Housing Market Decline Less Drastic in Midwest

While experts disagree as to the severity (or existence) of the so-called bubble, there is little doubt that the South Florida housing market is in the midst of a down swing. In other parts of the country, such as the Midwest, the signs are less clear.

Chicago economist Paul Kasriel says the market is in recession.

Home builder Joe Swiderski, however, believes otherwise.

“Housing is a little slower than before, with interest rates going up. Activity is a little less, but nothing drastic. It’s still hard to get my trades workers. I have to schedule two or three weeks ahead on my carpenters,” said Swiderski, owner of Joseph Developers, and who builds about a half-dozen homes a year.

Those conflicting views epitomize the contradictory conclusions in the June numbers released yesterday by the U.S. Commerce Department. Housing starts nationwide dropped 5.3 percent to a seasonally-adjusted annual rate of 1.85 million units. Building permits, considered a timely sign of future housing construction, fell for the fifth consecutive month.

But the Midwest leads the nation in new construction, posting a 3 percent gain over a year ago. Regionally, requests for building permits eased 1.6 percent from the previous month, while they dropped by 4.3 percent in the nation as a whole.

The reason? Despite the fact that the housing market is feeling the pinch of higher mortgage rates than in recent years, strong employment data and interest rates still at relative lows (in a historical context, anyway) continue to boost ownership in areas where the median prices are not grievously overvalued.

However, some economic experts such as Kasriel, who serves as director of economic research at Northern Trust Co., call the numbers weak.

“Nationally, we are seeing a definite slowdown. Housing is in a recession. It’s not that the whole U.S. economy is in a recession, but housing is in a recession,” he said, noting that the Midwest has seen far less speculation, or investor-driven buying, than other parts of the country.

Not surprisingly, Kasriel said the Midwest is more accurately valued in terms of current market prices than Florida real estate, along with areas of the Northeast and California. For the month of June, housing starts declined 11.5 percent in the Northeast, 4 percent in the South and 10.2 percent in the West.

In year-to-year comparisons, starts declined 9.6 percent in the Midwest from a year earlier, less dramatic than the 11 percent drop nationally. Increased inventory, or an excess supply of housing, both existing units and new construction, is the reason starts and permits are going down.

Kasriel said home builders are growing cautious when it comes to starting new developments, although they are continuing projects underway. For the past six months, rising Florida home loan rates have hampered construction activity considerably in the Sunshine State. With 17 consecutive rate hikes from the Federal Reserve in the last two years orchestrated to combat inflation and to cool the housing sector, the impact has been drastic in some areas.

Surveys of single-family home builders show a steady decline in confidence since the middle of last year, and builders are acting accordingly, the National Association of Home Builders reports. Although not everyone in the industry is quite so pessimistic.

“Our starts are right where we expected them to be. Last week we sold eight homes as a company. That’s very good for July,” said John Carroll, president of Streamwood-based Kirk Homes, who believes the growing inventory is a short-term concern.

Many builders say that sales volume is down more for higher-priced homes than those sold to first-time buyers and first move-up buyers. Locally, increasingly expensive Florida home loans and soaring property values have led many builders to offer lavish buyer incentives to drum up business. Expect more of the same in the current real estate climate here, but in the Midwest, it appears that the market is much closer to normalcy.