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Social Darwinism in the Chicago Home Building Industry

by Chicago Agent

In the last 10 years, public home builders have gained substantial market share in Chicago real estate.

Who knew home construction and sociology could go together so well? In a radical display of “survival of the fittest,” publicly-traded home builders have all but seized the Chicago home construction market, making wild gains while local, private builders struggle to keep up.

As detailed in a piece by Mary E. Morrison of Chicago Real Estate Daily, new data from residential consulting firm Tracy Cross & Associates Inc. has some troubling implications for Chicago home construction.

Of the 10 builders in Chicago with the most sales, six are publicly-traded, national companies, reported Morrison. Those six comprise almost 50 percent of all current new home sales; in 2001, before the housing boom and bust, that number was just 10 percent.

The boom and bust cycle, actually, has turned out to be the deciding factor in the public firms’ dominance. With home prices and housing construction at such lows, private firms have lacked the necessary access to capital to both weather severe losses and take advantage of remarkably cheap distressed properties – two areas that large public companies have no trouble utilizing.

Thus, as more and more smaller, private companies file for bankruptcy, larger, public firms sweep in and take over the companies’ market share, bit by bit. So far this year, Pulte Group Inc. and D. R. Horton Inc., two public builders, have accounted for 25 percent of new-home sales in Chicago.

“They can take impairments on their lots and adjust prices to find a new reset point where their sales volumes will kick in,” said Tracy Cross, president of Tracy Cross & Associates Inc., in Morrison’s piece.

Interestingly, the big builders are not necessarily denying that strategy. As Dave Balcerzak, the vice president of sales for Pulte’s Chicago division, said, “We’re getting them at the appropriate land cost, so then we can sell (homes on them) for the appropriate price.”

In addition, Cross noted that the public builders are also focusing their efforts on attached housing in mature towns by the city, areas already replete with sewage and curbs that lack competition from other buyers.

Not all private builders have disappeared, though. Morrison cites CMK Cos., W Developments LLC and Stonegate Development, all local builders that have stayed in business since the downturn.

“They’re very shrewd in their ability to hold prices on some of the more popular units and take a more aggressive approach on other units where they have more inventory,” Cross said. “You might get a 20% reduction in something that was heavy in inventory but might get prices raised in something with lower inventory.”

So at least, for the time being, some local companies are persevering.

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Comments

  • Aly says:

    Hi there – Very interesting article about how different home builders are strategizing in order to remain afloat in the current housing market. I work for a family-owned home builder here in Houston and we’ve had to find new ways to compete and grow with public home builders.

    Anyways, thanks for sharing! – Aly

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