The future of a new home purchase? When the price isn’t really the price

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You’ve finally made that fateful decision to buy a home, but your sparkling new dream home is still on paper. In other words, it’s not built yet. Still, in your mind, it’s a done deal. You’ve agreed to the price, and now it’s just a matter of waiting until the last nailed is hammered into place.

Not so fast. These days, with the price of lumber skyrocketing as your house is being built, you may have to pay for more than you bargained for when you signed on the dotted line. Realtor.com reports that more builders are adding escalation clauses to their sales or construction contracts to help protect themselves from ongoing price increases in the lumber market. “The rising and volatile costs of lumber continue to hamper the new-home and remodeling markets. Lumber prices nearly doubled over a four-month period in 2020 and have continued to reach new highs,” says Realtor, who adds that the price and availability of building materials have been cited as one of the top challenges that homebuilders face at a time when the real estate industry is calling for more housing inventory to meet surging buyer demand.

According to the most recent National Association of Home Builders’ Paul Emrath as well as the Wells Fargo Housing Market Index survey, 47% of builders said they were “including price escalation clauses in their sales contracts,” To boot, 10% are including shared price clauses in their contracts — similar to price escalation clauses in that they tie the final house price to the price of building materials. “The difference is that, in the typical shared price clause, the home builder agrees to absorb part of the material price increase, with the home buyer covering the rest,” he writes.

The complication with homebuilders covering their collective bottoms, however, is that price escalation clauses are likely to kick homebuyers in theirs since they may be unable to afford the escalated house prices. The result, according to Emrath? Lost sales. Builders may be betting on the market remaining crazy-strong, with multiple backup buyers lined up to make good on the fallout, but no one has a crystal ball.

While more builders are pre-ordering lumber to help avoid cost increases, a full 22% are obtaining price guarantees from suppliers. Those price guarantees, however, don’t often stretch past two months. It’s anyone’s ball game.

Source: Realtor | TBWS