Posted in Chicago Market | Posted on 11-14-2014 | Written by Metrostudy News
- The annual new start rate as of 3Q14 is up 12.4% YoY, and at the highest level since 1Q09
- 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
- We are not seeing the needed levels of urgency among homebuyers, many of whom are sitting on the sidelines. Metrostudy is revising its 2014 forecast downwards.
November 2014: Metrostudy’s 3Q14 survey of the Chicagoland market shows that the rate of new home permit activity has continued to slow through August and September of this year. In June of this year the annual rate of single-family permits issued peaked at 634,000 units. Since that time, the annual rate has declined, as both July and August saw a dip compared to the prior year. The current annual rate of single-family permits stands at 627,000, slightly above the 2013 tally of 617,000 units, but down slightly (-0.6%) from the annual rate one year ago. Even as economic growth continues, buyers seem hesitant to jump into the new home market with both feet.
“Including single-family detached units, townhouse units and duplex units in the twelve- county Chicagoland region, there were a total of 5,401 new units started in the twelve month period ending with the third quarter of 2014, an increase of 12.3% compared against the previous year,” said Chris Huecksteadt, Regional Director of Metrostudy’s Chicagoland region. “This is the highest annual rate of new home construction since 1Q09. The annual rate of closings also increased in the third quarter, to 5,190 units. This represents a 12.1% increase in the number of annual closings compared to the prior year. The double digit percentage increases represent the largest rate of growth in annual starts and closings since the early 2000’s.”
The 1,736 units started in the third quarter of this year represent an increase of 11.3% over the 3Q13 starts total. This number is more than double the first quarter tally, and nearly 200 units greater than that in the second quarter. The number of homes closed in the third quarter of this year also saw a significant improvement, up 8.6% compared to the 3q13 total. There were 1,620 new homes closed in the third quarter of 2014, compared to 1,492 units closed in the third quarter of 2013. With the job growth experienced over the past eighteen months, Metrostudy expects growth in both starts and closings to moderate for the remainder of 2014. Reported slowdowns in buyer traffic over the past several months make the increased rates of construction appear unsustainable.
Nearly two-thirds of all new home starts in the Chicagoland market occurred in four counties: Cook, Kane, and Will in Illinois and Lake County in Indiana. Lake County, Indiana, after leading the region through the first quarter, fell to third following the third quarter. Throughout the collar counties, a significant increase in construction activity occurred in the first nine months of this year when compared to the first nine months of 2013. The outlying counties within the greater Chicagoland area saw an uptick in activity as well. Grundy, DeKalb, and Winnebago counties saw an increase of 110% year to date 2014 over 2013 (177 new home starts in 2014 compared to 84 starts in 2013).
Finished and vacant inventory had steadily fallen in the overall market, which led to the need for new home construction as demand continues to grow. The supply of finished and vacant inventory rose slightly to 2.6 months for single- family detached and attached homes in the third quarter. “With the continued increases in construction activity, and the slowdown of traffic reported by builders, it is not surprising that inventory has risen over the past few quarters,” said Huecksteadt. “Metrostudy expects the rate of construction to slow in the fourth quarter as builders attempt to reign in inventory levels heading into 2015. In fact, don’t be surprised if incentives are offered to buyers by builders in an attempt to absorb the standing new home inventory 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 104.9 months. 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.
Much of the news that impacts the new home market continues to sound positive; job growth continues, the unemployment rate has fallen, foreclosures have moderated, and the resale market, though slowing, is still considered healthy. However, the positive news is just not positive enough to sustain the growth in construction activity that was seen over the past two years.
In addition, consumer confidence has waned in recent months, causing many to sit on the sidelines and wait things out. There just does not seem to be much urgency among prospective homebuyers in the marketplace. Metrostudy expects that the remainder of 2014 will see little to no improvement in the pace of new home construction and sales, with 2015 expected to be flat to modest in growth. The market is not too far off from having supply issues impact the market’s potential for growth in addition to an economy whose temperature can be described as lukewarm at best (though improving).
Given these factors, Metrostudy has revised its forecast downward to a range of 5,250 to 5,750 new home starts for 2014. Next year’s outlook will be heavily dependent upon growth in the local economy and builder’s and developer’s ability to deliver lots in desirable locations to meet potential new home demand. In addition, the housing industry desperately needs the consumer to jump back into the game. Modest growth from 5% to 10% is forecast for 2015. Economic growth and, maybe more importantly, consumer attitudes toward home buying, will be crucial for this forecast to materialize.
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