New Homes Sales Slump

New-home sales spring a leak
As contracts dip in 4th qtr., builders slash prices, dangle incentives; a 12% drop projected for '06
New-home sales are falling in the Chicago area, signaling an abrupt end to an unprecedented growth streak.
Amid rising interest rates, weakened consumer sentiment and talk of a housing bubble, sales of new homes slipped this fall, a trend expected to accelerate next year. Real estate consultant Tracy Cross projects Chicago-area sales will drop 6% in the fourth quarter and a steep 12% in 2006. That would be the first annual decline since 2002, and only the second in the past 12 years.
"We're starting to see some erosion in the market," says Mr. Cross, president of Tracy Cross & Associates Inc. in Schaumburg. The economy and job growth are "not going to be strong enough to offset the impact of (mortgage) rate increases."
Inventories of unsold homes are rising, prices are falling, and builders are rolling out incentives to stoke demand. In a recent Chicago Tribune ad, Dallas-based builder Centex Corp. touted price cuts at 15 homes in the far west suburbs. A four-bedroom house at a Centex development in Elgin now sells for $390,015, down about 10% from $435,015.
Dan Star, president of Centex's Illinois division, says price cuts are nothing out of the ordinary for this time of year. But Mr. Cross, the consultant, says builders — especially publicly held ones like Centex — have become more aggressive with incentives in recent months. The use of incentives "is the largest I have ever seen it," he says.
Builders have grown more pessimistic nationwide, as well. The National Assn. of Home Builders/Wells Fargo's Index of builder confidence slipped to 60 in November from 68 in October — an 18-month low and its biggest drop in four years.A slump in homebuilding would ripple through the local economy, affecting everyone from surveyors to excavating firms to lumber yards. Nearly 195,000 people work in jobs related to new housing, or about 5% of the area's overall workforce, according to Economy.com Inc.
'A SOFT LANDING'
While national builders have been busy in the suburbs, local condo developers have been especially active in the city, where torrid construction has sparked talk of a bubble. Condo projects present a greater risk than single-family suburban developments, as developers start construction well before all units are sold and thus can be stuck with a lot of excess inventory if the market sours.
Despite the sharp downturn ahead, sales are expected to rise for the full year of 2005, marking the fourth year of record sales here. Even with the 12% decline Mr. Cross predicts, 2006 would be one of the strongest years ever in the local homebuilding market.
"This is the biggest year we ever had, but next year is going to be even bigger," says Doug Brown, president of Libertyville-based Cambridge Homes Inc., which is owned by D. R. Horton Inc., a publicly held homebuilder in Texas.
However, recent evidence suggests that the Chicago market is deteriorating fast. New-home sales contracts fell in September, October and November from the same months in 2004, according to a recent survey of big homebuilders in the area by Strategy Planning Associates Inc., a Schaumburg real estate consultancy. November saw a 50% drop, the steepest of the year.
"We seem to be headed toward a soft landing," says Strategy Planning President Steven Hovany, who predicts new-home sales will drop about 5% next year. "People are a little more concerned now" about the economy.
Rising interest rates have crimped demand, as well. Thirty-year fixed-rate mortgages last week averaged 6.30% nationwide, up from 5.68% a year ago, according to the Federal Home Loan Mortgage Corp.
Majestic Research Inc., a New York-based research firm that covers publicly held homebuilders, recently ranked Chicago the third-weakest homebuilding market among U.S. metro areas it measures. The number of homes built but not sold in the Chicago area was 20% higher in October than it was a year earlier, Majestic Research analyst Matthew Burr says. At the same time, prices of new homes fell slightly in October from September, the first decline since November 2004.
OFFERING INCENTIVES
Robert Toll, CEO of Pennsylvania-based builder Toll Bros. Inc., recently called Chicago one of its weakest markets.
"I think there's some fear among the clientele right now about the economy, and they're just waiting until after the holidays to make some decisions," says Andy Stern, vice-president of the Illinois division at Toll Bros., which has 16 projects in the area.
Because it plays at the high end of the market — its average home price is $600,000 — Toll has felt more pain than its peers. Local sales rose in the fiscal year ended Oct. 31 but have slumped since then, Mr. Stern says, though he won't specify figures.
To stimulate demand, Toll is offering deals on kitchen appliances and hardwood floors. "We're doing what we need to do to get people in the door," Mr. Stern says. "I think we have to go back to the days of selling rather than being order takers."