The typical new homebuyer in 1992 will be looking for bargains in basic single-family housing.
That was the consensus of eight Chicago-area home builders participating in a recent round-table discussion led by The Tribune`s real estate writers.
”The glitz market has died,” said Roger Gatewood, president of Westfield Homes, Inc. of Gurnee. ”People no longer seem to thrive on having bigger staircases and bigger two-story foyers than anybody else in the whole country.”
Larry Johannesen, senior vice president/land acquisition for Rolling Meadows-based Kimball Hill Inc., agreed.
”We`re back to basic housing,” he said. ”People are still looking at housing as an investment, but I don`t think they are going out on a limb to take out $300,000 mortgages and just stretch to the gills to be able to get into that house with the thought they`ll sell it in three or four years and make a couple of hundred thousand dollars on it. Those days are gone for a long time.”
The basic buy for 1992, according to John Badway, president of Hometown Builders Inc. of Winfield: Three bedrooms with 1 1/2 baths or four bedrooms with 2 1/2 baths, living room, dining room, eat-in kitchen, fireplace, basement and two-car garage.
”The most active and strongest segment in the marketplace will be affordable single-family homes priced under $150,000,” added Michael Schall, vice president/sales and marketing for Sundance Homes of Rolling Meadows.
The home builders` other predictions for the new year included:
– ”Cautious optimism” for new home sales, better than the sluggish pace of 1991 but nothing like the peak sales records of the mid-1980s.
”A lot of the recession here stems from other parts of the country where it actually exists. When you read about that, it causes greater concern than maybe what it really is,” said John Barcelona, president of Westmont-based Woodhill Corp.
”I don`t see next year as a gangbuster year. To make the company work next year, from our perspective, put yourself in the price range where the first-time buyer can purchase.”
”The whole thing is dependent on consumer confidence,” added Richard J. Brown, president of Cambridge Homes of Libertyville. ”People are afraid to make a major decision. There`s really not that much reason for it, but it`s there. Next year will be better than this year, but I don`t look for it to be tremendously better.”
”If there`s any optimism because it`s an election year, the weights on that optimism would be the federal deficit,” according to William J. Ryan, vice president/sales and marketing for Town & Country Homes of Oak Brook.
”All we`re getting from the administration is some lip service.”
Brown agreed and added: ”The government today is not housing-minded. It`s not recognizing the fact that housing is the way that we will get out of a recession. They`re not doing things to stimulate housing as they did in the past.”
”People are looking for some kind of positive sign from the government, for something to happen to give them confidence,” Schall said. ”Consumer confidence brought us into the recession and it can bring us out.”
Weak net job growth in the Chicago area also was cited by several builders as a factor in their conservative sales projections.
”I have concerns for 1992 because of job growth in the Fox Valley market and in family formations,” said Richard Faltz, president of Primus Corp. of Oswego. ”We`re just not seeing the numbers of new families being formed in the traditional sense.”
– New home prices will increase in 1992 because of higher land development costs, impact fees and municipal fees as well as higher costs for lumber and other building materials.
”Prices are going to go up,” Johannesen said. ”We`re trying to keep those prices under control, but they are going up because of prices we don`t control such as impact and municipal fees.”
”We`ve gone through a very tough period and subcontractors have held their prices. They`ve been operating on very lean margins,” Brown said. ”In our own company, we`ve had a wage freeze for a period of time. Once things begin to turn, you`re going to see these prices go up.”
Schall added there are ”rumblings” of labor increases at the first of the year that ”could amount to a dollar a square foot on a house going into 1992.”
– The raw land cost spiral has stopped and prices have leveled off, but consumers will see no benefit because finished lot costs are soaring.
”Land development expenses have just gone through the roof because of government excesses with the cost of requirements and what they`re telling you has to go into the ground,” Gatewood said.
The costlier standards, he said, involve special road curbs, 45-foot cobra head streelights, thicker bases, special pavements and much larger storm-water detention areas than originally platted.
”Storm-water detention requirements have been doubled in a lot of communities now,” Faltz said. ”Where you used to engineer for a 100-year storm at six inches of rain, now we`re using 8 1/2 or 9 inches of rain, which doubles the amount of volume provided in the detention area.”
Johannesen said his firm encountered a similar problem in Aurora.
”We ended up giving up more land for the lake area to satisfy their new criterion than we had when we started,” he said. ”It`s a cost that has to be passed on. It`s a cost that is another hidden tax because here we are again solving a problem that pre-existed our development.”
– Impact fees imposed by taxing bodies on new construction will continue to inflate home prices in 1992.
”We also provide land for parks and schools, and if they don`t need the park or school, we give them cash,” Brown said. ”This is a state law and we do it.”
But not without protest. Schall said the impact fee for schools alone in a new Sundance project in Fox River Grove is $3,000 per home.
”The building community is not against paying the appropriate amount of impact fees on a fair and square basis, but we`re not interested in seeing the new home buyer subsidize the older home buyers because the government has not kept up with the times,” Johannesen said.
– Collar-county areas with infrastructure and accessible to transportation corridors will continue to be the growth communities for 1992. The home builders see increased activity along the Northwest Tollway and the East-West Tollway and in the Joliet-Plainfield area, Bolingbrook, the Fox Valley and northwest Lake County. None foresaw much new home building in Chicago itself.
”The city has consistently shown that it is not capable of growing healthily, at least for home builders and the type of business we do,”
Johannesen said.
”The things that go on in the city building codes, and the lack of job growth because the city is actually driving employment out, have quite honestly been one of the best things that`s happened to suburban builders/
developers.”
Ryan said there would be growth opportunities in the south suburbs if a third airport were to be built with convention/hotel business opportunities.
”Right now, the biggest reason for our company not getting into some of those communities is the lack of major infrastructure,” he said.
– A credit crunch for land acquisition and development funds is pinching all builders but working a special hardship on small and medium-sized firms.
”There are problems getting financing for acquisition and land development,” Gatewood said. ”Equity requirements have gone up – 50 percent is somewhat common – and more capital is necessary. This restricts entry into the business because only well-capitalized builders are able to continue.”
”In a market where everyone has to cut their margins to survive, the bigger guy is in an easier position to do that,” Ryan explained. ”He has a lot of inventory but that also means more staying power.”
Ryan had sharp words for the banking industry and regulators who say real estate is bad ”instead of saying residential real estate is good, commercial is overbuilt, hotel is overbuilt.”
”What these banks can`t do in the face of declining profits is shut out their higher return borrowers,” he said. ”They`re not going to improve their profitability unless they find borrowers where the risk/reward relationship is like what they`re used to in real estate.
”In its zeal to blame all of its problems on the real estate industry, the banking industry has devalued the assets they hold and then complain that those assets have been devalued,” Ryan said.
”In large part the banks have created their problem and the answer to that problem is not restricting lending to our industry,” he said.
