New Home Construction Slows, Sees Escalation Clauses As Prices Rise

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With single-family home starts down 13% in April, compared to March, many potential homeowners wonder why a slowdown persists during a period of high demand. The answer: lack of workers and scarcity of building materials.

“I have to blame the difficulty in procuring lumber and other products, along with labor issues for the miss, in addition to likely cancellations due to skyrocketing costs for single family starts,” said Peter Boockvar, chief investment officer at Bleakley Advisory Group.

Home builders have begun including escalation clauses in their contracts with homebuyers, says the National Association of Home Builders.

“Escalation clauses specify that if building materials increase, by a certain percentage for example, the customer would be responsible for paying the higher cost. Including such a clause allows all parties to be on notice that the contract costs could change if materials prices change due to supply constraints outside the builder’s control,” according to a recent NAHB post.

According to the NAHB’s most recent numbers, the average home built in the United States costs $36,000 more than the same home a year ago.

“Contractors are experiencing unprecedented intensity and range of cost increases, supply-chain disruptions, and worker shortages that have kept firms from increasing their workforces,” said Ken Simonson, chief economist with Associated General Contractors of America, an industry trade group. “These challenges will make it difficult for contractors to rebound as the pandemic appears to wane.”

The NAHB’s monthly survey of its builders said that as many as 15% are reporting laying concrete for a home without any materials to continue its production.

“Builders are also reporting difficulty obtaining other inputs like appliances,” said Mike Fratantoni, chief economist for the Mortgage Bankers Association. “These supply-chain constraints are holding back a housing market that should otherwise be picking up speed, given the strong demand for buying fueled by an improving job market and low mortgage rates.”

In the midst of a home buyer demand spike, lack of skilled labor and scarcity of building materials continue to impede construction volume.

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