The housing market for both newly built and existing homes is hot, hot, hot. While this should make home builders happy – rising home prices and plenty of buyers are both good news, of course – these are actually troubling times in the residential construction industry. Increased prices for materials and labor, coupled with extreme shortages and supply chain challenges, make it harder for builders to meet the high demand in many markets.
Builders are experimenting with ways to align their construction capabilities with market dynamics. Some hold off on writing new contracts until they can match their waiting list of buyers with properties, while others add escalation clauses to their contracts. Auctioning properties to the highest bidder or even canceling contracts with buyers have also been seen.
On the other hand, some are determined to continue serving customers with as much integrity as they can. For example, Highland Homes, a Texas builder established more than 35 years ago by Rod Sanders and his sister Jean Ann Brock, opted to continue with their traditional practice of sticking with the same price from contract to completion.
“Homebuying is stressful enough, and we don’t want to add to that,” says Aaron Graham, Senior Vice President of Sales for Highland Homes.
Challenges for Builders
Global shortages and supply chain disruptions for everything from windows and appliances to heating units and lumber have caused delays and rapid price increases for builders just as buyer demand is at its height. Regulatory costs, land prices, and a skilled labor shortage all contribute to the price pressure on builders.
The supply chain crunch and higher prices for materials left builders in a difficult position. Many builders found they could either finish home construction at a loss, or they would have to find a way to increase the price.
The challenge is two-fold. First, prices have increased, so a house estimated last year to cost $250,000 to build might now cost $300,000 or more to complete. Second, prices for both existing homes and newly built homes have appreciated at an extremely rapid pace and a builder could conceivably sell a house in 2021 for substantially more than a contracted price from last year.
The median sales price for a newly built home was $329,800 in July 2020, according to the Census Bureau. By July 2021, the median sales price rose to $390,500.
Some builders have tried to control their bottom line by severely limiting contracts and instead are developing waiting lists for customers. This way they can raise their prices to match the market as they work through the waitlist, rather than lose money on existing contracts. Other builders have stopped accepting new contracts entirely until supply costs stabilize.
A National Association of Home Builders survey in April 2021 found that 19 percent of builders were delaying sales or construction in response to higher material prices and shortages. Nearly half of all builders surveyed (47 percent) added escalation clauses into contracts, essentially allowing the builder to ask buyers for more money if their building costs increase, and 10 percent included a clause in their contracts to share price increases with buyers. Fifteen percent of builders opted to lay the foundation and then pause construction before starting the framing.
Highland Homes handled things differently, accelerating homes under construction to meet demand and declining to use escalation clauses in their contracts.
“We want our customers to know we keep our commitments because it’s the right thing to do. There are no games, gimmicks, or gotchas with Highland. Every single house we build is delivered at the price listed on the contract. It’s that simple,” says Graham.
In markets where inventory is extremely limited, some builders release a handful of lots and set a date when they accept bids, just as real estate agents do for existing homes. Others build a home first and then request bids at completion; buyers vie for a home by trying to outbid each other, something seen often in the buying frenzy of the past year.
Builders Focused on Reputation
Like other builders, Highland Homes has raised their prices with material and labor increases, says Graham. They just have not raised their prices on any homes that are already under contract. Highland recently added a “TrustPrice Guarantee” on its website to assure potential customers that Highland stands by its pricing.
“We want to make it clear that we haven’t changed our way of doing business in spite of the market,” says Graham. “We’re thinking about our long-term brand. We believe that what we do in difficult times can help us in better times. Homebuyers will remember what we did in 2021, and real estate agents will remember as well.”
Another builder focused on doing the right thing is The New Home Company, which builds homes in California, Arizona, and Colorado. A pop-up on the home page of their website attests to their commitment to being “respectful, fair, and consistent” with their customers. The company promises to work with customers from their homes and won’t tolerate people camping out for first access when new lots are released.
In addition, The New Home Company says it will not allow bidding wars or auctions. Instead, the company will follow its pre-established priority order and won’t be influenced by offers above the stated price.
Michele Lerner is an award-winning freelance writer, editor and author who has been writing about real estate, personal finance and business topics for more than two decades.