Lava Zones 1 & 2

[Kim]

The Big Island, paradise for palm growers, is also home to five volcanoes, two of them active. Most of you know the island is mapped into several "lava zones" representing the statistical likelihood of lava flow in those areas. Suddenly, at the nadir of an economic crisis, the national mortgage agencies decided to stop buying loans made on lava zone 1 and 2 properties. Effectively they have shut down mortgage lending on homes in these zones unless a private lender is willing to make funds available for their own loan portfolio. I wonder if any islanders have heard of any progress toward resolution of this issue? This has to have a very negative impact on real estate sales in these zones.

See article:

http://www.starbulletin.com/business/20090...n_meltdown.html

[DoomsDave]

Hmm.

Hate to hang crepe, but I see tighter rules all over. Including places like Florida, the Gulf Coast, and "volcanoes in Oregon."

Maybe California, too?

[www.dadluvsu.com]

Kim, talk to realtors there in Pahoa. They will have a better grip on financing. There are still plenty of lenders with unearning funds that are willing to purchase the loans in that area.

[John in Andalucia]

So is there a very real threat or is it a damage limitation exercise? The latter only appears to be restricting the options to buy. It shouldn't, in my view, devalue a property to any greater extent than realising the overall risks involved. If insurance companies did this kind of a U-turn then people would get nervous, perhaps. As it's mortgage lenders, they can blame it on the crisis. Still, I think it reflects bad on the existing home owners.

[bgl]

Kim,

I don't know how I missed this thread when you first posted it, but obviously I did! (Dean - thanks for noticing, and alerting me! ). I don't have an answer, but I don't believe there's been any change here on a local level. In other words, there are local lenders willing to lend in Zone 1 and Zone 2, and there are local lenders that are NOT willing to do so. There has been no change in volcanic activity to justify any change. Pretty much the same as it was last week, last year and ten years ago. Kilauea Volcano has been erupting more or less continuously since January 1983 and, as far as I know, has not caused a single structure in Zone 1 to be destroyed. Leilani Estates, incidentally, is entirely in Zone 1.

There are two areas that have been severely impacted by the lava flow since 1983: Royal Gardens and Kalapana. Both are entirely within Zone 2.

Royal Gardens is a subdivision that sits on the very steep south facing slope of the same ridge that Leilani Estates is located on, but we are further east. Royal Gardens happens to be in the unfortunate spot right below Pu'u O'o, the current eruption site. Over the years, lava has been flowing to the east of Royal Gardens, to the west of it, as well as right through it, destroying a majority of the houses there. It's possible they have all been destroyed by now. A few were still standing a few years ago, and people actually lived there.

Kalapana was the village by the ocean that got invaded by the lava flow in late 1990. We were here on vacation in July 1990 and saw it just before the destruction. Some 185 homes were destroyed by fire (from the heat of the invading 2000F degree lava). All in the fall of 1990. The lava also filled Kaimu Bay out to about a quarter mile away from the old shoreline. A few homes in Kalapana survived, and people still live there.

Definition of Zone 1:

Percent of area covered by lava since 1800: greater than 25%

Definition of Zone 2:

Percent of area covered by lava since 1800: 15-25%

Definition of Zone 3:

Percent of area covered by lava since 1800: 1-5% (Hilo is in Zone 3)

Definition of Zone 4:

Percent of area covered by lava since 1800: about 5% (Kailua-Kona and the areas above and around it are all in Z4)

Zone 5 thru Zone 9: zero percent covered since 1800. The entire Hamakua coast (as soon you cross the bridge over Wailuku River heading north on Highway 19 out of Hilo), is Zone 8. ("Only a few percent of this area covered in the past 10,000 years").

So, the obvious question - why knowlingly put yourself in (possible) harm's way? Well, why do people live in Florida, California and many areas where all sorts of natural disasters can, and do, happen? The simple fact of course is that once in a while SOMETHING bad will happen SOMEWHERE. Chances are pretty good it's not going to be exactly in your neighborhood, whether you live on the Big Island (even in Zone 1) or San Diego or Miami.

