Hawaii is the most expensive state in the country in which to rent – and Honolulu ranks third among cities – according to a recent study by the National Low Income Housing Coalition.

Yet it still could make more financial sense for people in Honolulu to rent rather than buy, according to one national analysis of buying vs. renting a home of similar value.

What’s known as the Price of Paradise puts people here in a double whammy: whichever way they turn prices may seem high. While it may be less financially burdensome to rent, some fear that if they don’t get into the housing market, they’ll be left behind, and never be able to own — or enjoy the hoped-for benefits of ballooning values.

But a recent New York Times analysis of buying vs. renting found that Honolulu has the country’s second highest “rent ratio”: the purchase price of a house divided by the annual cost of renting a similar one. A ratio above 20, according to columnist David Leonhardt, means people should at least consider renting, particularly if they plan to move within five years. When it’s under 20, buying tends to make more sense.

So what was Honolulu’s number? Thirty-four. In the nation’s largest cities — including New York, Chicago and Los Angeles — the average was 16.

Once the numbers reach 25 or 30, it’s a sign that there could be a housing price bubble, Thomas Lys, an accounting professor at Northwestern University, told the Times.

“Hawaii has been traditionally higher because you have a finite marketplace, and there’s always been pressure on the government to keep a lot of properties agricultural,” said Stephany Sofos, a real estate consultant and analyst. “Land has always been controlled and expensive. And because Hawaii is so beautiful and everyone wants to live here, you have guaranteed growth.”

Housing prices soared in Honolulu over the past decade, with the average sale price reaching a peak of $770,000 in 2007, and hitting a trough of $645,000 in 2009, according to a report from the University of Hawaii Economic Research Organization. The 16 percent decline on Oahu was far less than the 40 percent drop some of the neighbor islands experienced.

The neighbor islands, infused with overseas money, were clearly in a bubble, said Byron Gangnes, Director of the Hawaii Forecast Project for UHERO. Though Oahu has seen prices drop, he would not place it in the same category. He credits the overall economic recovery for recent gains in house prices.

Gangnes said: “But we still have a large number of foreclosures, and that’s going to weigh on prices,” which UHERO predicted won’t rise significantly until 2012 and beyond. Overall, the affordability that existed early in the decade has vanished and rising housing prices, while good for established owners, has put more pressure on renters.

The Fair Market Rent for a two-bedroom dwelling in Honolulu is $1704. To afford this, a household should earn $68,160 per year. For a three-bedroom unit in Honolulu, the salary requirement is nearly $99,000 — approximately 122 percent of the average monthly income.

Fair Market Rent is the amount of money a property would command in a certain area if it were available for lease. But according to a website tracking rental properties, the average price for a two-bedroom unit in Honolulu in March 2010 was $2111.

The situation is going to get worse, Sofos said. She pointed to several factors. A tight credit market continues to make it difficult to obtain a loan. Hawaii’s unemployment situation is far from resolved. Inflation is starting to increase. And taxes continue to rise.

“So you have a perfect storm coming,” she noted. “Unless there’s job creation in the next nine months, it’s going to be very tight. And if people can’t come up with $150,000 for a down payment, they’re going to rent.” Further complicating matters, foreclosures or sales by necessity push former owners into the rental market, increasing competition.

Real estate analyst Ricky Cassiday predicted the housing and rental markets would remain flat before rising again. When real estate prices go up, rents follow, with a lag of a year or two. The irony of the situation is that a good economy drives home prices up, making them more unaffordable. When prices fall, people don’t have jobs, can’t purchase houses and struggle to make rent payments.

In current budget negotiations, the Honolulu City Council is floating a proposal to create a new property tax class for non-occupant homeowners.”Landlords will be forced to move the cost down to the tenants,” said Sofos. “Those dollars are going right to the renter. They have to.”

It doesn’t appear that there’s an end in sight to the double bind in Honolulu.

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