n the last 30 years, Hawaii’s home prices have fallen in only one brief period – but that early 1990s run-up, and subsequent downturn, driven by Japanese investors is still fresh in the minds of many Hawaii residents. As home prices have climbed over the last 10 years, some keep waiting, anxiously, to see if déjà vu is just around the corner.

Hawaii is somewhat insulated from the housing troubles on the mainland, and with the median price of an Oahu home closing 2007 at a record high of $645,000, the market here is indeed different. Our finite supply of land is one advantage as is our universal appeal as a place to own a second home for vacations or retirement. A steady influx of military personnel with housing allowances, as well as tight mortgage lending laws have also protected Hawaii from the mortgage crisis that caused other housing markets to collapse.

But after 2007, a year when many mainland markets spiraled into foreclosures and depreciation, can Hawaii’s home market continue to avoid falling home prices and increasing foreclosures? That, indeed, is the $650,000 question.

Bank of Hawaii’s chief economist Paul Brewbaker points to the low rate of foreclosure in Hawaii and the stable mortgage industry as indicators that Hawaii won’t experience real estate meltdown seen on the Mainland.

“Currently, Hawaii has the lowest mortgage delinquency and default frequency in the U.S.,” says Brewbaker. While home sales in Hawaii have been declining since the end of 2004, home values across the Hawaiian islands have remained more stable than mainland counterparts.”

Prudential Locations President and CEO Bill Chee also forecasts flat prices in 2008. “The last half of 2007 showed clearsigns that the overall Hawaii real estate market will slow further,” says Chee. “Appreciation in the market cannot be taken for granted in 2008.”

Prudential Locations research dates back to 1977, and Chee has personally experienced market conditions from the bleak years after the Japanese bubble burst to the high-flying days of 2005. This year, he says, Oahu’s average price will likely remain flat.

“Some specific neighborhoods will experience declining pricing, while others will show stable or increasing prices,” says Chee. “Knowing the idiosyncrasies of each of the 245 neighborhoods just on Oahu will be a challenging task.”

Neighborhoods across the state are experiencing widely different market conditions. Some neighborhoods seem completely unaffected– homes go up for sale, and are purchased fairly quickly for close to the asking price. In other neighborhoods, home sit for months even after several rounds of price cuts, sometimes below what similar homes in the area sold for just months ago.

Part of this could be fewer buyers from markets like California says well-known real estate research expert Dr. Mike Sklarz, President and Global Head of Research at New City Technology, “A large concern is the subprime situation causing California home prices to decline more significantly such that investors and second home interest is impaired.” But other sources of buyers, especially new international markets, could make up for the drop in U.S. Mainland buyers.

Another bright spot for 2008 is continued low interest rates that will likely spell low mortgage rates for potential buyers.

But even with the increased buying power, sellers will still have to price their properties at market value. Overpriced homes tend to sit on the market, forcing sellers to eventually drop the price. This can make it look like prices are “falling” because buyers aren’t making offers on overpriced properties.