This is the soil where, in 1923, her great-grandfather planted 10 mango trees and built a house. Here is the place where geese chased her mother as a child. This is the land the federal government said belonged to Stephanie Lauifi as a Native Hawaiian.
Lauifi, 55, has lived on Molokai’s Kalamaula homestead for most of her life. Her great-grandfather, among the first Native Hawaiian homesteaders, moved onto the land just after the passage of the Hawaiian Homes Commission Act 100 years ago.
But when it comes to the bottom line, federal rules say the land is not Lauifi’s to profit from.
While Native Hawaiians can buy homestead properties for prices below market value, the deal is a double-edged sword. When it’s time to pay college tuition or repair a crumbling roof, they find themselves with less wealth to borrow against.
That’s because federal guidelines confine them to “replacement cost appraisals” that give no value to the ground below the house.
These appraisals also ignore home prices in the area, so that while fee simple houses around them appreciate with a soaring statewide real estate market, Native Hawaiians on homesteads watch their home equity stagnate.
After waiting years — sometimes decades — for a lot, Hawaiians are hamstrung by the rules governing the very homelands whose return they so long anticipated.
No matter how carefully Lauifi tends her orchard, she will likely never reap the full value of its soil.
Where capital is concerned, Lauifi’s land belongs not to her but to the Department of Hawaiian Home Lands, a state agency charged with facilitating the return of crown lands seized from Native Hawaiians in 1893 by a U.S.-backed group of sugar and pineapple plantation owners. The businessmen and their U.S. military co-conspirators deposed Queen Liliuokalani and lobbied the president for U.S. annexation of Hawaii, which occurred in 1898.
By then, after more than a century of population decline due largely to diseases introduced by Europeans, Native Hawaiians had become an economically marginalized ethnic minority in the islands.
Twenty years after annexation, owing to the advocacy of Prince Jonah Kuhio Kalaniana‘ole, Congress passed the Hawaiian Homes Commission Act.
It placed 200,000 acres of the captured crown lands in a trust for Native Hawaiian beneficiaries — those with at least 50% Indigenous ancestry.
The act sought to encourage Native Hawaiian economic prosperity and provide “financial support” to enhance self-sufficiency and community-based development that would allow the traditions, culture and quality of life of Native Hawaiians to “be forever self-sustaining.”
While the duty of administering the trust rested first with the federal government, that responsibility shifted as a condition of Hawaii’s statehood in 1959. The state Department of Hawaiian Home Lands, which took over the land trust, distributes land in the form of 99-year leaseholds, which can be extended to 199 years. Beneficiaries with homesteads are called “lessees.”
“DHHL, as a state agency, is treating all of us within these areas less than how the average homeowner is being treated outside of these areas. Isn’t that redlining?” — KipuKai Kuali‘i, Kauai homesteader
But federal guidelines continue to obstruct the full return of trust lands. Some housing advocates and beneficiary leaders say the confinement to replacement cost appraisals — unique in the United States to the homestead program — combined with policies such as the denial of second mortgages and a cap on borrowing power, are paternalistic and constitute a system of unfair lending that prevents Native Hawaiians from benefiting off their homelands.
DHHL defended its practices, pointing to the fact that beneficiaries have the chance to purchase homes for half price as compared to fee simple, and do not have to pay property taxes for the first seven years of their leases.
“Hawaiian Home Lands beneficiaries get preferential housing treatment over part Hawaiians and the rest of the free market,” wrote department spokesman Cedric Duarte. “Returning Native Hawaiians to their lands is the Department’s priority.”
Yet the median home values on Hawaiian Home Lands “tend(ed) to be lower than home values in the state overall,” according to a 2017 Department of Housing and Urban Development report. Some 35% of the homestead properties sampled were valued below $200,000. While median home values ranged widely between homestead developments, all were lower than Hawaii’s statewide median home value in 2017, $537,400.
For KipuKai Kuali‘i, who lives on the Anahola homesteads in Kauai, the contrast is stark.
