Oahu’s frenetic real estate cycle that saw the median single-family home price soar above $1 million is cooling.

The rush was still on in May to buy and sell homes on Oahu ahead of rising interest rates and inflation, which can price buyers out of the market, creating a drop in demand that causes values to soften.

Sales of single-family homes and condos were still moving at a near-record pace in May where the median time on the market was just 10 days. Demand was so strong in May that a majority of single-family homes and nearly half of the condominiums sold for more than the asking price. It’s still not unusual for buyers to come to the table with cash to cover gaps when appraisals come in higher than the sales price.

But there were signs in the data released Monday by the Honolulu Board of Realtors that the market is losing some of its sizzle. While median prices for both single-family homes and condos reached all-time highs in May, sales fell double digits for single-­family properties.

Paul Brewbaker, principal of TZ Economics, said the data is “an indication that there is a cooling off about to unfold, to the extent that it hasn’t already.”

The Honolulu Board of Realtors reported that the median sale price for previously owned single-family homes on Oahu hit $1,153,500, a rise of 17.9% from May 2021. However, single-family sales dropped to 344, a 15.1% decline from the same period.

The board reported that condominium sales in May climbed to 688, up 15.1% from May 2021. During the same period, the median price paid for a condominium rose 12.8% to $516,500.

Brewbaker said the recent exceptional demand, which has been driven in part by a new legion of at-home workers looking for better homes, has started to ease up as more buyers find themselves squeezed by rising interest rates and rising prices.

He said the full effect of the average rate on a conventional 30-year fixed-rate mortgage going from 3% to 5% likely won’t show up in real estate data until June, July and August.

“There’s a deceleration unfolding that will bite more deeply over the summer. It’s not a train wreck. It’s not a sudden stop. But it’s braking,” Brewbaker said. “We are hoping to observe a soft landing rather than a hard bounce.”

The University of Hawaii Economic Research Organization reported in May that the anticipated interest rate increases may have pushed up demand in the short term as buyers rush to lock in fixed-rate mortgages. But the organization said that “ultimately, the combination of higher interest rates and surging home prices will put downward pressure on housing demand suggesting rapid housing appreciation in Hawaii is unlikely to continue.”

Brewbaker said the slowdown doesn’t mean that prices have to collapse as they did following past bubbles, which differed from this pricing run-up because previous bubbles had higher appreciation. Also, past bubbles were uniform, unlike this cycle, where condominiums still have room to grow.

“I don’t think we’ll see a big exit in addition to the exit that we’ve already seen,” Brewbaker said.

“It’s possible prices could sort of drift for a while,” until they realign with their historical long-term average annual growth rate of 4%, he added.

Real estate analyst Stephany Sofos said even with the slowing, the current market is still hot.

Sofos said rising interest rates are adding challenges, although she’s more concerned about the impact of inflation and job stagnation.

“The interest rate rise makes more of a difference for someone buying a $1 million home than a $500,000 home,” she said. “The problem right now isn’t price for most people; it’s lack of inventory.”

Sofos said many buyers still are paying premiums. To be sure, the Board of Realtors reported some 217 single-family homes, or 63% of May’s single-family home sales, sold above asking. As many as 313 condominiums in May, or 45.5% of May condominium sales, sold for more than the original price.

Matthew G. Beall, CEO and principal broker of Hawaii Life, agreed that inventory is among the biggest challenges on Oahu, especially for homes in the luxury segment, which are over $3 million each. Last year, Beall said, that market and the uber-luxury market, homes above $10 million, “enjoyed their greatest year in the history of Hawaii real estate.”

“While we’re doing less volume in luxury then we were a year ago, it’s still historically very high,” Beall said. “If you zoom out, it looks like we had a big Stegosaurus spike. The question is, Where does it land?”

Beall said it could settle back into pre-pandemic levels. But, he thinks for Oahu, which has a lot more inventory challenges in the luxury space, “it may settle quite a bit because at a certain point you just run out of things to sell.”

Shannon Severance, a high-volume real estate agent with Re/Max Honolulu, said inventory is so limited on Oahu and demand is so strong that she has had buyers who were willing to pay six figures over asking.

“Even my 100% financing veteran buyers are having to come in with cash. If the appraisal comes out, everybody’s happy, but if not, they are expected in this market to make up the gap. I can’t remember the last offer that I’ve done that didn’t have an appraisal clause in over a year.”

Severance said home values have appreciated so much on Oahu that townhomes in her Ewa Beach neighborhood are now going for what she paid for her home in 2012. Rents are high, too, she said.

UHERO reported in May that nationally, rents have risen 18% over the past year, while rents in Honolulu have risen 11%.

“I think prices will level off and we’ll see a small plateau,” Severance said. “It’s not something that I’m nervous to see. I think it’s what we need for our market and our economy. It’s healthy.”

Severance said uncertainty about when the run-up in home prices will end has caused some sellers to try to cash in before the market turns.

“People are renting that normally own homes because they thought it was a bubble,” she said.

A few sellers are listing homes early even if that means the inconvenience of having to rent for a time, Severance said.

“People are reacting emotionally to the market,” she said. “I tell them, ‘It’s a seller’s market, congratulations. But now you are a buyer.’”

HOME SALES

The number of homes sold on Oahu in May with the median price and percentage change from the same month in 2021:

HOMES

SALES MEDIAN PRICE

May 2022 344 $1,153,500

May 2021 405 $978,000

Change -15.1% 17.9%+

CONDOS

SALES MEDIAN PRICE

May 2022 688 $516,500

May 2021 598 $457,750

Change 15.1% + 12.8%+

Source: Honolulu Board of Realtors