Let’s see, where were we? Oh yes. We are supposed to tell the real story of Hawaii Housing Authority v. Midkiff. So here goes.
Conventional wisdom has it that Midkiff was a case of land redistribution from a big, bad landlord, a “trust” no less, to poor serf-like tenants who leased the sites on which their homes stood. Because of Hawaii’s unusual history, there were these large land holdings that were assembled by the New England missionaries who went to Hawaii to do good and did well. If you want to learn more about that, see the movie “Hawaii” or read James Michener’s book by the same title. These are no history treatises but they will tell you a bit about what went on in an entertaining fashion. To make a long story short, the last member of the Hawaiian royal family was Bernice Pauahi. She married one of the missionary boys and became Bernice Pauahi Bishop. When she died the remnants of the Hawaiian royal land (which she had been holding in trust for the people) were put in a charitable trust appropriately named the Bishop Estate.
Proving once again that no good deed shall go unpunished, the Bishop Estate trustees, who needed money to run the so-called Kamehameha schools for Hawaiian children, subdivided some of the Bishop Estate land into home-sized lots and leased them in the 1950s to lessees on long-term leases, The lessees built houses on their plots and lived in them, paying $13 per month per plot. What a deal! Later, as land values began rising and land rents rose accordingly, the lessees decided to get in on a good thing and started pressing for a law that would enable them to buy their landlord’s interest and thus acquire freehold titles to the land on which their homes stood, all in all, they were just wanting to get the right property deal for their residency, they just wanted the land it also occupied. As it happened, a lot of the land that the Bishop Estate leased to these folks was located in the poshest parts of Oahu, located east of Honolulu in Kahala and Hawaii Kai.
Those tenants had clout. As James Mak, a commentator on these events put it: “[T]ens of thousands of owner-occupants of leasehold single family houses and condominiums in Hawaii constitute a powerful interest group that elected officials cannot ignore. When the proverbial gorilla asks for your lunch, it’s hard to say no.” And so, the Hawaii legislature passed a law allowing the condemnation of the lessor’s titles to plots already improved with single-family homes, and provided for recoveyance of those titles to the lessees who would have to pay fair market value for them. If they couldn’t pay or finance their purchase, the state would act as a financier of last resort.
But the Bishop Estate took exception to this law and argued that it violated the provisions of the Fifth Amendment to the U.S. Constitution which forbids condemnations unless they are for a public use. This, argued the Estate, was a transfer from one private party to other private parties, involving no change in use of those homes. Anticipating that problem, the legislature had made “findings” that there was a shortage of buildable land on Oahu, and that led to an oligopoly which in turn artificiailly limited the supply of new housing and caused prices to escalate. The new legislation was supposed to fix that by lowering or stabilizing prices. The problem with that “finding” was that it was bullpuckey. The reason for the shortage of buildable land was that the government owned about one-half of Oahu, and local land regulations made it hard to build new housing. Nonetheless, as history records, the U.S. Supreme Court bought the state’s story – when it comes to eminent domain, those nine folks will buy anything the government says – and approved the condemnation. 467 U.S. 229 (1984). The case went to valuation trial in which the Bishop Estate scored a bull’s eye – the jury awarded it it’s full opinion of value.
So what happened then? Did home prices decline? Stabilize? Did those former Hawaiian tenants live happily ever after in their own homes? Don’t be silly. We told you the legislative findings were bullpuckey, didn’t we? First of all, this scheme applied only to existing, occupied homes so it could not produce one square inch of new buldable land – it only redistributed titles to existing homes. Besides, the whole scheme was economically impossible. It could not increase the supply of housing and thus could not lower prices. Fee simple titles are more expensive than limited duration leaseholds because they convey more. So no rational lessee would pay full-pop for his newly minted freehold title and then turn around and sell it for less than what he just paid. Then there was the law of unintended cosequences.
The Japanese, at least at that time, were committed to long-term investments and therefore weren’t interested in limited duration leaseholds. But when fee simple titles became available in good parts of town it became a whole other thing. Also, it just happened that at that time the dollar was sinking and the Yen was rising. Do we need to say anything else? What resulted was what Charlotte Low Allen of Insight Magazine called a golden land rush. The Japanese swooped down on Kahala and started snapping up those nice, upscale homes for beaucoup bucks. They then tore some of them down and built little marble mini-palaces which they then marketed to Japanese tycoons as vacation homes. The champion was a fellow named Genshiro Kawamoto who reportedly bought 100 East Oahu homes without leaving the back seat of his limousine. Way to go Genshiro! So much for the government redistributing titles to tenants, lowering housing costs and fixing a “malfunctioning” housing market. As the Los Angeles Times put it at the time: “Though some buyers want vacation homes, many are speculators looking for fast profits. In either case, many of the properties they buy are left vacant much of the time, a painful condition in a city where housing is already in short supply.”
The upshot was that the original homeowners, now flush with the money generated by the fancy prices eagerly paid by Japanese investors for their old houses, fanned out across Oahu in search of suitable upscale replacement homes. That caused a ripple effect and goosed the prices of all Oahu homes upward. The result was that between 1984 and 1990 their prices more than doubled.
So much for the government helping out by fixing a “malfunctioning” real estate market and bringing prices down. So were there any heroes in this mess? Actually, yes. When the case was in the U.S. Court of Appeals, Judge Poole presciently pointed out in his concurring opinion that the Hawaiian legislative scheme could not work because its provisions were antithetical to the stated objective of the law. Which is precisely what subsequent events demonstrated. Give that man a cigar.