Tuesday, May 18, 2021

Material Prices for Homebuilders Are Climbing So Fast That Builders Are Adding Escalation Clauses to Sales Contracts

Housing prices are soaring and there appears to be no end to the advance. Prices are now accelerating at the fastest rate in over 15 years.

A combination of lockdown-related bottlenecks, limited labor availability (thanks to over-the-top unemployment payments that give potential workers incentive to just stay home) and, most significant, massive printing of money out of thin air by the Federal Reserve.

 In a monthly sentiment survey of builders, they reported higher costs for lumber, steel, gypsum and copper, some of which have hit record highs this year. Not to mention the limited labor. Construction employment stalled in April and actually fell below its pre-lockdown peak, according to the Bureau of Labor Statistics.

So what are homebuilders doing in cases where a home is sold but not completed?

Escalation clauses.

 “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.



  1. Builders were caught off guard by the scarcity and price increases of building materials. After I put a deposit in my new home in mid November, the price increased on the same model $50,000+. The contract did not have an escalation clause so I did not need to pay more. The sales agent told me that despite having economists and financial analysts looking at trends, the builder did not anticipate the current situation since November. The sales agent indicated that the builder may have lost money on my place. The builder is now waiting to release homes until some work is done. I understand that fixed prices for homes are not available. The builder will either open bidding or put escalation clauses in contracts. Escalation clauses will be a hard sell for buyers. They may have difficult time to obtain financing. I see a market bust coming although the administration does not. Biden wants huge increases in government spending with enormous increases in welfare such as increased child tax credits, extended unemployment benefits, bailouts to Democrat controlled states, stimulus payments, and many other government handouts. I see a permanent disconnect between consumption fueled by government spending and production.

  2. A lot of would be home builders (construction workers) are being pulled into government funded (prevailing wage) projects. The wages for non union government funded projects are far better than for residential construction and with the Fed spigot running wide open there are more state and federally funded projects ongoing. Just one of many factors driving up home building costs.