Rebound Markets Gain in Starts; Gain in Pricing

This month, we feature two markets that are on the rebound from housing downturns, Denver and Honolulu.

Denver is one of our favorite markets in the country. In addition to being situated in the center of the country, the area boasts a high education level and an outstanding quality of life. The long-term outlook for continued economic prosperity in Denver is excellent.

For a market with plenty of land in the outlying areas, housing is also relatively expensive. The median price of a resale home is $241,900, but prices vary widely by location. For $240,000, a consumer can buy a new townhome near the city or a 2,000-square-foot new detached home on a 6,000-square-foot lot 30 minutes north of the city.

Denver has a history of brutal housing cycles, which in the past have been driven by a combination of high supply and economic downturns in single industries (oil and technology). Today, the market is slowly improving after the technology decline of the early 2000s. Prices are slowly on the rise and job growth has returned.

The local pricing environment in Denver remains competitive, primarily because so many large builders are trying to maintain high sales volumes. The highly competitive conditions of the local housing market will persist and constrain price gains for the short-term. With an abundant land inventory, high levels of supply will continue to be added in outlying areas, even though these areas were hit the hardest during the recent downturn.

Building in desirable locations and within a reasonable commuting distance to central Denver are the lowest-risk strategies, as evidenced by the relatively strong performance of the Highlands Ranch and Stapleton communities during the local downturn. Over the long-term, a presence in Denver will pay off.

After being battered by the California and Japanese recessions in the 1990s, and the decline in tourism caused by 9/11 and SARS, Honolulu is on the rebound. The housing market feels like it did in the late 1980s, with bidding wars all over the island and high-rise residential construction again starting in Honolulu.

With a median price of about $451,000, Honolulu housing is far from cheap. D.R. Horton, Centex and Brookfield have all successfully expanded to Hawaii in the last several years, but each is taking high risks by competing with local builders who have owned their land for decades.

In the last two years, the housing markets in Oahu, Maui and the Big Island have all experienced robust price appreciation. Long-time home owners are recovering their equity and moving up to a new home, while the California-buyer-driven resort market is exploding. One of the most amazing examples of resort demand is Centex's Kolea community on the Big Island, with townhome prices exceeding $1,000 per square foot!

Although we are certain to get nasty e-mails for printing this, the new home architecture in Hawaii today reminds us of the cheap housing of the 1980s. Finally, local builder Stanford Carr Development and some of the mainland builders are beginning to "raise the bar" architecturally.

With only 4,100 permits issued on Oahu, in 2004 and another 3,400 on Maui and the Big Island combined, Hawaii is too small for most of the large builders but the right size for someone with local connections who is happy building a few hundred homes per year.

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