Economist's Commentary: July 21, 2008
The Price of Life
By Lawrence Yun, Chief Economist
Home prices, like the surrounding volcanic mountains, are steep in Hawaii. With the median home price at $620,000 in Honolulu, people will need to have saved up a lot before considering a move to the land of temperate climate. The summer heat index typically runs well below that in New York and Texas and highs in the 70s during the winter months invite professional surfers to ride the big waves. Some may indeed call it a genuine paradise.
What people may not know is that residents of Hawaii have the highest life expectancy in the U.S. People can expect to live for 81.7 years in Hawaii versus 78 years average for the country as a whole. There is evidently something about the island life that allows for a healthy lifestyle and a slower heartbeat.
How is this related to the housing market? Honolulu has always ranked very high in home prices, yet annual incomes of residents have not been very high. Housing market analysts will, therefore, quickly label Hawaii as over-priced market doomed for a major home price correction.
What is missing in the analysis is the incorporation of wealth data - the data on lifetime accumulation of assets. Annual income data are easily obtainable from the Census Bureau or the IRS, by locality. However, there is no reliable data on wealth by locality. Certainly, such information would be critical in determining housing demand and in assessing market conditions. Yet, due to the inconvenience of the lack of wealth data, analysts simply apply only income information with no regards to wealth. Such is the life of number crunchers that strictly focus on available figures without regards to what may be actually occurring in the real world.
I would say given the favorable climate, low crime rate, and higher life expectancy, the wealthy people will be willing to buy homes in Hawaii even at very high prices. These people have the financial means and are not overstretching their budgets by any means. Yet, the simple number crunchers will miss out on the obvious and label Hawaii as an overpriced market because home price and annual income somehow do not match up.
San Francisco is another market that has been consistently labeled as overpriced for ages, yet prices continued to move higher and higher on a long term basis even accounting for few years of declines. In 1980, the median price was $110,000. It hit $250,000 in 1990, then $450,000 in 2000. In 2008, it will be well above $700,000. Like Hawaii, the wealth factor (and not solely income factor) is no doubt playing a significant role in the Bay Area.
Many factors impact life expectancy, which I defer to health experts to explain. We should all be fortunate to see a growth of nearly 30 additional life years since 1900. But illusory or not, the perception of an even a higher life expectancy in Hawaii by simply moving there will draw many well-to-dos to the islands. Given limited land space, existing homes will command very high prices well into the future.
Life expectancy ratings: read more >
This is one in a series of commentaries by the Research staff of the National Association of REALTORS®. Read more commentaries >
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