The Chicago metropolitan area, which includes the Chicago Metropolitan Statistical Area (MSA), the Kankakee MSA, the Rockford MSA and the Lake/Kenosha MSA, added 34,700 new jobs during the 12 months ending in September 2007, a 0.8 percent growth rate.

This level compares with an annual rate of 49,900 new jobs reported at the end of 2006. Job growth has averaged at or below 1.0 percent annually since 2004, compared with a 2.5 percent average job growth rate from 1995 to 1999.

“Job numbers have been declining since June 2006, when annual job growth was 84,700. Concerns about the relatively slow job growth rate have added to other concerns regarding the housing market,” said Chris Huecksteadt, manager of Metrostudy’s Chicago division. “Historically, for every two new jobs created, a new household is formed. With just 40,000 job formations per year during the past four years, this equates to approximately 20,000 new households per year, not nearly enough to sustain the more than 30,000 annual housing starts recorded in both 2004 and 2005.”

The rising level of existing home inventory is another issue, Huecksteadt said. At the end of the third quarter of 2007, existing home inventory reached nearly 70,000 listings—the highest in several years. With annual sales totaling less than 60,000 units, there is a 13.9-month supply of resale homes. A healthy supply is in the five- to six-month range. The large inventory of existing homes has placed downward pressure on home prices and has forced many potential new home buyers who cannot sell their existing homes to cancel their new home contracts, he said.

The rate of new home starts and closings continued to trend downward. Since the peak, which occurred in the first quarter of 2006, the annual rate of new home starts has fallen 41 percent, while the annual rate of new home closings has dropped 30 percent. In the span of 18 months, annual starts have declined by nearly 15,000 units, Huecksteadt said.

Although closings have fallen, the market continues to close homes at a faster rate than they are being started. “This has kept the level of new home inventory in check. Metrostudy expects the decline in closings and starts to continue during the remainder of 2007 and through the first six months of 2008. The market will reach 18,000 annual housing starts by the fourth quarter of 2007, with further declines likely. The market should bottom out at the level of 16,000 to 18,000 annual starts by early 2008,” Huecksteadt said.

Vacant developed lot inventory continued to rise during the third quarter of 2007, with the delivery of 7,232 new lots to the market. The overall lot supply increased by 2,309 lots, or 3.5 percent, to 68,536.

Based on the current annual absorption rate, this represents a 39.5-month supply. Huecksteadt expects that by the end of 2007 there will be a four-year supply of existing lot inventory, with some markets reporting even more. McHenry, Boone, DeKalb, Will, Grundy and Walworth Counties all have more than five years of lot supply. Lake, Cook, Kendall and Winnebago have less than a 30-month supply of lots.

“With modest lot absorption rates projected for the next two or three years, lot inventory levels will continue to be a concern,” Huecksteadt said.

Lot supply has increased at all price levels, while the absorption rate has declined. The high levels of lot supply are most notable in price ranges above $400,000. At the end of the third quarter of 2007, there was a four-year supply of lots in this price segment.

Based on Metrostudy’s Weekly Traffic & Contracts Report, the rate of contracts per week per subdivision in 2007 consistently trailed the rates established during the prior two years. Through the third quarter of 2007, contracts lagged both 2005 and 2006 levels. As a result, home builders will enter 2008 without a backlog of contracts, Huecksteadt said.

“The market has yet to reach bottom, but will likely do so by mid-2008,” Huecksteadt said.

“The Chicago new home market is rapidly becoming a market that offers single-family detached homes exclusively in the $400,000 and up price range. Rising land costs and municipal regulation continue to force home builders into these higher price ranges, while the market for homes priced below $250,000 is neglected. Growth in the market will be difficult if this trend continues,” Huecksteadt said.

“The two keys to recovery in the Chicago new home market are strong job growth and diversity of new home product,” Huecksteadt said.