Do builders have an obligation to provide affordable homes?

Lev says yes, but it’s a shared responsibility.

“I think the responsibility should land on everybody. Frankly, if you think about it, affordable housing is important for everyone,” Lev says. “It’s very hard to build affordable housing, because of land prices, because of construction cost, because of the building code, because of union labor, and because of the affordable requirements ordinance. All these things add up and make it very difficult to building anything you would think of as affordable, especially in areas closer to the city.”

But that’s not to say affordable building is not already happening. “Not all builders are building at the high end of the market. Almost 30 percent of all product produced in the new construction sector is priced under $250,000,” Cross says, noting that in the custom home sector, builders have migrated closer to the $1 million-and-up side of the market. He adds: “But that’s only a very small portion of supply chain.”

The current inventory of affordable new construction homes is not enough to satisfy the demand for entry-level homes. But Cross does not believe filling that inventory deficiency is the sole responsibility of builders.
“Is every first-time home buyer entitled to a brand new house?” he asks. “The answer is no.”

Existing in the new market

Prime lot availability is another issue for today’s builders. In 2005, 1,507 building permits were issued for single-family homes in Chicago proper, and in the suburbs the number was more than 32,000. Last year, the number of permits issued dropped to 503 and 5,905, respectively.

“Most of the construction going on in the city is rental,” Lev says. “Builders are still delivering 4,000 units annually – which is down from the high water mark of 6,000-plus units – but most of it is apartments.”
A silver lining Lev sees in the new construction market, which may come to define new construction in Chicagoland over the next decade, is the growing condo market. “What’s selling in the condo market is larger units and high price points – $700,000 and up,” he says. “We’ve been able to tap into that market.”

The reason one-bedroom condos aren’t selling is because there is no demand for them. Millennials are not buying. They’re renting, or living with their parents. As this new generation of homebuyers struggles to find ways to buy new homes, less are being built.

“We’re 75 percent below peak, and we’ve been there since 2008,” Cross says. “Every year we’ve been bouncing along the bottom. So is new construction going to increase in the short term? Yes, it almost has to.”
For builders, existing in today’s local and national markets is a matter of waiting for the new generation to reach the means necessary to buy in substantial numbers. And Neal says it’s inevitable.

“The NAHB does a preference survey, and in it, we ask Millennials: do you prefer single-family homes,” he says. “Their preferences are not much different from what previous generations have expressed.”

Sixty-five percent of Millennials prefer a detached single-family home, but because of price, credit availability, student loans, stagnant wages, etc., they haven’t been able to buy. But they will, eventually.

“We’re experiencing a delay, and eventually that pent-up demand is going to be unleashed,” Neal says. “But it will take some time for young buyers to work their way through the rental market and the existing market before they can purchase a new home.”

When that wave of demand finally hits the market (in the mid 2020s), there’s unlikely to be an explosion of new single-family homes in the city proper. Builders are going to have to expand. They are going to have to subvert the lot shortage.

“Builders are going to need to move into the greenfield, so to speak, but not totally into the emerging markets where you can’t see the Chicago skyline anymore,” says Cross, referring to the under-developed areas beyond current suburban limits. “What I mean is that we’re going to see development occurring in areas along the Route 59 corridor in Plainfield, or near the Cape Farm Road Corridor near Joliet.”

Cross expects to see more development in Oswego, Elgin and Gilberts, as well.

That is what builders will have to do to survive.