What's Wrong with Chicago?

An industry colleague from the west coast asked me this question yesterday, and as any Chicagoan might answer, I said, "What do you mean? Blagojevich? The Cubs?"

Here is some of our dialogue about the current Chicago housing market.

You are a blue state and "labor rules."

Actually, the “labor rule” competitiveness will be declining as it relates to construction. Typically, most large homebuilders have had to use union labor for the construction of their units. However, in the last 2 or 3 years we have seen a shift away from the powerful unions to non-union labor (merit shops) which has resulted in a reduction in construction costs by as much as 25% per unit. Most builders are now bidding out jobs to both union and merit shops and the best price wins.

Employment has been "hit hard."

The overall unemployment rate in Chicago is now at 10.4 percent (May 2010). While this is not good, it has come down for five consecutive months (from a peak of 11.5 percent in January 2010). Chicago is a heavy manufacturing town and we are seeing some positive job growth in this sector (Ford just added a third shift to its south Chicago plant and Navistar just announced that they will be adding an additional 1,700 jobs in the Western Suburbs this year and next). Construction jobs are way down, however, they are a smaller percentage of the workforce than places like Las Vegas, Phoenix and Florida.

Cornerstones of demand are "weak."

Yes, this is true. Household formations are very weak and immigration is down because of the job market.

Supply is still a problem: I hear that there are 75,000 lots that are finished or partially finished. Also, foreclosures are a major problem since Chicago was a major subprime market (but FL, LV and PHX get more attention about it).

There are approximately 60,000 finished lots in the Chicago market. We think that about 15,000 of these lots are actually desirable and will get absorbed by investors/builders by the end of 2010 (we are currently working on several studies for investors and/or builders looking to acquire well located lots). The remaining 45,000 lots will sit in places like Plano, Yorkville and McHenry for a long time.

Foreclosures are a huge problem in Chicago. They are concentrated in lower income areas such as the south and west sides of Chicago as well as some formerly fast growing exurbs.

Chicago is a massive economic engine but the short run looks bleak. Job growth will help but the supply side will take some time to correct.

I equate the Chicago economy to a mile long freight train. It takes a long time to slow down and a long time to pick up steam. We didn’t really slow down in Chicago until late 2007 (other markets hit the brakes on 2006 or early 2007) and this market will eventually get back to its steady growth, it’s just going to take a while.

New Home Sales Forecast

Now that the tax credit has officially expired, what will happen the remainder of the year with home sales? As we expected, April sales for existing homes continued to improve by 12 percent over March and 49 percent over April of 2009. Although we don't expect great things for the remainder of 2010, there are a couple of positive indicators for the new home market. First, most new home communities seem to have figured out "where" the market is in regard to price. "Finding" the market is a big step toward sustainable sales volume. We also have seen new home inventory levels at record setting lows. With resale home supply at 7.8 months this April, we're almost at a balanced level of supply. Another positive sign for Chicago was the addition of 35,000 jobs in April, which lowered our unemployment rate from 11.2 to 10.7, although we do expect this to flatten out in the coming months, job growth is inevitable through 2011.

A couple of new home builders in the area said that sales in April and May have been "up" versus last year. The numbers aren't mind blowing, but positive sales each month over last year show that we are making progress and have begun the slow and steady climb to a recovery.