Three reasons why this is a favorable home market

A young couple with a growing family needs more space than they can squeeze out of the home they bought six years ago. Seeking a larger, move-up home, they recently looked at some new home communities, and they're excited about a two-story home in a subdivision with an on-site elementary school. But they wonder whether this is the best time to purchase a new home. They're on the fence.

Builders say the time is now for the couple to jump off the fence and plunge into the marketplace. Why? Interest rates remain low compared to national averages. Home prices will most certainly rise. And home inventory will remain low for the foreseeable future.

Low interest rates

Many experts predict the interest rate for a 30-year fixed mortgage will reach 5 percent by the end of 2018. Though up from historic lows of 3.35 percent in 2012, they are still far below the 18.45 percent high of 1981, according to mortgage giant Freddie Mac.

Locking in a lower interest rate on a mortgage now will save a buyer tens of thousands of dollars during the period of the loan, which means securing a loan now is in the buyer's best interest.

With rates going up, a person's buying power is as strong as it's going to be in the next several quarters, said Richard Bridges, Midwest director of sales and marketing for William Ryan Homes. “Now is the time to buy a new home.”

M/I Homes also believes the time is now. “Our market is strong and interest rates are on the rise,” said Cheryl Bonk, director of sales and marketing for the builder. “Taking advantage of buying power as it is today is a benefit to anyone purchasing a new home.”

Julie Pelock, sales manager at Springfield Pointe in Bloomingdale, agrees. “With favorable interest rates, securing a mortgage now is a smart move for buyers.”

With the strong economy right now, people receive higher earnings on savings, but interest rates are going to go up, and the value of the dollar is better now than paying a higher interest rate, said Jeff Samuels of Samuels Homes, builder of luxury townhouses at Victoria Park in Libertyville.

For new homes to sell, they must be affordable. If buyers wait until interest rates go higher, homes will be less affordable, and the increase in monthly payments may put the home they want out of their price range. That means they might need to choose a smaller home or scale back on options and upgrades they desire, making the home more affordable.

Home prices will rise

Besides interest rates, other factors contribute to the rising prices of new homes. Builders spend a lot of money on materials, and the big news now is the immediate impact of new tariffs on the homebuilding industry, Samuels said. “We're constantly receiving letters saying prices are increasing on a lot of our materials.

“It makes a lot of sense for buyers to buy soon or buy something under construction that wouldn't be affected by the tariffs. A buyer's opportunity is better now than in the future before we come into another slowdown.”

The cost of materials is also affected by the weather. When hurricanes in Texas or wildfires in California destroy a lot of homes, there's a huge demand for lumber. And construction resources usually go to places where there's an immediate need, said Christy Whelan, sales director for Airhart Construction.

“Builders in the Midwest can get lumber, but they will pay a higher price. And when builders have to pay more for materials, it costs them more to build a new home, and the consumer will pay more.”

Building materials are a commodity that fluctuates and generally increases, which means home affordability is at its lowest level and only going to increase.

Builders want to get homes started before the end of the year so buyers can move in before the end of spring next year, Bridges said. “Right now is a good time to start building a new home.”

To get a jump on the fall building season, some new-home communities are offering incentives. For example, William Ryan Homes is offering $10,000 in design credit and a free chef's kitchen, which is a luxury item that many buyers desire, at its Stonebridge community in Hawthorn Woods.

Low inventory

One of the factors in rising home costs is low inventory. When there are too many people who want to buy homes and not enough homes for them to buy, it drives up prices and increases competition in the marketplace.

People should buy now because the low supply of houses will continue to drive housing prices up and make homeownership less affordable. With the robust demand driven by the good economy and low unemployment, economists expect supply to remain tight this year. With more people in a position to purchase a home and fewer houses to choose from, competition will also be strong.

In Illinois, there's a limited supply of homes with a growing demand, so getting in early at a grand opening of a community or the beginning of a new phase of construction is a wise move, Bridges said.

“If prices go up, builders are not going to hold a huge inventory, but they'll build homes that they know will leave the shelves,” he added.

Pelock of Springfield Pointe agrees. “Inventory in general is low and especially with new construction in infill locations like ours in Bloomingdale. We're not out in the greenbelt, but in a unique location.”

Many older homes need updating, which means a lot of improvement dollars. And the older floor plans have smaller, cut up rooms and lower ceilings. With new construction, buyers will have newer, open floor plans with high ceilings and the current options and colors available to buyers today.

“We have 11 lots left in our first phase at Springfield Pointe before we're sold out; so they're going fast,” Pelock said. “Premium lots on the lake are difficult to find, especially at an infill site.”