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Builders Add Escalation Clauses to Offset Lumber Prices

NAHB survey: 47% of builders are adding the escalation clauses; 10% are adding shared price clauses; and 29% are pre-ordering lumber to try to avoid cost increases.

WASHINGTON – To help protect themselves from ongoing price increases in the lumber market, more builders are adding escalation clauses to their sales or construction contracts.

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. 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.

Forty-seven percent of builders said they were “including price escalation clauses in their sales contracts,” according to the most recent National Association of Home Builders and Wells Fargo Housing Market Index survey. Also, 10% are including shared price clauses in their contracts.

Shared price clauses are similar to price escalation clauses in that they tie the final house price to the price of building materials, Paul Emrath, NAHB’s vice president for survey and housing policy research, said on the association’s Eye on Housing blog. “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.

While these price escalation clauses may help to protect builders from rising costs, customers unable to afford the escalated house prices will result in lost sales, Emrath said.

More builders (29%) also are pre-ordering lumber to help avoid cost increases, and 22% are obtaining price guarantees from suppliers. But those price guarantees don’t often stretch past two months.

Some builders (19%) are delaying building or sales when costs spike; others (15%) are laying the foundation, then pausing before starting the framing, and 4% are using lumber options or futures to hedge against future price changes. Still, about 13% of builders aren’t using any of these options, according to the survey.

Source: “How Builders Try to Deal with Rising Lumber Prices,” National Association of Home Builders’ Eye on Housing blog (April 21, 2021)

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