Sssssssssssssssssssssssssssssss.

That's the sound of a predicted slow leak for O'ahu home prices this year, a leak economists say should plug itself next year to set up a gentle multi-year price rise.

Pop!

That's the sound of some Mainland housing markets that, like Hawai'i, experienced a doubling of median single-family home prices over the past five years, but recently have had sharp price drops indicative of a bubble bursting.

Some Hawai'i consumers have feared a local housing bubble was dangerously inflating over the past few years, but to date they've been proven wrong by past predictions of local economists who said O'ahu's housing price boom wouldn't result in a bust.

Paul Brewbaker, chief economist at Bank of Hawaii, said many long-time kama'aina naturally expect that the five-year doubling of home prices will be followed by a decade of price stagnation or worse, mirroring the 1991-2001 housing slump that followed the last boom.

But the last boom was largely shattered by a recession in California and financial crisis in Japan that hurt Hawai'i tourism and helped shrink the state economy roughly 1.5 percent from 1991 to 1998.

Job losses from the economic downturn and a major reduction in Hawai'i's military population dried up demand for homes, while state and county efforts pumped out affordable housing that increased inventory.

The result was a supply-demand imbalance that drove O'ahu single-family home prices down nearly 20 percent between 1994 and 1999.

Brewbaker said the military downsizing was as if a community the size of Kaua'i's population left O'ahu.

"That kind of exodus was extraordinary," he said. "Nothing like that is expected in the next couple of years."

SALES SLOWED

Today, speculative investors are largely gone, and home sales have slowed for more than a year. But general economic expectations are for continued job and population growth, rising personal income, flat interest rates, and steady second-home buyer interest — factors that industry observers say should support healthy sales and keep prices from falling significantly.

"It's still real stable," said John Harris, owner and principal broker of RE/MAX Honolulu. "It's more of a normal market."

Al Perdido, a 28-year-old engineer, bought his first home last month, a roughly $500,000 house in 'Ewa Beach. He said he bought it without much fear that prices will plummet. "I think prices are going to stay where they are," he said.

O'ahu median sale prices for previously owned single-family homes rose from $300,000 in 2001 to $630,000 last year, according to the Honolulu Board of Realtors.

The long rise of median prices initially was broken in November with a 4.8 percent drop, and the median price for the first four months of this year is up 1.1 percent.

The University of Hawai'i Economic Research Organization earlier this month forecast a 3 percent decline this year for O'ahu's median single-family home sale price to $611,000 from about $630,000 last year, followed by a slow rise back to $630,000 by 2009.

Moody's Economy.com has a bit rosier forecast for a 0.6 percent decline this year followed by small gains to $634,710 by 2009.

WILD PROJECTIONS

Nationally, the median single-family home price rose 1.4 percent last year, and is forecast to rise 1.5 percent this year, according to the National Association of Realtors.

"With all the wild projections by academics, Wall Street analysts and others in the media, it appears that much of the housing sector is experiencing a soft landing," the trade association's chief economist, David Lereah, said in January.

However, prices have tanked recently in some markets that experienced exceptional price growth over the last five years.

For instance, the San Diego area's median home price doubled from 2001 to 2006, and has fallen from 8 percent to 20 percent in each of the last three months compared with a year earlier.

In Sacramento, the monthly declines this year have been between 17 percent and 26 percent after a five-year doubling.

Several markets in Florida have experienced similar results, including Daytona Beach and Cape Coral-Fort Myers.

But a few others like Hawai'i have followed a five-year doubling with relatively flat or modestly positive median price changes this year, including Las Vegas and Baltimore, Md.

Of 40 U.S. metropolitan markets where home prices doubled from 2001 to 2006, Moody's Economy.com expects six markets, including O'ahu, to fare the best this year with median price changes between a 0.6 percent loss and 2.1 percent gain. Median prices for the six worst markets are forecast to fall between 9 percent and 16 percent.

OVERBUILDING BARRIER

Part of the reason Hawai'i's housing market hasn't suffered like others is that high regulatory controls over new home construction in the state acted as a barrier to overbuilding that occurred in other markets and hurt prices.

Job growth is another major factor. The number of jobs in Hawai'i increased 2.6 percent last year, and the state Department of Business Economic Development and Tourism forecasts job growth this year at 1.8 percent followed by 1.2 percent to 1.5 percent annually through 2010.

The national Realtor association in a July 2006 report on the Hawai'i market said job growth is one of the strongest guards against home price decline because it attracts potential buyers to the market and limits forced sales.

"This suggests that any price decline will likely be short lived given the additional buyers ready to enter the market," the report said.

