Will Hawaii Be The Next Puerto Rico?

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One possible explanation for Hawaii’s recent poor performance is costs. Here’s Hawaii’s CPI over recent years vs. the U.S. average:

Interactive. And yes, I know that CPI ratios aren’t actually totally valid; but I could index them both and you’d see the same story, but you’d need to look at 2 lines instead of one. And since the ratio is about 1 in 2002 and 2003 anyways, the ratio of indexes would be about the same too.

Since the early 2000s, prices in Hawaii have risen much faster than on the mainland.

We can look at Hawaii statewide on a shorter timeframe as well. BEA Regional Price Parities consistently show Hawaii around 17–19% higher priced than the rest of the U.S. So it’s an expensive place, and it’s getting more expensive relative to the mainland U.S. over time.

But that’s not a big deal if incomes rise. Lots of expensive places have positive net migration!

What has happened to economic activity?

It’s grown, but not by any means at stellar rates. Since 2006, the best that can be said is that Hawaii did about as well as the rest of the U.S. So with real economic output not outpacing the mainland and local prices high, is there any reason for workers to stick around?

Here’s real compensation per worker for Hawaii and selected other states from 2008 to 2015:

Interactive.

But, hold on, that’s nothing new, right? Well, the ratio of Hawaii’s real employment returns to other Pacific states has fallen over time.

So what drives Hawaii’s cost differential? Well, one is population growth in a place with very limited land. But we shouldn’t take that too seriously: Hawaii is the 19th densest state in the union, less dense than other island territories like Puerto Rico, American Samoa, or the Northern Mariana Islands.

Of course, Hawaii has protected much of its land, and it is very mountainous. It’s possible it is at the border of developable density, as remaining land is mountainous or legally protected, though, again, Puerto Rico is quite mountainous and yet far, far denser.

Thus, to the extent Hawaii is “running out of land,” that is almost certainly due to political choices about land use and protected areas, not a physical shortage of space to build on. And indeed, if you look at a topographical map of Hawaii, you’ll see large, relatively flat plains at a safe distance from volcanoes in Maui, Molokai, and a fair amount on the big island of Hawaii as well. More likely, the issue is land use rules, of which Hawaii has extremely strict ones. That drives up the cost of housing and commercial real estate. Likewise, the booming tourism industry in Hawaii may be creating a wedge between the price of real estate for vacation-usage and for residential-usage, pushing residents out in favor of vacationers, as suggested in this pretty good WaPo article. Another factor is the Jones Act, which restricts who can ship goods to Hawaii, thus driving up costs there.

But this is a bit of a non-explanation. Costs have been high in Hawaii for a long time. Why now would they be biting?

Well, here’s ratio between new housing units permitted in the last 5 years in Hawaii, and population change over the last 5 years, going back to 1980–1984:

Interactive.

That’s a big change! Whereas normally Hawaii permitted about 1 housing unit for each 1.5 to 2.5 new people, corresponding to typical household size, that fell sharply to 2000, meaning there was an oversupply of houses being permitted. But then it recovered until about 2006 or 2007. But then, suddenly, housing permitting dropped off a cliff even though population growth was chugging along nicely… and so only 1 house was added for every 3, then 3.5, then 4, then nearly 5 people! The housing shortage allegedly created extremely high homelessness for Hawaii, though that was as of 2007, which is a bit early for this spike.

So that being the case, there must be a really tight market for real estate in Hawaii, right? Here’s Hawaii’s vacancy rate (i.e. the share of housing units with no resident occupying them) compared to the nation on the whole:

Hawaii’s vacancy rate is rising, and above the national average. That is, from vacancy rates, if anything, we would have to conclude that Hawaii actually has a very loose housing market: it’s got a lot of vacant units available! This is not what we see in rapid-cost-escalation places like DC and California, though we do see it to some extent in New York. On the other hand, Hawaii’s real estate is not very much like Puerto Rico’s, another tropical island paradise with declining population.

So what’s going on?

We can look at the characteristics of these vacant units and see the reason for vacancy. Here are the reasons given for each vacancy type:

Interactive.

If what’s really going on is that AirBnB is replacing residential units, it’s not totally clear what category the unit should fall under. Would it be listed as “seasonal use”? Many AirBnB owners use a property for themselves part of the year, and list it on AirBnB the rest. Or would it be listed as “For Rent,” since it is, after all, listed for rent? Or would it be “Other”?

My guess is, there’s no single classification for AirBnB. Indeed, AirBnB is screwing with the data in a weird way: it turns residential property commercial without it ever showing up in housing or construction data as such. I can say this though: Hawaii actually does not have an unusually large share of its housing units listed as vacant due to seasonal or recreational occupancy.

But here’s the remarkable thing: other data confirms the story of a loose Hawaiian real estate market! We can look at the amount of inventory listed for sale (as reported by Zillow) over the last 12 months and compare it to population. Here’s Hawaii vs. selected states and the nation.

Interactive.

As you can see, Hawaii’s housing inventory is actually stable or growing as a share of population and, while it used to have tighter inventories than the nation on the whole, it now actually has bigger inventories!

Interactive.

All of the cities shown here have below-national-average average time on the market… but some are much farther below average than others, and Honolulu, along with Atlanta, is getting much closer to the national average.

So this is odd. The vacancy rate is rising, the relative time a listing sites on the market is rising, the amount of inventory on the market is flat or rising… and yet local prices are rising.

Is AirBnB to blame for this? Well, AirBnB usage could explain a market with high vacancy and high prices, but it seems like smart AirBnB business owners would buy up more houses and list them too. But maybe most AirBnBs in Hawaii are operated by folks who don’t want to manage a large number of properties. Maybe.

One last thought. One way we could look at this would be sub-state variation. Where is population growth slowest in Hawaii? We don’t have county data yet for 2017, but I’m going to take a guess at it based on the 2017 statewide estimates and the method used for back-year revisions, and guess that the population growth for each county from 2010–2017 looked like this:

Interactive.

The weakness is in Honolulu. The outlying islands are indeed having a growth-slowdown, but not as bad as Honolulu. A sidenote: this is a really fascinating case where the core city has great climate, high density, beaches, a progressive government… and is shrinking, while the outlying islands, which can’t properly be considered “suburban” in any sense but are properly rural or micropolitan, are actually growing. Kind of weird. But there’s good reason to think tourism may have agglomerative dis-economies.

Also worth noting: housing costs in the outlying islands do seem a bit lower, according to Trulia’s maps of sale price per square foot.

Let’s turn to a different story in greater detail: college-age migrants.

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Source : https://medium.com/migration-issues/will-hawaii-be-the-next-puerto-rico-31c220ca81e3

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