I was reading a well-written article this morning about how national numbers and metrics are by and large meaningless when it comes to trends in real estate and housing. The editor made a good point. How much does activity in Michigan or Tennessee affect your business in Hawaii or California? Yes, there are some markets that are going through similar situations — high foreclosure rates and unemployment, falling prices, etc. — and it’s useful to keep your eye on the nation as a whole, but using averages of such large areas or disparate populations is a recipe for decision-making disaster.

What really matters is knowing YOUR area and, I’d say, this is even more true at smaller geographic scales. In Hawaii, this means understanding what’s going at both an island level and within islands. So if you want to get into flips, you need to know that there are few buyers right now in the Hilo area on the Big Island which means you may need to factor backward from a heavily discounted ARV (after repair value). There’s just not much keeping people employed there right now outside of UH-Hilo. If you’re on Maui, you’re aware of how many short sales there are on the Valley Isle, especially in the Kihei area. I remember walking around Lahaina this past December and being shocked how few people were walking the waterfront – clearly the local economy there has some bouncing back to do.

Let’s look at Oahu. If you’re analyzing properties for your investment portfolio, whether for flips or long-term passive income, you better understand the different characteristics of towns around the island. I know quite a few local investors who don’t look at properties in the Waianae or Waimanalo areas because of the smaller buyers pool. If you’re looking for a quick flip, you might want to take this into consideration. You’ll either have to discount your price, offer other incentives or expect a longer days on market (DOM) when it’s time to sell. Of course, this is when having a ready-to-go buyers list is also helpful.

If you’re a landlord looking for more cash flow properties, then you might want to focus on the smaller condo units of neighborhoods like Kalihi and parts of Ewa and Waipahu and avoid places with lots of single-familiy homes like Kapahulu and Aina Haina. Cash flow is a tough gig right now in Honolulu, but there are people doing it, especially with low prices requiring a smaller financing amount to take down.

Other criteria you should use to compare neighborhoods include:

• Average driving distance to centers of employment (the reason some investors avoid North Shore or the stretch between Kahuku and Kaneohe).
• Number of sales in the past 6 months (get a sense of recent activity — are people buying there?).
• Number of short sales on the market — there are a lot right now in the stretch from Pearl City to Ewa and Makakilo, much more so than in Honolulu town.
• Planned changes in neighborhood development or activity — new Disney resort? Rail connections? Stores closing down? Influx of new visitors from certain countries – China? Korea? Remember, like attracts like. Any news like this can be strong indicators of changes in property values around the corner.

Obviously this is just scratching the surface, but the point here is to understand your market at the micro / neighborhood level or risk being stuck with properties or watching your ROI shrink to disappointing levels. So get out and drive your neighborhoods, spend some time there in the local Starbucks, get a sense of the local demographic, talk to other investors — whatever you need to do. It’s too easy to get in the trap of simply looking at listings on an MLS and throwing out offers without really understanding that you’re not just buying a house — you’re buying a house as part of a neighborhood.