Fritz Pfister

Real estate in Springfield Illinois in 2008 is experiencing a slowdown for the first time since the 1990’s. What is interesting is the impact new home sales have upon the housing market.

Remember following 9-11 how the Fed began lowering interest rates to boost economic activity? When mortgage rates became seriously low in 2002 the local housing market, including new construction took off.

In this medium sized market sales of new homes jumped 14% in 2003 to 291 sales. In 2004 new home sales increased by 8.9% to 317. The boom continued into 2005 with 339 new home sales, up 6.9%. The number of new home sales has fallen every year since, however none more pronounced than during 2008. In fact new home sales are running 32% behind the record year of 2005.

The median sale price for a home in The Capital Area Association of Realtors as reported by member brokers to the MLS in 2002 was $89,900. The median sale price has risen every year, excepting 2006 when the median retreated by only $1000, and stands at $105,000 through the first six and one half months of 2008. This $15,100, 16.7% increase in the preceding 6.5 years may be changing course due to weak demand overall, however more so in new homes.

The price of new construction began to rise with hurricanes Katrina and Rita spiking demand for building materials. Now comes the record high price for oil driving up oil based building materials used in infrastructure, and homes.

You could build a home in Springfield Illinois in 2002 for around $80 a square foot, and purchase the building lot for around $375 a front foot. Extremely affordable for any real estate market, especially with interest rates approaching record lows.

Today the lot cost would be around $600 a front foot, and the square foot price can easily exceed $130 per foot. In other words a 2000 square foot home on an 80 foot lot in 2002 would have cost around $190,000. Today it would be closer to $300,000.

During the rise in the overall market median sale price, the cost of new construction supported the price of existing homes. That is changing. The median sale price in the first quarter of 2008 rose an astonishing 5.8% while sales fell 19%. The second quarter experienced a meager .93% increase in the median sale price while sales fell 12.7%.

The reasons? Falling demand, record supply, and builders with unsold inventory lowering prices. There is now a three tier home pricing structure evolving within the market.

The custom home. Examples would be the Springfield Area Home Builders Association Showcase of Homes 2008 where one 2450 square foot home with an additional 1350 feet finished in the basement is selling for $469,900.

The new construction spec home, with 2512 Centennial Drive as an example. This 2356 foot ranch home with an additional 1371 square feet finished in the basement has been lowered in price to $299,900. Granted the home on Centennial Drive doesn’t have all the added amenities of a showcase home, however a $170,000 price differential is substantial.

The existing home is the third tier, and it is under pressure from new homes where the builders have lowered prices to move inventory. Most prospective home buyers will buy new if there isn’t a significant difference between the existing home price.

Where new homes once supported higher existing home prices, excepting custom homes, new home prices will force down the price of existing homes. At least until the inventory of unsold homes is greatly reduced. With the current economic environment, that probably won’t happen any time soon.

In 2005 a total of 4182 homes were sold by Realtors which included 339 new homes. Turned out to be a record year for both. In 2007, 4024 homes were sold including 287 new homes. The year 2008 sees new home sales down by 20.9% and on pace for 230 sales. Overall home sales are down 14% and on pace for around 3400. A far cry from the 4024 last year.

Along with declining numbers in sales will go prices. At least that’s the current trend. Will it be a precipitous decline in prices? Are you kidding? This is Springfield Illinois real estate where we defy the odds! The current trend will have prices down by 1 to 3% by years end.

The impact new construction can have upon a housing market is on display through this little historical snapshot within Springfield Illinois real estate.

Source of data, The Capital Area Association of Realtors MLS, and does not reflect all market activity, for example custom home sales or builder spec homes sold without the assistance of a Realtor, and fsbo’s of existing homes. It is estimated that 90% of all home sales involve a broker.