Kim, I copied your question in Post #1 and sent an e-mail to our real estate agent, who also lives here in Leilani Estates. As soon as I get her reply, I'll post it here.

Bo-Göran

[bgl]

I thought an illustration might be of interest. Royal Gardens is a pretty unique sight, but presently it's illegal to hike over there. I flew over the area a few years ago in a helicopter and took some photos. Here are two of them. The structure dead center in the first photo was actually used as a B&B for several years (and it was featured on the local news more than once). People had to hike over the lava flow for a couple of miles in order to get there, and then up the fairly steep slope. Like I said above, I don't know if this house is still standing. There have been a number of recent lava flows right through Royal Gardens.

Incidentally, looking at the first photo, Pu'u O'o is just out of sight, on the left hand side of the photo. So all the lava that's visible has been flowing downhill from that point and towards the ocean which is about three miles behind us.

[John Case]

Kim,

I don't know how I missed this thread when you first posted it, but obviously I did! (Dean - thanks for noticing, and alerting me! ). I don't have an answer, but I don't believe there's been any change here on a local level. In other words, there are local lenders willing to lend in Zone 1 and Zone 2, and there are local lenders that are NOT willing to do so. There has been no change in volcanic activity to justify any change. Pretty much the same as it was last week, last year and ten years ago. Kilauea Volcano has been erupting more or less continuously since January 1983 and, as far as I know, has not caused a single structure in Zone 1 to be destroyed. Leilani Estates, incidentally, is entirely in Zone 1.

There are two areas that have been severely impacted by the lava flow since 1983: Royal Gardens and Kalapana. Both are entirely within Zone 2.

Royal Gardens is a subdivision that sits on the very steep south facing slope of the same ridge that Leilani Estates is located on, but we are further east. Royal Gardens happens to be in the unfortunate spot right below Pu'u O'o, the current eruption site. Over the years, lava has been flowing to the east of Royal Gardens, to the west of it, as well as right through it, destroying a majority of the houses there. It's possible they have all been destroyed by now. A few were still standing a few years ago, and people actually lived there.

Kalapana was the village by the ocean that got invaded by the lava flow in late 1990. We were here on vacation in July 1990 and saw it just before the destruction. Some 185 homes were destroyed by fire (from the heat of the invading 2000F degree lava). All in the fall of 1990. The lava also filled Kaimu Bay out to about a quarter mile away from the old shoreline. A few homes in Kalapana survived, and people still live there.

Definition of Zone 1:

Percent of area covered by lava since 1800: greater than 25%

Definition of Zone 2:

Percent of area covered by lava since 1800: 15-25%

Definition of Zone 3:

Percent of area covered by lava since 1800: 1-5% (Hilo is in Zone 3)

Definition of Zone 4:

Percent of area covered by lava since 1800: about 5% (Kailua-Kona and the areas above and around it are all in Z4)

Zone 5 thru Zone 9: zero percent covered since 1800. The entire Hamakua coast (as soon you cross the bridge over Wailuku River heading north on Highway 19 out of Hilo), is Zone 8. ("Only a few percent of this area covered in the past 10,000 years").

So, the obvious question - why knowlingly put yourself in (possible) harm's way? Well, why do people live in Florida, California and many areas where all sorts of natural disasters can, and do, happen? The simple fact of course is that once in a while SOMETHING bad will happen SOMEWHERE. Chances are pretty good it's not going to be exactly in your neighborhood, whether you live on the Big Island (even in Zone 1) or San Diego or Miami.

Kim, I copied your question in Post #1 and sent an e-mail to our real estate agent, who also lives here in Leilani Estates. As soon as I get her reply, I'll post it here.

