CHICAGO HOUSING 3Q18: Marginal Growth Expected in the New Home Market; High Lot Costs, Low Inventory & Resale Competition Challenge Builders
- 3Q18 annual new home starts are up 5.8% YoY; annual closings are up 2.7% YoY.
- Consumers continue to prioritize location over product characteristics, challenging new home builders and developers to compete with the resale market in high-demand areas where lot costs remain high.
- Annual starts outpaced annual lot deliveries by 45.5% in 3Q18; lack of lots will continue to be a challenge in the Chicago market.
- Metrostudy expects marginal growth in Chicago’s new home market through 2019.
Metrostudy’s 3Q18 survey of the Chicagoland housing market shows that annual new home starts, including all for-sale units including single-family detached, townhomes, duplex units and condominiums in the twelve-county region, numbered 6,554 in the third quarter of 2018, down 2.5% from last quarter but up 5.8% from 3Q17. Total annual closings in the second quarter numbered 6,289, up 0.6% QoQ and up 2.7% YoY.
“Chicago remains a stagnant new home market evidenced by starts largely keeping pace with closings,” said Danielle Leach, Metrostudy’s Midwest Regional Director. “Consumers continue to prioritize location over product characteristics thus challenging new homebuilders and developers to compete with the resale market. Lot costs remain high in these consumer-desired locations, and municipalities continue to vote down small-lot land plans meanwhile push architectural requirements. These dynamics are holding back builders and developers in what is considered a largely undersupplied new home market.”
In 3Q18, annual starts outpaced closings by 12.8% in the $200K to $250K price range and by 8.6% in the $250K to $300K price range. These differences are considerably higher than the market average of starts eclipsing closings by 4.2%. In stark contrast, annual starts trailed closings by 11.5% in new homes priced under $200K. This price segment is rapidly diminishing with no signs of replacement.
The price spread between new and existing median home closing prices for single-family detached homes in the Chicago market is currently 54.8%, an improvement over the 70% average price spread the market experienced from 2013 through 2017 but well above the pre-recession average of 38.1%.
New home inventory (which includes models, homes under construction, and finished vacant homes) was down slightly QoQ at 9.3 months of supply (MOS). New home inventory in the Chicago market has hovered between 9.0 and 9.8 MOS since 4Q13. Finished vacant homes account for 27.6% of housing inventory. There are currently 2.6 MOS of finished vacant inventory, which is appropriate given the current level of annual closings. Annual starts outpaced annual lot deliveries by 45.5% in 3Q18. With only 1.6 MOS of new lot deliveries, lack of lots will continue to be a challenge in the Chicago market. Vacant developed lot (VDL) inventory was down slightly QoQ at 37.5K lots, but due to a slight uptick in starts, the MOS dropped by 0.2 month to 68.6 MOS.
“While job growth has remained positive in the Chicago market, it has not been enough to really fuel new home demand,” said Leach. “Challenges continue in state and local politics as well as with respect to taxing bodies, resulting in a shift from in-migration to out-migration in Illinois. Builders and developers have responded to the Chicago market’s affordability challenge with increased activity in attached housing, particularly with townhome development. Since builders and developers are poised to deliver homes in price points with the strongest consumer demand – the $200K to $300K range – marginal growth in Chicago’s new home market through 2019 is expected. Land and development cost increases show no signs of slowing while threats to the global and national economy, including tariffs and increasing interest rates, impede developer and builder’s margins and potentially unit volumes in 2020/2021.”
For information contact
Danielle Leach – firstname.lastname@example.org
About Metrostudy 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
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