Via Hawaii Business Magazine:

“Hawai‘i’s Condo Insurance Crisis Is Now Hurting Sales

Sales fell 48% in Waikīkī and 38% in Makiki-Mō‘ili‘ili in June. Both neighborhoods have lots of underinsured, older condo buildings.

Honolulu’s condominium market is starting to show the effects of skyrocketing insurance rates for homeowners associations: The number of condo sales in June was down nearly 25% from June 2023, even though more units were for sale than at any time in the last three years.

Disasters like hurricanes and wildfires in the U.S. and around the world – including the Maui fires a year ago – have driven up home insurance rates here and elsewhere. As a result, many Hawai‘i condominium associations have seen the prices of their master insurance policies increase 300% or more in one year, and some have seen an extraordinary 900% to 1,300% increase.

An estimated 400 condo associations on O‘ahu have elected to carry less than 100% replacement coverage on their master insurance policies, which means they won’t have enough money to rebuild if their properties are damaged or destroyed in a hurricane or other disaster. Some associations have secured insurance coverage on the pricey secondary market, but that means condo owners must deal with higher maintenance fees or assessments to pay for it, in addition to the premiums on their individual homeowners insurance known as HO6 policies.

Local banks, in most cases, won’t take the risk to lend on units in underinsured buildings. That makes it difficult, if not impossible, for buyers without access to large amounts of cash to buy condos in those buildings and puts sellers in a similar pickle. Some buyers have canceled sales after going into escrow because they weren’t able to secure their mortgages.

“My intuition is we’re going to definitely see this reflected in the market in the next six months,” says Fran Gendrano, president of the Honolulu Board of Realtors.

Makiki-Mō’ili’ili and Waikīkī Sales

The impact is already starting to show in the board’s monthly reports. The O‘ahu condo market, while battered by rising interest rates over the past two years, had shown some recovery in four of the first five months of 2024.

But then condo sales on O‘ahu dropped 24.5% in June, compared to the same month in 2023, and were down 25.7% from May. Larger drops occurred in neighborhoods with the largest concentrations of condo buildings on the island and many older buildings. In Waikīkī and Makiki-Mō‘ili‘ili, sales plunged 48% and 38%, respectively.

Islandwide in June, the decline in the number of condos that sold was largest among condos that sold for less than $700,000, according to Honolulu Board of Realtors statistics. That month, the number of units sold for $500,000 to $599,999 fell 37% compared with June 2023, while the number sold for $600,000 to $699,999 dropped 48%.

Even sales of units that sold for less than the median price of $530,000 fell. The number of units that sold for $300,000 to $399,999 dropped 31.6% in June, and the number that sold for $400,000 to $499,999 declined by 24.4%.

Taking Longer to Sell

At the same time, the number of condos on the market is rising, and those units are taking longer to sell. The active inventory of condos for sale in June totaled 1,729; that’s 49.2% more than in June 2023 and the most condos on the market on O‘ahu since September 2020.

The average number of days on the market – from listing to contract – rose to 29 days in the first six months of 2024, up from 22 days in the same period last year.

It took less time to sell single-family homes on O‘ahu. For those, the average number of days on the market was 20 days in the first six months of 2024, down from 25 days in the first six months of 2023.

Some local credit unions are still providing some first mortgages and home equity lines of credit, or HELOCs, for condos that don’t carry 100% replacement coverage. But that’s on a case-by-case basis and comes at a premium. Big banks are not.

“We do not extend loans on condo buildings that fail to meet the standard of 100% replacement cost coverage,” Alan Fentriss, senior VP and director of home loans at American Savings Bank, said in an emailed statement. “We’ve got many prequalified buyers looking to buy condos, but it’s unsafe for them to do so if the buildings aren’t adequately insured.”

Gendrano, who is also principal broker at KFG Properties Inc., says some mainland lenders still write mortgages here – but that may not be the case for much longer.

Deferred Maintenance Also an Issue

Chad Takesue, chief sales officer at Honolulu real estate firm Locations, says deferred maintenance on older buildings is compounding the problem. Buildings that have put off such projects as replacing aging pipes or drain lines are seeing their insurance premiums skyrocket as well.

“Some condos have done a good job of budgeting for that,” Takesue says. “Part of it is they may have budgeted but with inflationary costs, if they’re not reevaluating their budgets to the new cost structure, they’re short.”

Hawai‘i’s salt-air environment can play havoc with concrete spalling and cause pipes to rust before their estimated useful lifespans, which can accelerate the need for a project before an association has budgeted for it, he says.

“You see good condos implement annual inspections and plumbing inspections for each unit, (to see) if there are any leaky faucets,” he says. “Some condos have found ways to implement measures to minimize that.”

All of this is prompting some buyers to look at newer condo buildings that they might not have considered otherwise, Takesue says.

“One thing I am seeing is in areas where there are new projects, they’re fully insured,” he says, citing units in the newly built condo Ililani in Kaka‘ako. (Locations is the exclusive project broker for those units.) “We’re seeing some migration from resales to the new projects.”

Takesue advises sellers or their agents to order their condo documents before listing condos for sale, so they can inspect the insurance summaries and know up front about any problems for potential buyers seeking mortgages. Those documents are typically ordered for buyers after units are in escrow. While experienced agents already look for red flags ahead of listing, the insurance issue adds another layer to the due diligence, he says.

Seeking Government’s Help

Gendrano notes that the condo insurance problem is not unique to Hawai‘i. Condo communities in Florida, Maryland and California have also been hit with skyrocketing premiums.

She says the government needs to do something because affordability is being wiped out by the higher insurance premiums and limited access to mortgages. Differing bills that addressed the issue (House Bill 2686 and Senate Bill 3234) passed in their chambers this year, but a conference committee in the final days of the legislative session failed to find a compromise.

House Speaker Scott Saiki didn’t rule out a special session to reconsider the issue, but at this point there seems to be little momentum to call lawmakers back before January.

“We have to solve the problem. It’s not about just moving the property,” Gendrano says. “There’s a big looming issue. I don’t want the new buyer or the new owner to inherit this issue without anything in place, any sign that it is going to improve.”

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