Bo-Göran

There are a ton of factors that impact real estate lending activity. The availability of lending and the impact of the available interest rates has the largest impact on cost to the buyer, given similar purchase prices. If major lenders will not or cannot loan on a property, those that remain will probably do so at higher interest rates, based upon the demand and their underwriting criteria. Over time and changing business conditions, lenders who are looking for opportunities will see the higher returns, assess the risk (including the chance that the property may be under 40 feet of new lava during the term of the loan), and begin to make loans at the higher rates, perhaps a bit less. I would guess that nortgage insurance devices (at premiums determined by actuarial tables) would protect the lenders.

We were looking at property on the east side of the island last year on our trip and noticed something very telling. The prices in Leilani Estates seemed very approachable and there was a lot for sale. We went up the Hamakua Coast and saw the costs for similar properties was quite dear; additionally there wasn't much offered, comparably. Was this because of the lava zones? financing? desirability?

The Hamakua Coast and the rainforest in Leilani Estates are also much different (despite being fairly close to each other) in climate, types of properties available, etc.

The most expensive area we saw was the area south of Leilani, much closer to the volcano and the coast, with what appeared to be a large number od 'estate' properties behind gates. I know little about this area as the pricing was out of my league (and the Sultan of Brunai's as well).

In today's lending environment, it is much more difficult to get a loan for real estate for any reason. Even if you have good credit, income to support the payments, and a conventional down payment, loan condition requests are very demanding.

I am curious as to FHA financing availability in HI? Bo, if you get a chance, could you ask your RE agent?

Thanks,

John

[Kim]

Since I originally posted this, I have contacted an agent in the Leilani area who supplied me with names of lenders who loan in lava zones 1 & 2, but I have not yet confirmed this.

My own thoughts: if one buys in lava zone 1, it's for love of the area more than for maximizing investment return; as demonstrated by John's comments above, there is a discrepancy in pricing around the island. You'd have to accept the possibility of sacrificing your worldly goods to Pele in trade for the experience of watching your palms grow like weeds for as long as Pele allows, which might well be for centuries...not so different from risking fires, earthquakes or hurricanes, as Bo said. The idea of living somewhere "safe" is a convenient illusion.

[Dypsisdean]

In case anyone is interested.

[bgl]

Kim, re "your own thoughts" - yes, indeed! A quick background to our own situation: When I first began to look at different areas of the Big Island (1990), I was concentrating on the Hamakua coast, even though I did look at some Puna and Kona properties as well. I figured, "why not get something on the Hamakua coast? It's a beautiful area, and if I have a choice between Zone 8 (Hamakua) and Zone 1 (Puna), then it would seem silly not to pick what's less risky." BUT, for a variety of reasons, including the fact that most (but certainly not all) properties that were available at that time on the Hamakua coast were old sugarcane fields (in other words very open and exposed) I became less and less interested in Hamakua. When I "found" Leilani Estates I knew this was it, but I still needed some time to convince myself that living in Zone 1 would be OK. (It took MUCH longer for my wife to accept this...). The statistical risk of a lavaflow right here in my lifetime is about 3%-4%, and I figured that was a risk worth taking. And forget the investment aspect. I know that's important to a lot of people, and whatever makes one happy... But when it comes to major life choices I believe in doing what will make me happy, and as important as money may be, I've never let that influence any of my major decisions! So far, so good!

Addition/edit: Dean added the map while I was typing this. Just as a point of interest, Leilani Estates is right where the last "A" is in the name "Kilauea". That purple line (Zone 1) is the East Rift Zone, which continues out on the ocean floor for another 100 miles or so. An eruption from the Kilauea volcano can happen ANYWHERE on the East Rift Zone, OR on the Southwest Rift Zone which runs in a southwesterly direction out from the main Kilauea caldera. But the East Rift Zone has historically been more active. The village of Kapoho was completely wiped out by an eruption in 1960.

