Shrinking numbers, soaring prices put new houses out of reach for families
When Paul Bertsche and his wife, Wendy Andrews, began searching for a home in 1994 they scoured the city for a new house with a yard where their children could play. The pickings were slim, so in 1995 Bertsche and Andrews decided to build their own home – along with 88 others for young families facing the same dilemma.
“We got into developing because we wanted more options,” Bertsche says. “It (was) our goal to provide families with an alternative to moving to the suburbs – yards, family rooms, rec rooms.”
Their development, the Terraces of Old Irving, was in Irving Park, a Northwest Side neighborhood known for its large lawns, 19th century Victorians and Prairie-style homes. Townhouses at the Terraces were priced from about $190,000 and detached single-family homes started in the $220s.
Ten years later, Bertsche and Andrews still live in their Irving Park home and have returned to building in the neighborhood with the Residences of Old Irving Park, a development of 33 single-family homes and 15 townhouses at 3902 N. Kilbourn Ave. Their company, CA Development, continues to build urban homes with suburban flair, but the game has changed significantly. The Residences of Old Irving Park run from the $470s to the $720s – more than twice the price of CA Development’s earlier homes in the same neighborhood.
That shift reflects a citywide trend. The median price of a single-family home in Chicago rose to $216,300 during 2004, an increase of 83 percent over five years, according to the Chicago Association of Realtors. Prices for new-construction single-families, however, are much higher on average. Finding a new detached home for less than half a million dollars is difficult and in lakefront neighborhoods on the North Side, the starting price is usually more than $1 million.
Of course, depending on the neighborhood, finding a new single-family home at any price point can be a chore in the city. In mid-August New Homes counted just 23 active single-family home developments of two or more units on the market – and 350 condo projects. Even the city resale market, which once tilted toward single-families, is now dominated by condominiums. During the second quarter of 2005, CAR recorded the sale of 3,437 single-family homes compared with 7,039 attached units. The CAR numbers include new construction but reflect mostly resales.
Rising land costs
The small numbers and high prices of new single-family houses in Chicago are partly a function of exorbitant land costs, which have been driven to new heights by increased demand. The city has undergone a renaissance during the last decade. It’s safer and cleaner with greater options for dining, entertainment and education. The 2000 U.S. Census recorded the first net gain in population for Chicago in 50 years as suburban empty nesters, young couples, immigrants and others decided the city was the place to be.
“Land has become super expensive because the city has become so desirable,” says Lincoln Park homebuilder Stuart Rose, of SR Builders. “Whether it’s the park every two blocks, the gentrification, or the life, people want to stay in the city.”
The upturn in the cost of land has led developers to crowd lots that formerly held single-families with more lucrative condos. A developer paying $500,000 for an old house he plans to demolish has less risk and more profit if he builds several new condominiums priced in the $250,000 to $600,000 range on the site than if he constructs a single detached house priced at $1 million or more. The teardown phenomenon is evident on streets throughout the North Side, especially in neighborhoods like Lakeview and Uptown, where two- and three-flats tower over neighboring single-family homes.
So why build single-family homes at all?
Low interest rates and strong appreciation have made detached houses a good investment for buyers. And there will always be demand for the proverbial white picket fence.
“(A home) is one of those expenditures that history shows is going to be worth more money every year,” Bertsche says. “Housing is not a luxury item, it is a necessity.”
Developers face less competition in the single-family niche, and they’re enticed by the comparative ease of building standalone houses in neighborhoods opposed to denser condo projects.
“It’s easier to get a building permit (for a single-family),” says Philip Soto, a sales associate at Jameson Realty Group. “You only have to deal with one client. If you’re building a spec house, you can do it as cheaply (or) expensively as you want, and you’ll attract the right buyer. And for a small developer just getting in the business, it’s a lot easier.”
But the juice still must be worth the squeeze for builders, and in the current market this translates into buyers shelling out big bucks for homes and developers bargain shopping for land.
Bertsche says he’s focused on finding deals, often in the form of non-residential sites.
“The hardest part is acquiring land at a reasonable price,” Bertsche says. “There is no or very little ‘vacant’ land in the city. Our developments have always been creative reuses of obsolete or vacant industrial properties.”
JMM Development is another sale shopper. The developer currently has 11 four-bedroom 3.5-bath homes available from the $670s to the $940s in what it describes as “emerging neighborhoods,” such as Horner Park, Addison Mall and Mayfair.
“We really scour property to find things,” says JMM owner Marla Mason.
Longer market times
While large industrial parcels remain in places like Irving Park and Jefferson Park, they are scarce in denser neighborhoods where demand is high, forcing developers to buy more expensive single lots. Lincoln Park, where the median price for a single-family home in 2004 was $1,235,000 according to CAR, is a prime example.
Competition for lots is intense, and projects like Geneva Terrace Estates, a 22-unit development of single-family homes at 646 W. Drummond Place, in the heart of Lincoln Park, have become rare. SR Builders is able to charge a premium at this project partly because the site, a former Chicago Transit Authority property, was an unusual find. The mansions have five to seven bedrooms, 4.5 to 5.5 baths, high-end finishes and price tags of $2.25 million to $3.5 million, or roughly $450 per square foot. Six homes were sold and two reserved at press time, according to developer Stuart Rose.
