The Midwest economy continued to slow in 2002. Employment in the region averaged 24.9 million through November, down from 25 million for the same period in 2001. Indiana, Minnesota, and Wisconsin recorded employment gains from 0.5 to 1.5 percent, partly offsetting declines in Illinois, Michigan, and Ohio. Manufacturing employment in the region was down for the second year in a row. The University of Michigan’s Department of Economics forecasts gradual improvement in manufacturing activity for the State beginning in 2003. By 2004 manufacturing employment in Michigan is expected to be up by 14,800 jobs. According to recent survey of business conditions in Ohio, Cleveland and Cincinnati area manufacturers also expect moderate recovery of activity in 2003.

Favorable financial conditions in 2002 and strong demand for new homes in most of the region’s major markets kept homebuilding at high levels throughout the year. Builders took out permits for 203,344 single-family homes in 2002, the second highest permit volume in the past 25 years. The Builders Association of the Twin Cities reported that 2002 was a very busy year for residential construction in the Minneapolis-St. Paul metropolitan area with 17,100 new homes starting construction during the year, the highest volume in the past 15 years. Twin City area builders are optimistic about new home construction in 2003 because of sustained strong demand for housing in all price ranges. Despite the slowdown in Michigan’s economy, homebuilding in the State held up well during 2002 because of strong activity in the Detroit-Ann Arbor area, where single-family permits were up 8 percent for the year to 20,500 homes.

Buoyed by robust new home sales in suburban Chicago, the State of Illinois recorded 42,200 single-family permits in 2002, an 8-percent increase. The Wisconsin Builders Association reported that 2002 was another great year for homebuilding in the State, with approximately 22,000 new homes starting construction. Activity in 2003 is expected to continue at high levels, particularly in the Madison and La Crosse areas, where demand for new homes has been strong. In Indianapolis more than 13,000 new homes were sold in the metropolitan area during 2002, down from record sales of 15,000 homes in 2001 but still one of the best sales performances in the past 5 years. Indianapolis builders expect 2003 to be another good year with 13,000 to 14,000 new homes likely to start construction.

Existing home sales in the region were also strong in 2002, largely because of low mortgage interest rates. In Minnesota the Minneapolis Area Association of REALTORS^® reported that existing sales activity in the Twin Cities area remained strong in the fourth quarter, which is when activity normally declines. A record 52,200 existing homes were sold in the metropolitan area during 2002. Ohio’s Association of REALTORS^® reported that 2002 was one of the best years for existing home sales, with activity in the State up 5 percent over 2001. Strong sales in the metropolitan areas of Cleveland with 22,000 homes, Cincinnati with 20,400 homes, and Columbus with 19,900 homes, contributed to an increasing homeownership rate in Ohio of more than 72 percent. The Illinois Association of REALTORS^® also reported a strong year for existing home sales, not only because of low mortgage rates but also because of the robust demand for condominium units. Overall existing home sales in the State were up 6 percent for the year, but condominium sales increased by 9 percent. In Michigan, sales activity in the Detroit and Grand Rapids areas was up more than 5 percent.

Rental market conditions in the region continued to soften in 2002 because of the slowdown in the Midwest economy. An owner of 40,000 existing apartments in the region reported that vacancy rates increased gradually during the past 2 years, going from 5 percent in 2000 to 8 percent in 2002. Multifamily building permit activity in 2002 was up 8 percent to 65,900 units; however, much of the increase was due to increased demand for condominiums and townhouses for sale in many major markets. The apartment market in the Detroit area apartment market was soft in 2002 and is likely to remain soft in 2003. An owner of 10,000 new and existing apartments in the metropolitan area reported that vacancy rates rose throughout the year. In the Grand Rapids area the story is the same. The rental market softened in 2002 because of the slowdown in the local economy and the number of renter households becoming homeowners.

Conditions in Ohio’s major apartment markets in 2002 were mixed. In Cincinnati CB Richard Ellis reported that apartment production in the metropolitan area was down significantly, from 3,000 new units in 2001 to 1,800 new apartments in 2002. Overall apartment vacancy rates for 2002 in the Cincinnati area were in the 11- to 12-percent range, up from 8 to 10 percent in 2001 and 7 to 8 percent in 2000. In the Columbus area, construction remained strong, with multifamily permit activity up 18 percent in 2002. The apartment market in the metropolitan area began to show signs of softening during 2002. According to a Corson and Associates survey of 85,000 apartment units, apartment occupancy declined to 92 percent as of the fourth quarter, and rent concessions were more common in 2002 than in 2001. Demand for rentals in downtown Cleveland remains strong, but the market is becoming more competitive as new apartments enter the market.

In Wisconsin rental market conditions in the State’s major markets were mixed. Madison’s healthy economy and strong demand for rental housing have kept apartment vacancies in the 3- to 5-percent range for the past 3 years. Multifamily building permit activity in the metropolitan area averaged 2,100 units annually between 1999 and 2001 compared with 1,500 units annually in the previous 3-year period. Activity in 2002 was down 26 percent from high levels in 2001. In Milwaukee an owner of 6,000 new and existing apartment units reported that suburban markets softened in 2002, occupancy declined from 94 percent in 2001 to 92 percent in 2002, and rent concessions became more widespread. Downtown Milwaukee’s apartment market was stronger due to increased demand for housing by young professionals. Occupancy was in the 93- to 94-percent range.

Rental market conditions have also loosened in Indiana during the past 3 years, according to CB Richard Ellis. The Bloomington, Indiana, apartment market was the only market in the State to exhibit tightening conditions, because of the growing student population at Indiana University. Occupancy in the apartment market was reported to have increased to 98 percent in 2002.

In the Indianapolis area the rental market is currently very competitive. Conditions are expected to remain soft in 2003 because of the slower local economy and likely addition of 2,500 new apartment units to the market next year. Apartment occupancy in Fort Wayne and Kokomo fell below 90 percent in 2002, down from a 4-year high of 93 percent in 1999. In Lafayette-West Lafayette occupancy was down to 91 percent in 2002.

The Minneapolis-St. Paul apartment market also showed some signs of softer conditions in 2002. Vacancy rates as of the fourth quarter were in the 6- to 7-percent range compared with 4 percent in the fourth quarter of 2001. Concessions, absent in the market a year ago, are now widespread. The softer rental market is due to the economic slowdown, renter households switching to homeownership, and increased production of new apartments in 2002.