[John Case]

Kim, re "your own thoughts" - yes, indeed! A quick background to our own situation: When I first began to look at different areas of the Big Island (1990), I was concentrating on the Hamakua coast, even though I did look at some Puna and Kona properties as well. I figured, "why not get something on the Hamakua coast? It's a beautiful area, and if I have a choice between Zone 8 (Hamakua) and Zone 1 (Puna), then it would seem silly not to pick what's less risky." BUT, for a variety of reasons, including the fact that most (but certainly not all) properties that were available at that time on the Hamakua coast were old sugarcane fields (in other words very open and exposed) I became less and less interested in Hamakua. When I "found" Leilani Estates I knew this was it, but I still needed some time to convince myself that living in Zone 1 would be OK. (It took MUCH longer for my wife to accept this...). The statistical risk of a lavaflow right here in my lifetime is about 3%-4%, and I figured that was a risk worth taking. And forget the investment aspect. I know that's important to a lot of people, and whatever makes one happy... But when it comes to major life choices I believe in doing what will make me happy, and as important as money may be, I've never let that influence any of my major decisions! So far, so good!

Addition/edit: Dean added the map while I was typing this. Just as a point of interest, Leilani Estates is right where the last "A" is in the name "Kilauea". That purple line (Zone 1) is the East Rift Zone, which continues out on the ocean floor for another 100 miles or so. An eruption from the Kilauea volcano can happen ANYWHERE on the East Rift Zone, OR on the Southwest Rift Zone which runs in a southwesterly direction out from the main Kilauea caldera. But the East Rift Zone has historically been more active. The village of Kapoho was completely wiped out by an eruption in 1960.

Has your fissure done anything of import since you showed it to me? I found that to be a very interesting aspect of your landscape, especially when you showed me the other part (holes) out on the back 40.....

[John Case]

......... And forget the investment aspect. I know that's important to a lot of people, and whatever makes one happy... But when it comes to major life choices I believe in doing what will make me happy, and as important as money may be, I've never let that influence any of my major decisions! So far, so good!

Bo, your decision is the rational one, actually. When you purchase a property you do it for 1 of 2 reasons. Either you will use it as your personal residence, in which case its value is in its utility to you, or as an investment, where the financial aspects (in economic terms, rent and appreciation) are king.

As a society the real estate bubble of the late 20th and early 21st century had people trying to have it both ways. Many were buying house for the wrong reasons and ended up getting burned, using the last fool principle. Real estate historically has been a long term investment (for income proerties) and it appeared to be a short term investment, for a long list of reasons which are both boring and controversial, if that is possible.

Living where you are happy is the best return of all, in any case. I congratulate you!

[bgl]

John,

Thank you! I'm not used to being called "rational"! At least, I don't recall that word being used by my wife when, back in the mid 1990s, I was telling her we were moving to Lava Zone 1 on the Big Island. But it makes for interesting conversation from time to time. For instance, when we have visitors here (who obviously know little or nothing about the complexities of our local volcanoes) and they ask "How far away is the volcano?", and I point straight down and tell them "oh, about 5 miles that way!".

And the fissure on our property is not likely to do much of anything unless the volcano decides to erupt right here in our backyard. Which is possible, but somewhat unlikely. At some point Leilani Estates will be covered by a fresh flow of lava again. Just like Hilo will be invaded by a lavaflow from Mauna Loa and Kailua Kona will see lava cascading down the slopes of Hualalai, reaching the ocean very quickly. But chances are that all those events are far away in a distant future. But IF it were to happen tomorrow morning it would be one heck of an experience!

Bo-Göran

[bgl]

Sorry for the delay. Our real estate agent was on the mainland, and I just heard from her with this response:

"There ARE loans in lava zone 1. Freddie Mac has always and still does buy loans in these zones. What is not available is VA financing….really no other changes, just a lot of media hype since Wells Fargo stopped doing loans in zones 1 & 2.

A good person to talk to is: Tim xxx, Lender On the Rock, 808-935-xxxx (I can provide this information in a PM to anyone interested - bgl)

We are in escrow currently with a mortgage broker on Oahu with a property in Leilani Estates. Central Pacific Bank is doing the loan, we have final approval today. We can supply other lenders names to help out, if you would like.

Bad press has hurt these areas."