Posted in Chicago Market | Posted on 08-17-2015 | Written by Metrostudy News
- Through 2Q15, Annual New Home Starts in the Chicagoland region stood at 5,722, up 9.7% over 2Q14. This is the highest annual rate of new home construction since 4Q08.
- Builders and developers are feeling the squeeze from a lack of quality lots in desirable locations. While the overall market shows an oversupply of lots, lots in many of the most desirable locations are becoming more and more scarce
- During peak construction years, the Chicago market reached nearly 35,000 new home starts, with 45% of the activity priced under $250,000. Today, just 35% of new home starts are priced under $250,000.
AUGUST 2015 – Metrostudy’s survey of the twelve county Chicagoland region shows that – including single-family detached homes, townhome units and duplex units – there were a total of 5,722 new units started in the twelve month period ending 2Q15, an increase of 9.7% over 2Q14. This is the highest annual rate of new home construction since 4Q08. The annual rate of closings also increased in the second quarter, to 5,563 units, up 10.7% from 2Q14. This follows a slight decline in the annual rate of closings that occurred in the first quarter of this year.
“The 1,608 units started in the second quarter of this year represent an increase of 2.8% over the 2Q14 starts total – the most started in a second quarter since 2Q08,” said Chris Huecksteadt, Regional Director of Metrostudy’s Chicago market. “There were 1,560 new homes closed in 2Q15, up 27.9% over 2Q14 and the most of any quarter going back to 2008. Still, reports on buyer traffic in the past few weeks make the increased rates of construction appear unsustainable through the remainder of this year. With the slow disappearance of below market value lots, it is likely that the share of new home closings as compared to all home sales will begin to decline.”
Following years where the market expanded into the outlying counties of the Chicagoland area, the past five years have seen the market consolidate around Cook and the traditional collar counties. Cook, Kane and Will counties in Illinois, along with Lake County in Indiana accounted for the majority of activity in the Chicagoland region, with 64% of all new homes starts through the first six months of this year occurring in these four markets. The outlying portion of the Chicagoland market that saw explosive growth ten years ago, are beginning to slowly rebound, with Kendall County seeing an increase of nearly 25% in construction activity in the first six months of this year compared to the same time frame in 2014.
With the continued increases in construction activity, and the slowdown reported by builders of traffic, it is not surprising that inventory has risen over the past few quarters. Metrostudy expects the rate of construction to continue to remain flat, as traffic and contract activity has been lackluster. In fact, don’t be surprised if more incentives are offered to buyers by builders in an attempt to absorb the standing new home inventory and generate activity in the market place.
With a relatively consistent pace of new home construction (the rate of lot absorption), and a declining level of vacant developed lot inventory, the months of supply for lots in the Chicago market has fallen from a high of nearly 250 months in the third quarter of 2011, to a current level of 94.5 months (we’re below 100!!!). Increases in construction activity, even in the outlying areas of the market, have continued to drive the months of supply indicator downward. If Metrostudy excludes those lots in less desirable locations from the survey, the months of supply indicator drops even more sharply. Builders and developers are both feeling the squeeze from a lack of quality lots in desirable locations, leading to elevated levels of acquisition and development activity. While the overall market shows an oversupply of lots, lots in many of the most desirable locations are becoming more and more scarce.
Nearly all of the fundamentals for a strong housing market are in place, and certain aspects of the housing industry are benefiting. Apartment vacancy rates continue to hover in the 3.5% range, with rental rates inching upward toward $1,500 per month. Resale activity as reported through MLS saw a significant increase year to date when compared to 2014, up 15.8%, with resale prices also up 4.7% June over June. Homes are selling, and will continue to sell. There is job growth and people need a place to live. The question remains as to how big a slice of the pie will the new home market be able to cut.
“During peak construction years, the Chicago market reached nearly 35,000 new home starts, with 45% of the activity priced under $250,000,” said Huecksteadt. “Today, just 35% of new home starts are priced under $250,000. Rising home prices due to increased construction costs, land and lot price increases, and rising development costs have forced new home prices above levels that could maximize absorption. While many economists see the first time home buyer and the Millennials as an important component of the new home demand forecasts, many of our locations are priced above what these buyers can afford. The new home market is unable to reach what could be the largest pool of potential buyers that are out there.”
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