New housing starts expected to rise

Residential construction in the Chicago area is seeing “fairly healthy growth, especially when you consider that housing starts in 2012 were up 31.9 percent over 2011,” said Chris Huecksteadt.

Huecksteadt is the Elgin-based director of Midwest Markets for Metrostudy, a leading provider of primary and secondary market information to the housing, retail and related industries.

“This was the first year-over-year increase (in housing starts) we have seen here in five or six years,” he said.

Chris Naatz, vice president of sales for D.R. Horton's Chicago operations, concurs. “We saw more demand for homes in the Chicago market in 2012 thanks to stronger consumer confidence and the fact that people are recognizing the opportunities that exist in the current market,” he said.

“We are at the forefront of a new cycle and there will only be a short window of time when we will enjoy this unique affordability, which combines low prices and low interest rates,” Naatz said. “Price are already inching up a bit because we won't be able to sustain these low prices forever. Now is the time to take advantage of a new cycle at its beginning.”

Andrew Konovodoff, division president of K Hovnanian Homes, said its housing starts improved 60 percent between 2011 and 2012 because the builder opened six new, smaller locations, which gave it more sales opportunities. “The traffic didn't really increase, but the quality of the traffic improved dramatically,” Konovodoff said. “People who were visiting were serious because they realized that interest rates will potentially be rising.”

Metrostudy recorded 3,758 housing starts in 2012 compared to 2,850 in 2011 throughout the 11 northeast Illinois counties, plus Lake County, Ind.

“Percentage-wise, this is a great increase and we expect that starts will rise to between 4,500 and 5,500 in 2013 and to between 7,500 and 8,000 in 2014,” Huecksteadt said. “But you need to remember that for a market of this size, 18,000 to 20,000 housing starts per year is what is considered healthy. We are still a ways from that, but we are making decent percentage gains.”

In 2005 and 2006, builders in this region were starting 30,000 to 35,000 new homes a year — 50,000 when you include condominiums, he added, offering further perspective on the current numbers.

“Many of the area's largest builders from ten years ago no longer even exist. Today you are one of the top builders if you closed on 70 homes last year,” Huecksteadt said.

Among the busiest suburban builders today are Pulte/Del Webb/Centex, K. Hovnanian, Ryland Homes, William Ryan Homes, D.R. Horton, Wilcox Communities, Shodeen, Lexington Homes, Smith Family Construction, J. Lawrence/Smykal Homes, Four Season Dream Homes and Aspen Creek Partners. In Chicago, both Park Monroe and 474 Lake Shore Drive condominium buildings are actively advertising new units for sale.

Chicago is the third largest metropolitan area in the United States, yet it is still lagging most other areas in housing construction. Particularly strong areas are the Carolinas, Texas and Arizona, considering the ratio between housing starts and population, Huecksteadt said. He believes concerns about jobs, pension liabilities, state government and both the local and national economy are holding back sales here.

“In addition, during the housing boom we overbuilt the market, expanded the geography of new home construction too far and the prices being charged were unsustainable,” he said.

“Local governments were hiking their architectural requirements and impact fees until the prices just got too high for anyone to afford. They were charging in the $400,000s for houses that should have cost $180,000 and we can't get away with it anymore,” Huecksteadt said. “People have to be able to qualify for a mortgage and the lenders won't allow it.”

Most of the new construction that is selling in the suburbs is single-family houses. Only lower priced townhouses are now selling well, usually in small infill locations closer to the city where everything is selling briskly and at good prices, he said.

“We still have a segment of the population that wants to live closer to the action in the city and near rail transportation, so infill locations have been very active recently,” Huecksteadt said. “The challenge with them, however, is getting land. The supply is definitely limited, while the demand doesn't seem to be.”

For instance, a 25-unit townhouse community in Libertyville recently sold out in only 18 months with prices ranging from $600,000 to $700,000, he said. Smaller developments are doing well, generally.

When it comes to very large subdivisions in further-out suburbs, Huecksteadt said the communities with diversified products that break the larger community into specialized sections sell best.

Communities in suburbs along the main transportation corridors like Elgin, Huntley and Oswego continue to do well, albeit at more “reined in prices,” he said. Those in places like Hinckley and Janesville, Wis., which are more difficult to reach, aren't doing as well.

“We are seeing the release now of some of the pent-up demand. We have college graduates who have been living at home for four years or more and now they are ready to buy a home. These newly-forming households didn't just go away. They have been holding back and now that their ability to own for less than the cost of rent has been made clear, they are jumping in,” Naatz said.

Interestingly, the bursting of the housing bubble may have permanently altered the way that land is developed and built upon in the Chicago area.

“We are now seeing new middlemen coming in to buy raw land, develop it and then sell 10 to 15 lots at a time to builders. That is the way it has always been done in other cities, but in most cases, builders here developed their own land. However, when the downturn came, many of them got caught with too much land on their books. Now the developer will be taking most of the risk,” Huecksteadt said.

“Under this model, the builder can afford to pay more for their lots and that is how the developer makes his money,” he added.

Huecksteadt, who has been with Metrostudy since 1990 and has earned a reputation in the Midwest for thorough analysis and insight into the many factors that affect the success of residential and commercial developments, believes this is also a time municipalities should be rethinking their fees and restrictions.

“It is a delicate balancing act for these municipalities because new housing can have a big impact on their schools and other services. But it won't work to build $500,000 homes in remote communities. People won't buy and lenders won't lend,” he said. “They need to sit down at the table and be willing to negotiate and most of them seem to be doing that, looking at deals on a case-by-case basis.

“Deals are definitely starting to happen again. Builders and developers are getting back to business, buying land and planning for the future and that is great,” Huecksteadt said.

Konovodoff said K Hovnanian is finishing some projects that were started by other homebuilders that went bankrupt during the recession.

“Now we are looking to buy raw land again, as long as it is in a good location with good schools,” he said.

Recent improvement in the resale market also impacts new home builders, Naatz said.

“We builders are also seeing real estate agents seeking us out because they see that their supply of resale homes is low, so they are seeking information about new homes in order to supplement their business,” Naatz said.

“The fact that resale inventories are down is a great opportunity for builders,” Konovodoff agreed. “We expect to be up another 20 to 25 percent in 2013.”

Top 10 Chicago area builders

Here are the top Chicago-area new home builders, based on 2012 sales, according to a recent Metrostudy survey.

Pulte/Del Webb/Centex — 446 closings

D.R. Horton — 391 closings

Ryland Homes — 296 closings

K Hovnanian — 204 closings

MI Homes — 195 closings

Lennar Homes — 137 closings

William Ryan Homes — 75 closings

Hartz Construction — 74 closings

Toll Brothers — 52 closings

Orleans Homes — 45 closings

Note: Two builders in Rockford and Lake County, Ind., excluded from ranking.