I've been working with several buyers recently, and as I assist them trying to sort out if this is the right time to buy...it occured to me that as we try to "guess" the market...a little logic and common sense can help 
It's only logical that the ‘bleeding' from these ARMs has to stop fairly soon. We've been weathering through this credit crisis now for over a year, year and a half. ARMs were generally 2, 3 or 5 year terms. With lenders currently having such tight qualification and underwriting guidelines, it's clear that we won't see any more of these overextended owners in the next few years...only the trailing bleeding out of the glut of ARMs from the past 5 years.
When this all calms down, we'll still be the beautiful island of Kauai, and if it makes sense for a buyer to own here - might as well negotiate now when sellers are motivated. We can't predict the future, but if a buyer is willing to hold the property through any further minor fluctuations, it's only logical that a property currently at a discount price is bound to be worth more.
What are your thoughts??
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I think you are right, I havent the foggiest clue about HI real estate... wrong ocean for me! ... but I have been saying that 2008 is a buying opportunity, we will probalby look back and say.. "we should have...." Especially for some one that plans to hold the property... if they think they will flip in a year and get rich they shouldnt buy... we will probably have a stagnant market for a while prior to any significant appreciation.
I think the market will hold the way it is for at least another year or two. Well, that will all depend on who the next president will be. Also, what proposals our new president will set can have an impact on all this. Economists have been crying recession for over a year now and in NYC, nothing of that sort has happened. Hope it doesn't come to that. If the war ends, our market can shift for the better, but if not, we can continue to be in a declining market for while. I still think ARMs is a good way to get a loan for someone who just found a home that needs renovation and won't live in it for few months. Or for those investing in the short term.
I can't comment much on the HA market, but I do know that the credit crunch is not over. Much of this week's negative tone on Wall Street is due to continuing write downs (Losses) by the large brokerage houses such as Lehman Bros., Merrill, Citigroup, et all, who were the buyers for much of the sub-prime mortgage backed securities (Bear Stearns was the biggest of them, and we know what happened there!). It was the downgrade of this industry as a whole by Goldman Sachs yesterday that was additional fuel for the fire sale in the world markets. The big push of those radioactive option ARM's occurred during the 2nd and 3rd quarters of 2006, and as a result there are still a lot of them pending on the books (which is why Goldman made the downgrade).
Despite all that negative headline news, I believe you are absolutely correct in your advice for buyers. If they are looking to buy and hold, they are in a position to make an outstanding investment! They just need to be sure they will hold for roughly 4 to 5 years, or more. Last time I checked, God was not making any new land down there in paradise (at least that you can build on - I've seen your volcano on TV), and I'm willing to bet there's a lot of people who would love to own a dream home on your island.
Wish I was there with ya!