High demand and rising lumber costs mean buyers are paying tens of thousands of dollars more for newly constructed homes.

Dennis Rodkin

Crain’s Chicago Business

May 04, 2021

Twin Vines Real Estate Services
This house in the Grande Reserve development in Naperville sold for about $597,000 in March.

New home sales, like virtually every other part of the housing market, were buoyant in the first quarter of the year in the Chicago area.  

More new homes sold in the first three months of the year than in any stretch since spring 2008, according to data released this week by Tracy Cross & Associates, a consultant to the homebuilding industry based in Schaumburg.

Builders sold 1,869 new homes during the quarter. The last quarter when more new homes sold was April-June of 2008, when 2,092 new homes sold, according to Tracy Cross data.  

The latest data “is a continuation of what we’ve been seeing for a year,” said Erik Doersching, executive vice president at Tracy Cross. “The low interest rate environment is coupled with the outmigration from higher density areas to lower density.” 

Sales were about 76 percent above the norm for first quarter sales. Over the past decade, the winter quarter has averaged 1,056 sales. The figure was also a steep increase from first quarter 2020, but that’s a somewhat shaky comparison because the start of the COVID crisis in March last year crumpled new home sales during what’s usually one of the biggest months of the year.  

The booming first quarter of 2021 followed vigorous sales in 2020, which finished as the strongest year since 2008.  

Strong demand for new homes has spawned price increases, Doersching said, averaging $28,000 across the Chicago-area market. “Every major builder and every community had increases,” Doersching said.  

SaiRavi Suribhotla has seen it. An agent with Charles Rutenberg Realty in Naperville with many clients buying new homes, Suribhotla said, “Wherever we look, the prices have gone up. I would say people are paying 6 to 10 percent more than they were last year.” 

Suribhotla has clients who put a new construction house in Pulte Homes’ Wagner Farms subdivision in Naperville under contract in August. The four-bedroom house was completed in March, and the buyers paid slightly over $597,000 for it.  

Go shopping for a similar house now, Suribhotla said, and “you’ll pay 35 grand more.”  

Prices on new homes haven’t risen so sharply since the 2003-06 period, “during the boom before the Great Recession,” Doersching said.  

The price increases are the result not only of rising demand but of skyrocketing prices for lumber and other construction materials. But at least, Doersching said, “demand is strong enough that builders can pass those costs along to the buyer” rather than swallowing them in a tight market.  

The super-tight inventory of homes for sale in the existing market is driving some of the growth in new home sales, said Doersching and Matthew Trusk, a Re/Max of Naperville agent-.  

The existing home market “is cold to buyers,” Trusk said, adding that many struggle to find the right home in a low-inventory market and, when they do find one, they’re often thrown into a bidding war to get it.  

Trusk had clients shopping for a home in the far west suburbs near Aurora, the area where they work. When they got frustrated with losing bidding wars on existing homes, they turned to new construction.  

For sellers of new homes, “it’s all business, not a lot of feelings and hard feelings,” Trusk said, which made his clients less anxious. In March, they paid $272,000 for a new three-bedroom, 2,200-square-foot house on Anna Maria Lane in Yorkville.  

Anna Maria Lane is in the Grande Reserve development, which, according to the Tracy Cross report, was the top-selling subdivision in the region in the first quarter. Builders D.R. Horton and Ryan Homes sold 59 homes there.  

In Chicago, builders sold 112 new homes during the quarter. That’s up from 70 in the same period last year, when sales collapsed in the early part of the COVID crisis.  

Based on the quarterly sales total regionwide, builders are on track to sell 6,624 homes on a seasonally adjusted basis, according to the Tracy Cross report. If that holds, it will be the biggest year in sales of new homes since 2008.  

The key obstacle to meeting that figure, Doersching said, is a lack of inventory to meet demand. Because the few years prior to the pandemic were anemic for new home sales, the number of new subdivisions in the pipeline is small.  

At the start of 2020, Tracy Cross counted 358 active developments in the Chicago area, Doersching said. Now there are 330.

“We’re down 28 developments, when demand is so high,” Doersching said. “Supply won’t keep up with demand.” 

Boosting the supply isn’t an overnight task. While thousands of individual homeowners could quickly decide to cash in on the fast-moving real estate market and put their homes up for sale, easing the inventory crunch, for builders “it’s a long, arduous process,” Doersching said.  

The time it takes to find and buy land, get permits approved and start selling “is years,” he said.