“We are in a designated area. We are in the homestead. You can draw a line around us if you want,” Kuali‘i said. “DHHL, as a state agency, is treating all of us within these areas less than how the average homeowner is being treated outside of these areas. Isn’t that redlining?”
To the naked eye, the homes lining a Kapolei cul-de-sac might appear nearly identical. Two stories, garage, neutral paint job. But under an appraiser’s trained gaze, the difference in value is stark.
Homeowners need to have their properties appraised to determine the home’s value in the eyes of the bank, which decides how much its owner can sell it for, or borrow against when refinancing their loan.
Susan Gonsalves, a manager at Mann Mortgage, one of a small pool of banks issuing loans to beneficiaries, described a particular area of Kapolei where she has worked.
“There’s a subdivision, on one side of the street, that belongs to Hawaiian Home Lands, and then there’s homes right across the street that are market homes,” she said. “And we’ve got people living in basically the same house. But the Hawaiian Home Lands consumers are probably paying less than half in mortgage payments from the people across the street. And that’s just value. Their houses are coming in at $300,000, versus the ones across the street at $700,000.”
Indeed, lessees who manage to get off the long waitlist and qualify financially for a lot are met with lower mortgage payments than their neighbors across the street. But this is a disadvantage when it comes time to pull equity out of their homes.
The disparity is not in the backyard or kitchen size. Rather, appraisers evaluate these houses with different methods that leave the homestead property worth far less than its fee simple neighbor.
While most American homeowners get market value appraisals, meaning their home is evaluated based on sale prices of similar houses nearby, for Native Hawaiians, their houses may as well be in the middle of a desert.
Federal guidelines mandate that DHHL homes be evaluated using a “replacement cost appraisal,” which calculates exactly how much it would cost to rebuild the house, nail by nail, if it’s completely destroyed.
“A lot of times, I feel really bad for … (lessees on Hawaiian Homelands), because they’ll come in saying, ‘I think my house is worth this much,’ but when we get the appraisal back, it could be $100,000 less than what they anticipated,” Gonsalves said.
The replacement cost method does not take into account the value of the land below the home — a particularly big disadvantage in Hawaii, where land contributes far more to a home’s price than in the rest of the country.
“There’s trapped equity in homestead communities.” — Michelle Kauhane, former DHHL deputy director
In Honolulu, an average of 65% to 75% of the cost of a common home is based on the value of the ground on which it sits, according to a study by University of Hawaii economist Sumner La Croix. Meanwhile, the nationwide share peaked at 46% in 2006.
Disregarding the land means ignoring its location, too.
“It’s not market-based. It doesn’t matter who sold a house in their neighborhood, (or) when it sold, there’s none of that. Versus the regular consumer who gets to go off of market appreciation,” Gonsalves said.
The increase in home values along with the owners’ borrowing power, a process known as equity appreciation, has for the last century formed the foundation of upward mobility for middle and working-class Americans. In 2016, home equity was the greatest single source of wealth for Americans, accounting for 34% of American household net worth, according to a U.S. Census report.
The denial of such appreciation to African Americans, whom the federal government largely blocked from the benefits of homeownership by redlining beginning in the 1930s, has entrenched and exacerbated economic disparity between Black and white Americans.
Equity appreciation is particularly salient in Hawaii, where home values and land prices have skyrocketed. The median sale price for a single-family home on Oahu nearly quintupled between 1985 and 2019, going from $158,600 to $789,000, according to data from the Honolulu Board of Realtors.
But Native Hawaiian lessees are largely excluded from such generational wealth-building, by the very program designed to right historic wrongs.
According to a 2018 state report based on census data, Native Hawaiians — including those with less than 50% ancestry — have the highest poverty rates of the five “largest race groups” in the state. That year, Native Hawaiian per capita income was $20,664, 31% below the state average.
