The much predicted cooling of the five-year housing boom appears to be under way, but Chicago-area builders aren’t feeling much of a chill.
The Commerce Department said Tuesday that March housing starts across the nation dropped 7.8 percent, to a seasonally adjusted annual rate of 1.96 million units, from nearly 2.13 million a month earlier.
But in the Chicago area, thanks to a mild winter, building continues to sizzle. Ground was broken for 40 percent more new homes in the first quarter of this year than in the same period of 2005.
Analysts credited several new megadevelopments that are getting started, as well as intense competition and the influence of major national builders in the area.
“The housing market is a lot stronger than we anticipated,” said Chris Huecksteadt, director of the Chicago division of Metrostudy, a real estate consulting firm, which conducted the local survey of construction. “It is stunning.”
Huecksteadt cautioned, however, that first-quarter figures are a poor indicator for the year as a whole, and added, “we expect it to slow in this year’s second half.”
Nationally, evidence is piling up that the housing market is losing steam.
March permits, a measure of future construction, fell to a seasonally adjusted rate of 2.06 million, off 5.5 percent from the February rate of 2.18 million.
“As you see interest rates rise, they have taken a punch out of housing,” said Timothy Rogers, the Boston-based chief economist for Briefing.com.
“New-home sales are down 21 percent from their peak in July 2005,” he said, and the latest report “speaks more to the pace of new-home sales.”
Rogers noted that starts are down year-over-year or flat in all regions of the country except the South, which is rebuilding after the devastation of Hurricane Katrina.
“I don’t think I am generalizing too much that starts follow sales and sales follow demand, which is slowing,” said Rogers.
“The real test will be in the three months of spring when we will see how dramatic the downturn is. Our expectations are for a weaker sales pace going forward,” he said.
The early spring buying season is considered the year’s most important period for the housing market.
Ian Shepherdson, chief U.S. economist for High Frequency Economics in Valhalla, N.Y., warned against reading too much into the March numbers.
“This all sounds horrible, but there are two big caveats,” he said. “Starts were hugely boosted by the relatively warm winter, which caused much less disruption than usual to construction activity in January and February. The level of starts now is only just below its December level.”
New wariness was evident in an index of builder confidence released Monday by the National Association of Home Builders and Wells Fargo & Co.
The April figure was 50 overall, considered a neutral score, but Midwest builders showed the least confidence of any region, with a five-point decline to 32.
David Seiders, chief economist for the National Association of Home Builders, said that with “mortgage rates back up to the 6.5 percent range and serious affordability issues in the high-priced market,” a decline in confidence was not surprising.
Consultant Huecksteadt said his firm tracks building every 90 days in 6,500 new-home developments in a 14-county area from Rockford to Kenosha, Wis., and to northwestern Indiana.
Regionwide, ground was broken for 8,000 new houses, duplexes and townhouses from January through March, compared with 5,500 a year ago, he said.
He said the mild winter allowed builders to continue construction at full tilt in what is traditionally a cold weather lull while work is getting started on a number of long-anticipated developments planned for 1,000 homes or more.
Kendall and Kane counties, home to several of those megadevelopments, had the biggest gains in first-quarter starts, Huecksteadt noted.
“Lots of stuff that has been in the pipeline and which we have been talking about for years is on the market and selling,” he said.
Another factor: fierce competition and the growing local presence of national builders loath to miss monthly goals reported to Wall Street.
Leigh Nevers, vice president of marketing for the Hoffman Estates-based Chicago division of Lennar Corp., which includes Concord Homes, said the company broke ground on 42 units last month compared with 157 for the same month in 2005.
She noted that it is company policy to meet monthly start goals whether homes are sold or not.
“There is never a reason we wouldn’t start the number of new homes that were projected for each month,” said Nevers. “We will incentivize the homes if we have to sell them. We can’t miss starts.”
Noting that housing starts trail sales, Steve Hovany of Strategy Planning Associates in Schaumburg said the strong first quarter shows that builders “had a good fall and they are just breaking ground now” on homes that were sold at the end of a very strong 2005.
Hovany said “sales are down but permits are not down as far.”
“I am seeing a slowdown, but it is off a record year,” said Christopher Shaxted, executive vice president of Lakewood Homes in Hoffman Estates. “I am seeing [building] levels of two years ago. It is still a healthy market.”
In general, he said, builders “need to be smarter. The consumer has a little more time to look around.”
Shaxted said he doesn’t foresee a glut of new homes and “we certainly won’t see price decreases.”
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