Region's demographics point to starter homes

Who do builders, developers, banks, equity partners and even municipalities and school districts consult when they want to know the best way to develop and build on a parcel of land, and then market that end product?

The answer to that question, both locally and nationally, is often Lance Ramella and his team at RW Real Estate Advisors in Oakbrook Terrace.

Ramella and his partner, Mary Lisa Wahlfeldt, have been advising such clients for 23 years.

Since the downturn first began in markets like Florida, Las Vegas, Arizona and California in the fall of 2005, Ramella and his colleagues have faced some unique challenges.

"We have been going back to market research we did on properties before the downturn and have been updating our expectations with regard to absorption projections and product suggestions," Ramella said.

"We have been suggesting smaller, different products, much lower prices and telling them to expect half as many sales per month as we were seeing before.

"Communities where homes were selling in the high $300,000s at a rate of four to five units per month are now getting $250,000 to $280,000 per home and, if their sales are good, they are selling two units per month."

And the marketing of those units has also changed, according to Ramella, with more and more builders relying on social networking sites like Facebook and Twitter.

What are the biggest problems that builders have faced during the current downturn?

"Land that they paid $50,000 to $60,000 an acre for has dropped in value to $20,000 to $30,000 per acre and that has really hurt. So many builders have sold that land to get it off their books. Others have created separate land companies for the same purpose. The carrying costs and development costs on land has just killed the builders."

An inventory of unsold homes hasn't been as much of a problem for homebuilders. Most of that inventory has already been cleaned out by the offering of lower prices.

"The publicly-traded companies have really churned through their inventory and many even started new construction this summer in order to cash in on first-time buyers wanting to get in on the $8,000 federal tax credit.

"The small and mid-sized firms, however, are having a hard time getting construction loans to build houses, so they aren't building any new inventory."

What is the biggest change you have seen in your business due to the downturn?

"We have seen a large shift in our business. It used to be that most of our work was done for developers and builders. Now most of our clients are banks and private equity firms.

"The private equity firms are looking to invest in land and want advice. The banks are now controlling lots of land that they have foreclosed on and they need to understand what to do with it."

RW Real Estate Advisors is also suddenly seeing increased interest from apartment developers. This suggests more people are going to be renting in the future, rather than owning their own homes, he said.

How is the real estate market in Chicago now faring?

"We are now entering the slow season and a return to normal seasonality in Chicago. Sales traditionally decrease from August to December and then start building again in the spring. So we won't really know until next spring how the market is truly doing. It is too soon to know whether the dropping sales are a function of the season or the market.

"Chicago was late to the party on this downturn. Investors in Florida, Las Vegas, Arizona and California deserted those markets about four years ago and flooded them with their holdings.

"But things are starting to rebound a bit in there now. I hear that builders in those markets are even starting to bid again on vacant land to replace some of the overpriced inventory that they were forced to purge over the past few years."

"Here in Chicago, however, I think that we are just now hitting bottom. So it will take us longer to rebound."

Do you see more movement in any specific sector - i.e. single family, condominium, townhouses?

Entry-level single-family homes are selling the best right now, by far, according to Ramella.

KB Homes, for instance, has downsized its product line and is selling pretty well, and Centex has added smaller floor plans, which have been moving.

Active-adult communities have also been holding their own, Ramella said. But sales of move-up single-family homes and condominiums have been very slow to this point.

"But I expect those markets to start to pick up soon."

What differences do you see between the city and suburban markets?

In 2005 and 2006, two-thirds of the building permits pulled in the city were for condominiums, Ramella said. As a result, the city is now faced with a overbuilt situation.

"They have a tremendous inventory of condominiums down there right now. Once you start a condominium building, you can't just stop. So you end up with 150 to 250 units in inventory when the building is complete.

"In the suburbs, on the other hand, you are building single-family homes and townhouses. So when the economy slows you can just stop building homes. You end up with a home site in inventory instead of an entire unit in inventory."

Ramella estimates the counties surrounding Chicago now have 65,000 developable lots in inventory. Most of those are located in Yorkville, Plainfield, Oswego, Joliet and Elgin. DuPage County, on the other hand, has very few lots sitting empty.

What steps need to be taken to strengthen the Chicago area real estate market?

"Most importantly, we need to stop losing jobs in Illinois and start adding them. That is key to making people feel comfortable enough to spend again. Our unemployment numbers are starting to move in the right direction recently."

Once that happens, Ramella said lending needs to loosen up so people can get mortgages again and appraisals need to become less conservative.

"It used to be that people moved a lot because they had equity in their homes and were able to keep increasing it by buying bigger homes. Now that they have lost so much value in their homes, the market is struggling.

"Income and equity need to be shored up again in order for the market to really get moving."

Ramella said demographics haven't changed.

"People are still getting older and needing a place to live. Only the economics have changed."