Posted in Chicago Market | Posted on 05-10-2015 | Written by Metrostudy News
- The annual rate of new home construction through 1Q15 was the highest since 4Q08
- 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.
- Rising prices have prevented the new home market from reaching the largest potential pool of buyers – Millennials and first-time buyers
May 2015 – Metrostudy’s survey of the twelve county Chicagoland region shows that a total of 5,748 new units were started in the twelve month period ending 1Q15, an increase of 15.9% compared against the previous year. This is the highest annual rate of new home construction since 4Q08! The annual rate of closings also increased in the first quarter, to 5,228 units, a 6.7% increase compared to the prior year. A closer look, however, shows that the annual rate actually fell from the prior quarter, down 0.4%
The 923 units started in the first quarter of this year represents an increase of 6.8% over the 1Q14 starts total. This number is the most started in a first quarter since 1Q08. The number of homes closed in the first quarter of this year, however, saw a slight decline, down 2.3% compared to the 1Q14 total. There were 966 new homes closed in the first quarter of 2015, compared to 989 units closed in the first quarter of 2014.
“Even with the recent uptick in job growth, the slowdown in closings gives cause for concern,” said Chris Huecksteadt, Director of Metrostudy’s Chicagoland region. “Reported slowdowns in buyer traffic over the past several months also make the increased rates of construction appear unsustainable. With new development beginning to occur again, and 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 County saw more new home starts (even excluding the vertical market) than any other county in the region.
“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,” said Huecksteadt. “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 97.2 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.
Even though the number of new home starts continues to steadily increase, closings have slowed and the amount of traffic reported by many builders has been spotty. Even in the face of strong job numbers, there seems to be little excitement among prospective homebuyers in the market place. The cost to deliver new homes in the market continues to rise and with every increase in new home prices due to costs and regulation, a few more homebuyers are lost to the resale market. Homes are selling, and will continue to sell. There is job growth and people need a place to live. The question is how big a slice of the pie will the new home market be able to cut.
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. Many economists look to the emergence of the first time home buyer and the millennials as an important component of the new home demand forecasts, however, many of our locations are priced above what these buyers can afford.
“The new home market is unable to reach the largest pool of potential buyers that are out there. Given these factors, Metrostudy forecasts new home starts to range from 5,600 to 5,800 units in 2015, no to only slight growth,” said Huecksteadt. “Strong wage growth combined with continued job growth in the 1.5% to 2.0% range could positively impact this forecast. It remains to be seen, however, if the economy can sustain strong numbers for more than a three to six month period.”
For information contact
Metrostudy is the leading provider of primary and secondary market information to the housing and related industries nationwide. Metrostudy provides research, data, analytics and consulting services to help builders, developers, lenders, suppliers, retailers, utilities and others make investment and business decisions every day. For more information, visit www.metrostudy.com
About Hanley Wood
Hanley Wood is the premier information, media, event, and strategic marketing services company serving the residential, commercial design and construction industries. Utilizing the largest editorial- and analytics-driven construction market database, the company produces powerful market data and insights; award-winning publications, newsletters and websites; high-profile executive events; and strategic marketing solutions. To learn more, visit hanleywood.com.