By Buzz Hoffman. One thing that strikes me about the competitive landscape in the Chicago area has less to do with the big builders coming into town and more to do with the lack of a recession.
Typically, we have a recession every 4 years. The fourth year, through natural selection, those that are weaker and those that can't cope with the market just fall out. That hasn't happened in 12 years. Builders who otherwise would have fallen out due to natural attrition are still building today.
What I find even more interesting has more to do with land, the effect of recession, and how quickly we're expanding from the center of the city. I look at it like this: Every three years, the market takes three steps out. And then the fourth year -- the recession year -- the market consolidates backwards because you've got projects that have either slowed or failed. Builders replace other builders and those builders must move into the "infill" jobs and they don't have to push further out in order to get land and get houses built. When I say backwards and outwards, I mean geographically.
Let's take the past 12 years. We've got 12 years out and no years back, resulting in development twice as far out from the center of the marketplace as we would have been had we had the normal recession cycle. That's huge. As I look at what happened in Chicago five years ago, typically most of the heavy selling stuff was within 35 miles of the center of the city. Now, there are a number of jobs that are more than 45 miles out. That shouldn't have happened in five years.
The further out we go, the more difficult times we are going to have getting infrastructure, utilities. And now, if the builders want to continue going out and doing large numbers, they're going to be forced to fund sewer plants, water facilities. It's good that the big builders are in town because they're the ones who can afford it.
There is a map of Chicago that most of us use to compare one location to another. As of six months ago, this map is extinct because it doesn't go out as far as we're now looking for land. At the center of the map, it goes out about 45 miles. We're now looking 50, even 55 miles out. When the big builders come to town there is both a stated and implied goal of doing 2,000 units. And in order for the big builders to accomplish that, they have to look far out. We all need helicopters! That sums it up.
Home building has always led the national economy in and out of recession. And it is my opinion that irrespective of Iraq -- and of course you can't say irrespective of Iraq -- the economy is getting better. What that necessarily means is that there is going to be some upward pressure on interest rates because the economy is getting better. And typically when rates go up, housing suffers. By virtue of the fact that rates are going up because the economy is getting better, that bodes well for housing.
We're very much in a win-win situation here in the home building industry. Look what housing has done in a bad economy; we've set records. So the feeling is that when the economy gets good, we're going to get better.
When I think about the future market for housing in Chicago, I have to go back to the lack of a recession. The villages have a significant surplus of revenues and they feel very confident in their ability to restrict zoning. Because there is not a recession, communities aren't being forced to say 'I need to get some building revenue back here, and I need to get some small lots so I can have production housing and build my coffers.' If this continues, it's going to be a definite consequence for home building.
Buz Hoffman is president of Lakewood Homes, Hoffman Estates, Ill.