“It’s a very unique setting – these homes are going to appreciate tremendously,” he says.
Rose is confident that the custom cabinets, countertops and tile stonework, as well as an almost suburban, cul-de-sac layout in an urban neighborhood, will attract buyers with “champagne taste and the budget to match.”
However Geneva Terrace fares, homes are sitting on the market longer in Lincoln Park than in any other neighborhood in the city. The average Lincoln Park home spent 130 days on the market in 2004, according to CAR, a 113 percent increase in just one year. The pricier the neighborhood, of course, the longer market times tend to be, but the acuteness of the jump looks like softness, at least at the highest price points, to some.
“(There are) a lot of the higher-end homes,” Soto says. “Two million-plus in Lincoln Park – there’s probably a couple years supply of those.”
Mason agrees.
“In some senses, the market is tough,” she says. “If it’s $1.3 million they’re sitting on (it). I find Lakeview and Lincoln Park markets are really hard.”
Rose is well aware of the challenges of selling in the area.
“There are an amazing amount of single-family homes that have been built and haven’t sold,” he says. “A lot of people felt five to 10 years ago that anybody could build anything and it would sell, but today you need to be better or the homes will sit.”
Outlying neighborhoods
Skyrocketing prices have not been limited to trendy lakefront neighborhoods. Bridgeport, perched just southwest of the Loop, has seen the largest jump in prices for detached homes of any neighborhood in Chicago during the last five years. The median single-family home in Bridgeport was $559,192 in 2004, according to CAR, an increase of 446 percent over the 1999 median of $102,500.
Much of the growth in Bridgeport has been a product of Bridgeport Village, a 116-home subdivision claiming to be Chicago’s largest single-family home development in 40 years. The community offers large detached houses from the $650s, though some have been in the $1 million range.
While the development has been key in the revitalization of the neighborhood, it has recently run into problems. The city issued a blanket stop-work order for the project in January after discovering building permit violations, and lifted the order in early July, according to Department of Buildings Public Information Officer Peter Scales.
Former lead developer Thomas Snitzer is no longer with the project and has been replaced by his financial partners, John Kinsella and Syd Diamond. Sales on the last five homes in the current phase were stopped until the units that exceeded their original permitting are brought up to code and certified by a structural engineer.
In March, CA Development sold out Bridgeport Landings, a development of 41 single-family homes, in less than two weeks, according to Bertsche. Prices ranged from the $340s to the $530s.
“Emerging” neighborhoods like Bridgeport, a blue-collar enclave that until lately was heavy on industry but short on residential construction, are good candidates for single-family development, especially when the city or an alderman insists on it.
“We’re seeing some of these second-tier locations develop single-family,” says Gail Lissner a vice president of housing analyst Appraisal Research Counselors. “Land is less expensive and developers are able to offer that product in what would be a townhome price close to downtown.”
Left in the Dust
Not everyone is encouraged by the snowballing growth. Many Chicago families are unable to afford cramped condos, much less new houses.
“As land values go up, this type of price escalation makes doing affordable housing all the more challenging, and that’s at a time when the need continues to grow,” says Kevin Jackson, executive director of the Chicago Rehab Network, an affordable housing coalition.
The Department of Housing has responded to the problem with a number of programs to encourage home ownership. New Homes for Chicago provides developers with subsidies to encourage construction of moderately priced condominium, single-family and two-flat homes. The program currently has 100 single-family homes available in North Lawndale and 13 in South Chicago. The price of houses in the program is capped at $155,000. To be eligible, homebuyers can earn up to 120 percent of the area median income.
TaxSmart is a city-run program available to buyers purchasing homes for the first time or living in targeted low- to moderate-income communities. It allows homebuyers to reduce their income taxes by an amount equal to 20 percent of the interest paid on their mortgages.
While New Homes for Chicago and TaxSmart mark progress toward affordable housing, they are not enough, according to Jackson.
“Hats off to the city for TaxSmart. That’s a brilliant program and it’s certainly the right direction to be working on,” he says. “But we need greater coordination across the industry.”
Jackson cites Genesis Housing Development Corporation as an example of this coordination. In 2003, Genesis completed Genesis Phase I – nine three-bedroom, 1.5-bath, single-family homes that averaged $154,000 in Bronzeville. Phase II will begin sales in late fall, according to Executive Director Donnie Brown, and will include 20 three-bedroom, two-bath, single-family homes priced at $275,000.
Brown hopes that the city will work harder to spur the development of affordable single-family homes.
“Detached single-family housing is what many consider family housing,” Brown says. “(In a condo) children don’t have a play yard. It’s hard to raise a family in a condo.”
But if detached houses continue to shrink in number and grow in cost, moderate-income families may not have a choice.
“The supply is so limited and the demand is great, so prices keep going up,” Rose says. “It is important that everyone is able to own a home…but single-family homes (are) going to become more exclusive.