“I definitely think that there’s trapped equity in homestead communities,” said Michelle Kauhane, who served as deputy director of DHHL from 2011 to 2012. “They give value only to the vertical unit — there’s no land value, because again, it’s trust lands.”
In 2001, after decades of living on fee-simple properties around Hawaii, Richard Soo moved onto a Hawaiian Home Lands lot, at last obtaining his entitlement as a Native Hawaiian. But in some ways, that’s when it began to feel as though he was entitled to less.
To pay college tuition for his two sons, Soo, like so many Americans, tapped into his home equity. The tax statements he received from the City and County of Honolulu — telling him his property was worth nearly $1 million — seemed to confirm he would have no problem financing college.
But he soon faced the reality that this equity wasn’t all his to tap into.
“Our property over here is now worth almost $1 million,” he said. “You know, that’s how it is these days in urban Honolulu. But Hawaiian Homes doesn’t allow us to access this property value.”
Instead, the bank appraiser based its estimate off the replacement cost appraisal Soo’s insurance company had done.
“The government is telling me that my property is worth like $900,000 plus, and then State Farm is telling me that my property is $430,000,” Soo said. “It’s like 50% less than what I could get if this was fee simple.”
Replacement cost appraisals restrict Native Hawaiians when they’re trying to buy or sell a homestead, too.
Cindy Pagan, a loan officer at Guild Mortgage who works with beneficiaries, said there’s often a gulf between the list price of a homestead sold by a lessee and its appraised value.
When a beneficiary seeks to buy a homestead from a current lessee, they can only get a mortgage on the appraised value of the home. But sellers will often choose to list their homes for more than that, leaving buyers to pay the difference out of pocket.
“You get no credit for the land because it’s owned by Hawaiian Homesteads (DHHL),” Pagan said. “So typically, the values are a lot lower than a normal resale … it could come in as much as $80,000 less than what the seller deems it’s worth.”
In the end, Pagan said, this gap often means a would-be buyer can’t afford the house.
A HUD reference guide says lessees are restricted to replacement cost appraisals because there’s no ‘open market’ for homesteads. But loan officers and advocates alike said that even though the market is restricted to those with at least 50% Hawaiian ancestry, it’s competitive.
“Generally, if the house is livable and safe, it’s not spending a lot of time on the market,” Gonsalves said. “There are people fighting over those houses.”
Loan officers said most homestead mortgages they issue are for sales between beneficiaries, not for homes awarded directly by DHHL.
In a given year, almost as many Native Hawaiians move onto their homelands through private purchases as they do through purchases from DHHL, property records show. In 2019, 16 homes were sold privately to other lessees, for a median value of $420,000. In October 2019, the median single family home value statewide was $695,000. In 2018, 17 lessees bought homesteads from current lessees, and 24 did so in 2017.
Meanwhile, out of the 28,306 applicants on the waitlist in 2018, DHHL awarded a total of 29 residential leases that year.
Kauhane, the former deputy DHHL director, thinks there could be a way to allow market value appraisals on Home Lands: theoretically, for refinancing and buying from other lessees, homesteads could be appraised using sales of comparable leasehold properties in the area.
But it’s not as easy as flipping a switch. Policymakers would need to examine how such a change would impact costs for beneficiaries on the waitlist.
When asked about replacement cost appraisals, DHHL said HUD crafted the policy. Duarte said that beneficiaries who want the Hawaiian Homes Commission to advocate for a change may request that by submitting testimony.
Stacelynn Eli, a Hawaii state representative and fifth-generation homesteader, said the lack of equity appreciation on homestead properties has amplified the harms caused by America’s takeover of the islands.
“From Kingdom days to statehood, I think there’s just been generational trauma caused by colonization,” Eli said. “Even though I’m a proud American, I’m still a Native Hawaiian, just trying to find my way. I think a lot of my community members feel that way, too.”
The Hawaiian Homes Commission Act’s basic promise to foster economic prosperity has yet to be fulfilled. “After all these years since the Act was enacted … I would like to see our people thrive, and not just survive,” Eli said.
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