Mortgage Rates, Employment and New Construction: A 2014 Market Outlook

by Nichole Odijk DeMario

Bright Spots

Many real estate market practitioners and their clients recognize the areas of the market and outside influences that are still in need of improvement.

Broker Kathleen Malone of Related Realty has worked throughout Chicago for eight years. The majority of her business prior to the economic downturn was new construction. It wasn’t until 2013 that she saw an increased demand for new developments. The turnaround in a majority of the Chicagoland market has been very strong.

“There is a big demand, especially from empty nesters and baby boomers that have had a change in life and are coming back to the city,” Malone says. “They are looking for the amenities of their large single-family suburban homes in an urban environment.”

Thanks to the strong buyer demand, gone are the days when a potential homebuyer could take ample time in deciding whether or not to make an offer on a property, and look at 20 properties in about six months.

“Now you have to be ready to pull the trigger or be willing to lose out,” Malone says.

Broker John Morrison of RE/MAX of Barrington echoed similar sentiments about this past year and expects to see a similar 2014. In Morrison’s niche market, which is approximately a six-mile radius in Barrington, the demand for vacant property for new construction has gotten so high that consumers are electing to purchase tear-down homes to utilize the land. In his area, builders are starting spec homes, which to Morrison is an indicator of continued improvement in the years ahead.

New Construction and Luxury Markets

While home values are on the rise, the luxury market, according to McCatty, is the only market that isn’t hitting a positive note – home values have decreased since 2008 and haven’t quite started to incrementally increase. In the Orland Park area, he says, existing luxury homes that once sold for the $800,000 to $900,000 range are now selling in the $500,000 to $600,000 range.

The good news, however, is that new construction luxury homes are moving. “According to MLS statistics, most of the luxury homes that are selling are new,” McCatty says. “Existing luxury homes are dated; instead of buying a luxury home where buyers would need to replace or redo any finishes or features, they’re buying new homes that come with everything they want already.”

Yun says that when it comes to the rest of the new construction market and non-luxury homes, housing starts are “moving slower than what it needs to be” on a national level. In 2013, there were 1 million single-family home starts, when 1.5 million starts were needed to keep up with demand. One major hindrance to this part of the market is the current regulations on construction loans, according to Yun, although high vacancy rates are also to blame (click here for a graph on the low formations).

Yun believes there will be a household formation burst in 2014. From 2007 to 2011, the number of new households created was less than half the normal rate. Since 2012 the creation of new jobs has helped fuel household formation, which in turn increases home buying demand and rental demand.

However, others have competing views. Jed Kolko, the chief economist at Trulia, argues that employment rates for young adults ages 25 to 34 – typical first-time homebuyers – are still too low for formations to rise substantially. Just 74.9 percent of the 25 to 34 age bracket are employed, which is only 23 percent back to normal (79.3 percent employment rate) from the worst level of the recession (73.6 percent). Young adults need jobs in order to move out of their parents’ homes, form their own households and eventually become homeowners. The housing market cannot fully recover until young adults get back to work.

Yun says Chicago was a late comer as far as price recovery is concerned, but it’s getting on track with the rest of the nation. The main reason for this? Chicagoland’s massive inventory of distressed homes is finally dissipating. NAR reported preliminary nationwide existing-home prices in 2013 were expected to be approximately 12 percent higher than 2012. That pace will dip to about 5 percent in gains in 2014 and another 4 percent in 2015. CoreLogic’s latest report showed there was a year-over-year gain of 12.4 percent for Chicago existing-home prices in November.

“We’re at the beginning of an appreciating market,” Morrison says. “Consumers will really start to take advantage of it in the next few years. For whatever reason, people don’t jump into the [real estate] market when they see blood in the streets, so to speak, but when it really starts to improve, that’s when people will jump.”

As the stock market shot back up, economists and practitioners alike kept a close eye. Yun says as the stock market improves, the luxury and vacation home markets will pick up much faster.

“When the stock market is doing really well, it seems to open up some wallets,” Yun explains.

Hewings says from mid-2007 to early 2013 more than half of homes sold in Illinois were under $200,000. But now the “market is returning to a degree of normalcy,” where a greater share of the homes sold are over the $200,000 threshold.

The days of the buyer’s market are numbered. “What better time to be a seller when there is less competition and low interest rates are still available to entice buyers?” Morrison says. CA

GeoffreyGeoffrey Hewings
University of Illinois






Kathleen-Related-052Kathleen Malone
Related Realty





Michael McCatty
Century 21
Orland Park




john_morrison.jpg 1-7-2014John Morrison
RE/MAX of Barrington




lawrence photo_rgbLawrence Yun
National Association of Realtors
Washington, D.C.

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  • Greg Phillips says:

    This seems realistic regarding jobs. It does not tend to pump up misleading reports that mask the mediocre job market.

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