Chicago Homebuilding Market - Huge Downturn - Smaller Homebuilders May Go Out of Business

The local homebuilding industry’s freefall accelerated in the second quarter, as builders posted their biggest quarterly sales drop since the market peaked two years ago. Residential developers in the Chicago area sold 4,376 new homes in the quarter, a 37% drop from the year-earlier period and their poorest showing since 1994, according to Tracy Cross & Associates Inc. Conditions are especially grim in the suburbs, where sales fell nearly 41%, to 3,184 units — a level not seen since the recession of the early 1990s.

The market “hasn’t shown any sign of recovery at all,” says Tracy Cross, president of the Schaumburg-based real estate consulting firm. “It’s just a very lethargic market that isn’t reacting to anything.” Amid a downturn much deeper and longer than many predicted, suburban homebuilders have cut prices, slashed payrolls and reduced their land holdings. Kennedy Homes L.P. of South Barrington employs about 75 people today, down from a peak of 160 in 2005, says President William W. Kennedy. The firm is on track to sell 275 homes this year, compared with 350 last year and more than 700 in 2005. It’s conceivable that a few smaller, privately held homebuilders could go out of business before yearend, Mr. Cross predicts.

The slump so far has landed at least one homebuilder in Bankruptcy Court: Burnside Construction Co., a Downers Grove-based company that has built more than 28,000 homes since it was founded in 1911. In early May, Burnside filed a Chapter 7 petition in U.S. Bankruptcy Court in Chicago. “Projects didn’t go as anticipated. Nobody was buying,” says Kent Gaertner, the company’s attorney. “It’s as simple as that.” On a seasonally adjusted, annualized basis, sales totaled 16,378 units, down 36% from a year earlier and the lowest level since fourth-quarter 1994.

The slump began in late 2005 as rising prices and mortgage rates made homes increasingly unaffordable for buyers, many of whom opted to rent instead. Concerns about a housing bubble scared away speculators, curbing demand further. More recently, troubles in the subprime mortgage market have made it harder for buyers with marginal credit to finance home purchases. Although suburban builders are having their worst year since the early 1990s, the city market is in better shape. Developers sold 1,192 homes in the quarter, a 24% drop from second-quarter 2006, according to Tracy Cross. Still, on a seasonally adjusted annual basis, city sales are roughly equal to 2003 levels.

A growing glut of condominiums, however, could delay any recovery. Tracy Cross is tracking 172 active condo and townhome projects in the greater downtown area with a combined 7,814 unsold units. Mr. Cross estimates that two-thirds of the projects are under construction and will open up in the next 12 to 18 months. Unless demand picks up, some developers could get caught with unsold units, eating into their profit or even preventing them from paying off their construction loans. “It’s going to bring the strongest (developers) to the fore, and the weakest will really drop,” Mr. Cross says.