Editor’s Note: This story first broke over the weekend in the Guam Buildup News e-newsletter and is made available now at the web site.
GUAM – Even as the market for residential real estate turned soft in the second quarter this year and has remained so going into the third quarter, Guam’s overall market continues to recover and investors remain focused on the medium and long term, experts say.
Long term confidence on the part of investors and developers that the military rental market remains reliable even now and will grow over the next ten years as the military continues to expand on Guam, lies at the heart of continued market recovery, even as short term conditions are a test of faith and staying power.
In the short term, the market has shown just how much it depends on military housing rentals. “The majority of the high-end properties are having a tough time right now,” explained Christopher S. Murphy, owner and principal broker of The Real Estate Professionals LLC. “One thing that happened recently is that it appears the military has held back some military from renting off-base to fill up the recently renovated and new-build housing on-base.”
Mr. Murphy said that while military families continue to frequent the local housing market, they spend less on rentals, $2,200 to $2,600, than the “renter teams” of the past where three or four military singles would team up to afford a luxury rental, spending up to $3,800 a month.
Military housing rentals have been a leading indicator for the residential market, but personnel stationed in Guam must first be approved to use their housing allowance for off-base rentals, Mr. Murphy said. “Most realtors will tell you that while they rely on the military to sustain them, more and more military renters are being held back.”
But there are reasons to believe the market overall remains on track to recovery, according to an August 2011 report by W. Nicholas Captain, president of Captain, Hutapea & Associates.
“Overall Guam’s real estate market through the first half of 2011 remains in recovery from the anemic market conditions reflected following the financial market meltdown in 2008,” Mr. Captain wrote. “Although market conditions remain tenuous, we haven’t witnessed any type of mass market exodus or explosion of foreclosure activity that caused prices to collapse in the early 2000’s.”
Developers see profit potential in investments priced neither too high nor too low for the market, Mr. Murphy said. Even now, the rental market is still averaging out at a healthy $2,500. That would earn an 8 to 10 percent return on a $300,000 investment home, “which is pretty good,” he said. “So the opportunity is still out there for investors, if they can find that kind of property — good quality, right price point — for sale.”
Developers also see military families as a nascent investor market since the banks will give them 100 percent financing through the VA program to buy their primary homes. “The military has become a little savvier to the market opportunities in Guam, and more banks offer the VA program,” Mr. Murphy said. By the time they leave Guam at the end of a typical three-or-four-year tour, the investment has matured and the homeowner can now earn rental income.
Many who see the long term potential still struggle, however, with current barriers to investment.
“As for home sales, they’ve been fairly soft as well because there is not a huge supply of quality homes at affordable prices for the local buyer, even though interest rates are good,” Mr. Murphy said. “Bank fees and underwriting requirements are still pretty stiff, making it hard for the average guy – even with low interest rates — to meet the typical down payments, high closing fees and steep credit score standards.”
“Besides the people looking to upgrade their own living situation as owner-occupants, property investors are going to sit back and wait to see what happens in the rental market before they go out and invest,” Mr. Murphy said.
In light of the nation’s budget worries, the Navy’s award in August of the first-ever military buildup project funded by the Government of Japan was an unexpected display of confidence at a moment when the future of defense spending is foggy at best.
The new debt ceiling law passed on Aug. 2 has clouded the short-term outlook for most federal programs, including the $17.4 billion Guam military buildup, as it carries the potential to trigger even deeper spending cuts across the board. It’s too early, however, to tell how much the Defense budget will shrink and what that would mean for Guam.
“It’s just a question of being patient and seeing where everything falls in place,” Mr. Murphy said.
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