Phil Hayworth – The Garden Island Hawai‘i’s three largest banks raised their base lending rate to 5 percent, up from 4.75 percent. It was the fourth moderate rate increase in the past five months, following the lead of the Federal
Phil Hayworth – The Garden Island
Hawai‘i’s three largest banks raised their base lending rate to 5 percent, up from 4.75 percent.
It was the fourth moderate rate increase in the past five months, following the lead of the Federal Reserve Bank, who raised short-term rates by one-quarter of a percentage point to 2 percent. That rate stood at 1 percent, a 46- year low, when Fed Chairman Alan Greenspan and his colleagues began raising rates in late June.
The increases are part of a gradual process to wean the economy from what was an extraordinarily low federal funds rate. Fed officials seek to tighten the money supply and slow economic growth after the economy finally rebounded from its summer slowdown.
The new 5 percent rate went into effect Wednesday at First Hawaiian Bank, and the Bank of Hawai‘i and American Savings Bank announced that their new rates kicked in yesterday. The prime, or base lending, rate is the benchmark for many types of loans such as home, car and business loans, and credit card rates. Meanwhile, mortgage rates around the country rose. Rates on 30-year, fixedrate mortgages averaged 5.76 percent for the week ending Nov. 11, Freddie Mac said in its weekly survey released Thursday. That was up from 5.70 percent last week. Most lenders in Hawai‘i have been quoting 5.375 percent for a mortgage this past week.
How will all this affect Kaua‘i’s super-hot real estate market?
Very little, says Ed Mac- Dowell of Vision Properties in Kapa‘a.
“I don’t anticipate any drop in the market,” Mac- Dowell said. “Most Realtors are pretty comfortable until lending rates hit about 6.75 (percent).”
At that point, borrowing becomes prohibitive. When it gets that high, MacDowell and others in the business recommend that people with excellent credit (and sizable incomes) borrow from large banks like Merrill Lynch and Morgan Stanley, pegging the loan on the London Interbank Offered Rate or “LIBOR” index.
“Right now, the LIBOR is at about 2 percent,” Mac- Dowell said.
The LIBOR is relatively unknown outside of banking and real-estate circles, and is recommended for buyers looking for short-term ownership — anywhere from five to seven years, Mac- Dowell said.
“That’s about the normal amount of time people hang on to a property, even here on Kaua‘i,” he said. But the average real estate buyer or business person reinvesting in a business usually goes the route of a traditional bank. By doing so, they stand to pay far more in interest over the long haul. Long-time Kaua‘i real-estate professionals like MacDowell figure that, even as rates jump, the inventorypoor Kaua‘i market will continue to woo well-heeled buyers looking for that second home or retirement villa. The ones hurt most by rising rates are low- and middle- income buyers looking for the ever-elusive “affordable” home somewhere in the $300,000 to $400,000 range.
To keep the market hopping even in times of a tighter money supply, Kaua‘i simply needs more inventory, MacDowell said.
“The big issue here is getting some ‘gap’ and affordable housing developed,” MacDowell said.
A perplexing issue surrounding the prime lending rate is that low rates don’t guarantee cheaper mortages, credit cards or car loans. For example, a year ago when the lending rate was 4 percent, 30-year mortgages averaged 5.98 percent with 15-year mortgages at 5.31 percent and one-year ARMs at 3.73 percent. As for automobiles, officials at Kaua‘i’s largest dealer, King Auto Center in Lihu‘e, anticipate another banner sales year because most manufacturers offer startlingly low in-house financing. “We can offer loans much lower than the prime rate,” said Jose Aguayo, King’s general manager. For example, Chrysler Financial is offering zero-percent financing for 60 months — that’s five years — on most of their vehicles, Aguayo said.
“The manufacturers are still being very aggressive with their vehicles,” he said. “We don’t see a change coming this year. In fact, they’re all competing against each other, so when one offers a deal, the others usually follow.”
And with the big end-of-theyear push coming, Aguayo said, “everyone wants to be number one. We might see a change next year.”
As car makers jockey for business with zero-down, zerointerest loans, local credit unions are competing with low interest loans themselves, sometimes as low as 0.9 percent, Aguayo said. “The auto industry is a little bit different than other businesses,” he said.
Phil Hayworth, business editor, may be reached at 245- 3681 (ext. 251) or phayworth@pulitzer.net.John Smithson
