Friday, December 24, 2004

New-home sales drop 12%, but not here (Chicago)

City, area buck November trend

Chicago Tribune

By John Handley and Sharon Stangenes, Tribune staff reporters. Staff reporter William Sluis and Tribune wire services contributed to this report

Sales of new single-family homes fell a steep 12 percent in November, the government said Thursday, but local builders say the effect is barely being felt in the Chicago area.

The Commerce Department said the annual sales pace dropped to 1.125 million single-family houses in November. The monthly decline was the sharpest in more than a decade. In October, new-home sales climbed to a record 1.278 million, higher than previously estimated.

"Some markets have been so hot that some cooling is expected," said real estate analyst Tracy Cross.

However, in the Chicago area, he said, housing sales were 12 percent ahead of the same period in 2003.

"We haven't noticed any precipitous drop since the end of the third quarter, though there were a couple of rough weeks in late November," said Cross, president of Tracy Cross and Associates in Schaumburg.

In the city of Chicago, sales soared 76 percent during the first three quarters of this year, he added.

"The national drop in housing sales has missed downtown Chicago. Numerous city projects have sold very quickly in the last quarter," said Keith Giles, principal in Frankel & Giles Real Estate and a partner in the Metropolis, a residential conversion of an office tower at State and Monroe Streets in the Loop.

The commerce report showed a 39.4 percent decrease in Midwest new-home sales last month, the steepest on record.

About 143,000 new homes were sold in the region on an annual basis, a 9.5 percent drop from the 158,000 sold in November 2003. However, the November pace still was higher than the rate for all of 2003, a record year, analysts said.

"In the Chicago area, we started to fall behind in sales starting the second week of November, but that's not worrisome," said real estate analyst Steve Hovany, president of Strategy Planning Associates in Schaumburg. "We're pretty steady on our projections for the year. Also, Chicago has outperformed the rest of the Midwest for several years."

Jack Sorenson, president of U.S. Shelter Group, an Elgin-based home builder, said the "market fundamentals remain strong. My sense is that the drop-off is seasonal."

Sorenson said his firm's main problem is finding enough land for new-home construction.

While surprised by the steep November decline, economists weren't overly concerned.

"Given everything else that we think we know about the market, I'm not going to lay awake worrying about this one," said David Seiders, chief economist at the National Association of Home Builders.

Nor are many area builders.

"We saw a very strong November and we're seeing a strong December," said Christopher Shaxted, executive vice president of Lakewood Homes, based in Hoffman Estates. "We're up from a year ago, seasonally adjusted."

Shaxted said his company had a slight sales dip in October, but sales have rebounded.

"I think there are some issues in the very high end," particularly in downtown Chicago, where the market is slow for units priced above $1.5 million, Shaxted said.

As for the suburban market, "I don't see weakness," he said.

Nationally, sales of new homes also may have been depressed by the dismal weather. November was the fifth wettest on record, according to the National Climatic Data Center in Asheville, N.C.

"We've got a strong economy, we've got rising incomes, we've got a relatively low unemployment rate--all these lead me to believe the underpinnings of the boom aren't changing rapidly," said Brian S. Wesbury, chief economist at Griffin Kubik Stephens & Thompson in Chicago.

There isn't any "bubble bursting," he said.

Another economist wasn't as sure.

Although members of the construction industry continue to deny that they are faced with overbuilding, there are growing signs of a real estate bubble, said A. Gary Shilling.

"More and more buyers are at the lower end of the income scale and need a loan of 3 percent or less in order to obtain a mortgage," said Shilling, who heads an investment firm in Springfield, N.J.

In addition to loans with tiny down payments, many builders are offering interest-only mortgages that require no reductions of principal, Shilling said.

"The last time these loans were popular was in the 1920s, before the Great Depression," he added.

He said many home buyers will face rolling over their mortgages within five years, so any decline in demand will place the real estate industry in a dilemma.

By then, "unless human nature has changed, there could be a huge inventory problem," Shilling said. "When you're in a bubble, there are no signs of dangerous backlogs until the whole thing comes crashing down."

Sales fell in three of four regions. In addition to the reported 39 percent in the Midwest, sales fell 28 percent in the West, to an annual rate of 321,000, and 7.1 percent in the Northeast, to 78,000. They rose 14 percent in the South, to 583,000.

The latest report was the second pointing to a slowdown in demand. Housing starts dropped 13 percent in November, the most in almost 11 years, to a 1.771 million annual rate, the Commerce Department reported last week.


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