Metrostudy’s Q4 2014 survey of the 12-county Chicagoland region shows that including single-family detached homes, townhomes and duplex units, there were a total of 5,708 new units started in the 12-month period ending with Q4 2014, an increase of 17.3 percent compared to the previous year. That is the highest annual rate of new home construction since Q1 2009. The annual rate of closings also increased in the fourth quarter, to 5,265 units. That represents a 9.5 percent increase in the number of annual closings compared to the prior year. The double digit percentage increases represent the largest rate of growth in annual starts and closings since the early 2000s.
“The 1,538 units started in the fourth quarter of this year represent an increase of 24.9 percent over the Q4 2013 starts total,” said Chris Huecksteadt, director of Metrostudy’s Chicagoland region. “This number is nearly double the first quarter tally, and the most in a fourth quarter since the mid-2000s. With the job growth experienced over the past eighteen months, Metrostudy expects growth in both starts and closings to moderate somewhat in the coming year”
Nearly two-thirds of all new home starts in the Chicagoland market occurred in four counties: Cook, Kane and Will in Illinois, and Lake County in Indiana. Lake County, Indiana, after leading the region through the first quarter, fell to third following the third quarter. Throughout the collar counties, a significant increase in construction activity occurred in calendar year 2014 compared to the prior year.
Finished and vacant inventory has steadily fallen in the overall market, leading to the need for new home construction as demand continues to grow. The supply of finished and vacant inventory rose slightly to 2.8 months for single-family detached and attached homes in the third quarter.
“With the continued increases in construction activity, and the traffic slowdown reported by builders, it is not surprising that inventory has risen over the past few quarters,” Huecksteadt said. “Metrostudy expects the rate of construction to slow in the first quarter as builders attempt to reign in inventory levels heading into 2015. In fact, don’t be surprised if incentives are offered to buyers by builders in an attempt to absorb the standing new home inventory in the market place.”
With a relatively consistent pace of new home construction, and a declining level of vacant developed lot inventory, the months of supply for lots in the Chicago market has fallen from a high of nearly 250 months in the third quarter of 2011, to a current level of 98 months. Increases in construction activity, even in the outlying areas of the market, have continued to drive the months of supply indicator downward. If Metrostudy excludes those lots in less desirable locations from the survey, the months of supply indicator drops even more sharply.
Much of the news that impacts the new home market continues to sound positive; job growth continues, the unemployment rate has fallen, foreclosures have moderated and the resale market, though slowing, is still considered healthy. However, the positive news is just not positive enough to sustain the growth in construction activity that was seen over the past two years. In addition, there does not seem to be much urgency among prospective homebuyers in the marketplace.
“The question is whether the new home market can maintain its 2014 momentum into 2015. The market is not too far off from having supply issues impact the market’s potential for growth, in addition to an economy whose temperature can be described as lukewarm at best (though improving),” Huecksteadt said. “Given these factors, Metrostudy forecasts new home starts to reach the 6,000-unit threshold in 2015, which is modest growth, but growth nonetheless.”
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