Brandon Lee is an example of job-fueled housing demand. Lee bought a townhouse in Hawai'i Kai earlier this month after relocating from Columbus, Ohio, in January to become Hawai'i district sales manager for his company, American Honda Motor Co.

"It's a tough market because it's an expensive market," he said. "I had to (buy a home) to a certain extent."

Real-estate brokers say most home buyers and sellers don't try to time the market, but act because of major life changes such as a job promotion or divorce.

"If prices go down 1 or 2 percent, they're not going to respond like buying stock," said Bill Chee, president of Prudential Locations.

Likewise, it's not necessarily attractive for buyers to wait a year expecting prices to decline by $20,000 on a $630,000 home, because the savings could easily be eaten up by rent in that time or a slight move in interest rates.

"You should be more concerned about getting divorced or losing your job or something else that would force you to sell (as opposed to a little negative home equity)," Chee said. "If you don't have a home, you should buy one regardless of the market."

FEAR OF LOSING EQUITY

If prices drop a lot, it could convince considerable numbers of prospective buyers to hold off for fear of losing big amounts of equity.

But brokers said changes of 3 percent or less to median prices should have a negligible effect on sales volume.

The number of O'ahu home sales has generally slowed over the last 18 months, partly because prices spiked out of the price range of more buyers.

Affordability hasn't totally disappeared, and is one reason economists say demand, though softer, has stayed healthy enough to keep inventory relatively low and prices from falling significantly.

The UH Economic Research Organization calculates that homes are more affordable today — considering interest rates, median income and median home prices — than they were in 1990 and 1981.

Carl Bonham, a UH economics professor and UHERO executive director, said the median home price was 2.61 times higher than the "affordable" home price in 1981, 2.11 times higher in 1990 and 1.62 times higher last year.

UHERO's median home forecast price of $611,000 this year would be 1.45 times the affordable price of $421,580.

Brewbaker of Bank of Hawaii used slightly different calculations in a January economic report to conclude that the median home price would have to be $750,000 to be as unaffordable as homes were in 1990 or 1981.

"Residual affordability still provides economic opportunity," he said in the report.

Brewbaker added in an interview that it appears the number of sales during the first three months of the year may be gaining strength.

There were 865 single-family home sales in the quarter, which was down 8 percent from a year earlier, according to the Honolulu Board of Realtors. But Brewbaker said when adjusting the numbers for seasonal differences to represent an annualized rate, sales have picked up from the annualized rates based on the last two quarters of 2006.

"There's a little bit of a push back," he said.

Bonham expects sales activity will continue to decline this year but stabilize next year.

Harris of RE/MAX said the sales slowdown hasn't pushed inventory up as much as he thought it would. Inventory had risen consistently since early 2005 from about 800 units to 2,000 units late last year, but has since receded to about 1,700 units, compared with historical highs near 2,500 in 1991 and 1996.

"We still have fairly low inventory for how fast things are being absorbed," Harris said. "I still think there's healthy demand out there."

CONDO SALES SLOWING

Still, because homes are so expensive — typical buyers spend about 50 percent of their income on mortgage payments — more people are having to buy condominiums instead.

Condo sales have outpaced single-family home sales for several years, but also have been slowing for 18 months or so. During the first quarter, sales were down 19 percent to 1,361.

The median condo sale price more than doubled from $133,000 in 2001 to $310,000 last year.

This year through April, the median price is up 5.6 percent.

UHERO forecasts the median condo price will peak this year on a 3.5 percent rise to $321,000, dip 1 percent next year and rise 1 percent in 2009.

Of course, it remains to be seen whether prices will move in line with forecasts. Economists and brokers say that an extraordinary unexpected event like an interest-rate spike or an economy-derailing natural disaster could derail the housing market's stabilization.

The National Association of Realtors last year said the biggest risk to Hawai'i's housing market was interest rates approaching 7.5 percent and triggering a drop in purchases and prices.

Recently, the trade group forecast fixed rates on the average 30-year mortgage will fluctuate within last year's range of 6.2 percent to 6.6 percent through mid-2008.

HOUSING MARKET IN '90S WAS A BUST

Historically, most housing booms haven't lead to busts.

According to a 2005 Federal Deposit Insurance Corp. study, 54 housing booms in different communities across the country from 1978 to 1998 were followed by nine busts.

The study defined booms as a three-year price rise of 30 percent or more and busts as a decline over five years of at least 15 percent.

O'ahu's housing market in the 1990s was one of the busts, and largely stemmed from California's recession, Japan's financial crisis and military downsizing that hurt Hawai'i's economy.

In 45 of the 54 booms, post-boom home prices rose an average of 2 percent per year for the next five years.

Reach Andrew Gomes at agomes@honoluluadvertiser.com.