New-home sales: ‘The industry has been basically obliterated’ By Alby Gallun Crain's Chicago Business 02-01-2010

New-home sales: ‘The industry has been basically obliterated’
By Alby Gallun
Crain's Chicago Business
February 01, 2010

Local new-home sales inched higher in the fourth quarter, but homebuilders will remain stuck in their slump until the economy recovers.

Chicago-area builders sold 584 homes in the fourth quarter, up 3.9% from 562 in the year-earlier period, according to a recent report by Tracy Cross & Associates Inc. It was a positive end to an otherwise awful year for local developers, who sold just 3,753 units in 2009, down 41.0% from the year earlier and 88.7% from the market’s peak in 2005.
Though a federal tax credit and low interest rates have propped up the market, high unemployment and a tight lending market have depressed demand, which isn’t likely to bounce back anytime soon.

“We see normalcy in the Chicago market probably being established in 2013,” says Tracy Cross, president of the Schaumburg-based consulting firm. Normalcy, he says, “will more or less look like ’93 to ’98 or ’99,” not the boom of the last decade.

Sales in the city fell 12.5% in the fourth quarter, to 21 units, while suburban sales rose 4.6%, to 563 units. For the year, city builders sold 848 homes, a 42.7% decline from 2008, and suburban sales totaled 2,905, a 40.5% drop.

New-home sales will rise about 10% this year, “but that is off such a low base that it is meaningless,” Mr. Cross says. Many sales “will result from reselling of distressed properties that are bank-owned.”

Prices are likely to drop further as more lenders take over projects, restructure construction loans or sell off the loans at a discount, allowing more pricing flexibility. New homes sold for an average price of $291,858 in the fourth quarter, down 4% from the year-earlier period, according to Tracy Cross.

The four-year downturn has forced many builders to close up shop, while others have abandoned or mothballed developments. By the end of 2009, 447 once-active Chicago-area developments had been put on hold, according to Tracy Cross.

“The industry has been basically obliterated,” says Perry Bigelow, CEO of Aurora-based developer Bigelow Homes.

Developers were marketing 754 local projects at the end of the year, down from 1,301 three years earlier. And large public builders like D. R. Horton Inc. have been grabbing an increasingly larger share of a shrinking market, accounting for 45.8% of all sales in 2009, vs. just 10.9% in 1999, the report says.

The Chicago market has suffered a larger sales decline — 88.7% from 2005 — than the broader U.S. market, which has endured a 72.8% drop. Mr. Cross attributes the discrepancy to the area’s poor labor market, which has lost 297,000 jobs since June 2007, a 6.9% decline, vs. a 5.2% decrease for the country.

Citing the grim job market, high foreclosure rate and tight lending climate, Mr. Bigelow doesn’t foresee a near-term recovery for the housing market.

“There are just too many difficult things that have piled up on us,” he says. “And it’s like the perfect storm.”