might dip a bit more.

Scenario A: Bob buys today at $200K with 10% down, securing financing of the remaining $180K at 4.5% interest rate for a 30 year mortgage. His mortgage payment (interest/principal) is $912 per month. But Bob wonders if he should have waited for prices to decrease even more.

Scenario B: Bob waits a year, during which time prices have gone down 5% (which is not out of the realm of possibility) but interest rates have gone up by 1%, which many analysts/economists are predicting. So Bob is very happy that he is able to save $10K from his purchase by buying it at $190K. So with a 10% down payment and financing at 5.5% interest rate on a 30 year mortgage, he assumes that he is in a much better position than he would have been a year ago. But now his mortgage payments are $971 per month.

Scenario C: Bob waits a year, during which time prices have remained flat and interest rates have gone up by 1%. So Bob considers buying it at $210K, with 10% down but interest rates at 5.5% for a 30 year mortgage. So now facing a mortgage payment of $1,068 per month, Bob realizes that he can’t afford it.

Sure, from $971 to $912 is a difference of ‘only’ $59. But in a year that amounts to $708, which over the life of a 30 year mortgage totals $21,240.  With the median sales price of a Maui home at $500K and a Maui condo at $390K, there is certainly plenty of incentive to take advantage of today’s low interest rates.

According to tourism officials, March was a significant improvement for the Hawaiian islands over a year ago, with Maui taking the most dramatic headway.  Visitor arrivals grew up to 181,182 (a remarkable 14.2 percent improvement over March 2009) and expenditures increased to $257.7 million (an incredible 25.2 percent growth).  Credit can be partly assigned to more new  flights to Maui being added, in particular from Canada and parts of California.  This will have a lasting effect from this point forward (unless such flights are later discarded by carriers) and can be the beginning of a trend, where most of the tourism growth will be allocated to the Valley Isle.  However, to keep in context, one must remember that last year was the height of the economic crisis and tourism was anemic, at best.  Does this mark the beginning of long-term economic recovery?  Quite possibly.  The Maui real estate statistics for the month of April will be out in few days, with the possible sign that we have scraped the bottom of the market and are on the path for long-term growth and endurance.  Taking into account for declining unemployment rates, improved consumer confidence (based on job creation and national trends), tourism increases, and all the indicators are there for a stabilization (and possible growth) of the Maui economy.  Stay tuned, we could be in for a collective sight of relief.

Most home buyers are well aware of the looming deadline for the $8,000 first-time home buyer tax credit, and the $6,500 repeat home buyer tax credit.   In order to qualify for these credits, the Buyer needs to be in a binding contract by April 30 and have the purchase completed (closed/settled) by June 30 (there are certain exemptions to these deadlines, specific to military personnel, foreign service, and certain governmental agencies).  In addition, homes with a final sales price over $800,000 do not qualify for these incentives, and there are a number of income requirements that must also be satisfied to qualify.   Keep in mind that if you made a qualifying home purchase in 2010, you can still submit it on an amended 2009 income tax return (or of course, you can wait to file it with your 2010 tax return).  What impact will the end of this incentive have on the Maui real estate market?  Well, possibly, with so many buyers flooding the market to take advantage of these tax credit incentives, there could be a drain on the pool of qualified buyers resulting in a reduced amount of potential buyers actively in the market after the deadline has expired.  With fewer buyers, sellers could be forced to further entice the remaining Maui home buyers by lowering prices or offering incentives (i.e. closing costs, home warranties, negotiating repairs or final sales price).  Could that possibly mean that you would get more value than a $8,000 or $6,500 tax credit?  Absolutely.  For potential home buyers, it is of critical importance to make an informed decision based on your specific situation, weighing in aspects such as your price range (lower price ranges will see a bigger effect on their overall purchasing power), criteria in a home (starter homes are most likely to be affected by the tax incentive), and overall motivation (do you NEED to purchase now).  Feel free to search for Maui real estate and contact us should you need further information.

For most home buyers, the real estate tax is a major part of their decision, as a high rate can easily make a home unaffordable to maintain.  In Maui, we have enjoyed remarkably low property taxes (you can click here for the official Maui County tax website where you can find the current rates), but now Mayor Tavares has proposed a new tax increase to overcome some of the revenue losses due to depreciation in home values.

The following are the proposed amounts (per $1,000 of net taxable assessed valuation):
* Time share: $14; no change.
* Improved residential: $5.80; plus 95 cents.
* Apartment: $5; plus 45 cents.
* Commercial: $6; plus 25 cents.
* Industrial: $6.50; no change.
* Agricultural: $5; plus 50 cents.
* Conservation: $5; plus 25 cents.
* Hotel & Resort: $8.75; plus 55 cents.
* Unimproved residential: $7.25; plus $1.90.
* Homeowner: $2.50; plus 50 cents.
* Commercial Residential: $6.25; new tax category.

As you can see, even with the proposal taking effect (which is questionable in a political arena where increasing taxes is highly debated by the public and can amount to political suicide), it still remains remarkably lower than most areas. I have had many buyers ask for tax estimates on specific properties (homes and condos), and when presented with the facts, most buyers can’t believe how low our taxes are.  What does this mean for potential buyers, specially mainlanders or foreign investors? Owning a piece of Hawaiian paradise is more affordable than you could have possibly anticipated. For updates on this and other community news, subscribe to our blog.

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