13 May Builders are putting up fewer new houses in Chicago. Here’s why.
Construction of new houses in the city’s affluent North Side neighborhoods has slowed as builders contend with several headwinds that are holding back demand, including potential buyers’ fear of future property tax spikes jacking up their housing costs.
“They don’t have a lot of confidence in paying $1.4 million, $1.6 million if they don’t have any idea how big the tax increases, which we all know are coming, will be,” said Brian Goldberg, CEO and partner in LG Development, a prolific homebuilding firm based in Bucktown that has built numerous single-family homes and condo buildings in the city. “Taxes are a big part of your monthly mortgage payment, and if you have no idea how much it will go up a few years from now, that makes you more likely to put off buying.”
It’s not the only reason for the fall-off in construction. Rising land and construction costs and buyers’ conservative approach to investing in the slow Chicago real estate market are also factors that homebuilders and real estate agents cite. But the uncertainty about future taxes is the one that has “the most effect on making buyers go into wait-and-see” mode, said Mario Greco, a Berkshire Hathaway HomeServices KoenigRubloff Realty Group agent. “Uncertainty is always a market-killer.”
In Cook County’s triennial reassessment cycle, the city’s next turn to get reassessed is 2021. In the last round, 2018, assessments of North Side property values soared. Combine that with higher tax rates that went into effect in 2019, and “one thing everybody asks us is how much the tax bill will go up next,” Goldberg said. Like everyone else, his firm is in the dark on that for now. If the increases turn out to be small, today’s reluctant buyers may regret postponing their purchase. If they’re large, a round of back-patting may ensue.
In the first four months of 2019, builders took out permits to build 100 single-family homes in the city, according to data from the Chicago Department of Buildings. That’s down more than one-third from the same period last year, when 160 permits were issued. In the first four months of 2017, builders took out 170 permits. (The department’s figures include both new homes built speculatively to be sold, which is the subject of this story, and new homes built custom for their intended owners, generally a small subset of the total.) In the full year 2018, builders took out about 500 permits, down sharply from 600 the year before.
“We simply can’t build them anymore for what buyers think they should pay,” said Sabina Szura, partner with her sister Joanna Szura in Lakeview-based PLD Homes.
The reason for the mismatch: Land costs have gone up—Sabina Szura said lots in Lincoln Park or Lakeview that they could get “in the $700,000s a few years ago are $900,000, $950,000 now.” Construction costs have gone up—materials prices were up 8 percent in 2018 alone. But home price growth in Chicago, even in the hot neighborhoods, hasn’t been robust enough to convince buyers that stretching to the top of their range will pay off. There’s also the overall pessimism about the future financial health of the city, county and state.
“They’re not going to assume that appreciation will take (the value) up above what they paid,” said Colin Hebson, a DreamTown Realty agent who has represented many new-construction homes in the city.
In Roscoe Village and other neighborhoods where PLD builds, “buyers seem to believe that between $1 million and $1.5 million is the golden price point,” Szura said. “It’s virtually impossible in the areas where they want to buy.” In the past few years, PLD has shifted from building almost entirely single-family homes to building condos, she said.
“We can get to that number with condos,” Szura said.
The equation is different in Bridgeport, scene of the hottest-selling set of new houses in the city, according to homebuilding consultancy Tracy Cross & Associates. At Hillock Avenue and Throop Street, construction is underway on AAA Residences, which will contain 20 houses and 27 townhouses.
The developers bought the a 2-acre site, which for more than 25 years housed AAA Catering Service, for $2.6 million in 2016, according to the Cook County recorder of deeds. That works out to about $55,300 in land costs for each of the 47 units planned.
The result: “We come in at single-family prices that you can’t find if you go north of downtown,” said Dan Mark, a partner in the development team. The houses, under construction now, are priced in the $630,000s. The townhouses will be built next year, Mark said. Their prices have not been announced.
Ten of the single-family homes are under contract, Mark said. “We have price going for us,” he said, “but there’s also location.” The homes are walking distance to the CTA’s Halsted Street Orange Line stop, which is a two-stop ride to the Loop; the Chicago Park District has a handsome three-year-old boathouse designed by architect Jeanne Gang on the river’s edge; and the restaurants of Bridgeport and Chinatown are all nearby. AAA follows the 70-unit Riverbend Estates development in bringing new contemporary-style homes to this relatively isolated piece of Bridgeport, between the Stevenson Expressway and the South Branch of the Chicago River.