Crain’s Chicago Business
January 30, 2023
This house in Ivanhoe, a DR Horton development in Manhattan, Illinois, sold for $434,990 in November.
Sales of new homes in the Chicago area dropped to their lowest total in 12 years in the fourth quarter of 2022, according to a new report.
Builders sold 677 homes in the 10-county Chicago metropolitan area in the last three months of the year, reports Tracy Cross & Associates, a Schaumburg-based consultancy for homebuilders. That’s the lowest sales figure for any quarter since fourth-quarter 2010, when the same number of homes sold.
In 2022, Chicago-area builders sold 4,275 homes, according to Cross, down 22.8% from the year before.
The cause is “mostly the interest rate environment,” said Erik Doersching, CEO of Tracy Cross, but another big factor is “our lack of supply of new homes.”
The Federal Reserve’s effort to stifle inflation by increasing its lending rates led to the interest rate on a 30-year mortgage crossing above 5% in May for the first time in a dozen years.
Along with steep increases in monthly costs that the rate hikes cause, another factor is the region’s years-long problem of short supply of new homes, which quickly became depleted during the housing boom.
Illinois built fewer new homes per capita in 2022 than nearly every other state, according to a report out earlier this month from an Oregon real estate firm. Only Connecticut and Rhode Island had a lower rate of new construction. It’s the result of flat or declining population, Doersching says. The metro area’s biggest population increase in recent years was 0.27%, in 2022. Compare that to Austin, Texas, where annual population growth consistently runs over 2% a year.
Seeing minimal population growth in the Chicago area, “builders will put their money on other places,” Doersching said.
In 2022, the number of active new-construction developments in the region was the lowest it’s been in the entire 21st century. There were 259 active developments, down from 297 the year before and far below the average of 1,173 developments operating in the years 2004 to 2008, during a housing boom.
When a development is sold out, “we’re not getting new ones to replace them,” Doersching said.
The year-end tally of home sales was below both 2021 and 2020, the recent boom years, but was well above the average sales in the five relatively normal years before COVID. The average number of sales in 2015-2019 was 3,978. The year-end figure for 2022 was 7.5% above that.
The decline in sales began in the first quarter of 2022 and accelerated throughout the year. It shows up as a progressively widening gap between 2022 quarterly sales and the corresponding figures in 2021. First-quarter sales were down by 13%, second quarter by 22%, third quarter by 19%, and fourth quarter by 45%.
Although interest rates have dipped a bit since their peak in the fourth quarter, Doersching said he does not expect new-home sales to rise this year, largely because of the lack of new inventory.
There have been reports nationwide of an increasing number of buyers canceling their contracts to buy new homes, but Doersching does not believe that problem has hit Chicago-area builders just yet. He said only one of the 259 developments reported negative sales, an indication of canceled contracts, but he declined to identify that development.
An apparently low rate of cancellations, Doersching said, is largely attributable to Chicago prices “not going up as much as they did in other places.” The average price of a new home sold in the Chicago area in fourth-quarter 2022 was $444,628, up about 25% from the same time in pre-COVID 2019. That’s far smaller than the 43% increase nationwide during the same period.