Frazzled Builders Reset Expectations Under Crushing Demand

Home builders

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More buyers are turning to the new-home market for greater inventory options, but builders are struggling to keep pace. Some smaller firms have temporarily stopped signing new contracts in order to catch up with existing orders, according to reports. Larger home builders are experimenting with blind auctions and shifting away from fixed prices, and they’re increasingly accepting bids on contracts and putting customers on wait lists.

Rising construction costs and delays for items such as appliances, cabinets, and Sheetrock are causing longer timelines to complete projects. To deal with the market pressure, about 19% of builders say they are delaying sales and home starts, and 47% are adding escalation clauses to contracts to recoup higher material costs, according to a National Association of Home Builders survey conducted in April. “We’ve shut off sales until homes are nearly completed,” Greg Yakim, a partner at Texas builder CastleRock Communities, told Bloomberg. “We have huge waiting lists.”

Financial flexibility is increasingly needed on the parts of buyers who are flooding the new-construction market. Contracts for new homes typically lock in the sales price prior to construction. But as costs soar, some builders are limiting the number of contracts they sign each month. This strategy aims to mitigate the burden of construction costs, which can spike dramatically between the start and finish of one project.

About 63% of home builders nationwide say they are limiting the number of contracts they sign each month, according to a recent survey conducted by Austin, Texas–based real estate advisory firm Zonda. “It’s something that we’ve never seen,” says Vaike O’Grady, regional director for Zonda. “The builder’s job has gone from trying to sell homes to trying to build homes.”

Some builders are even starting to accept bids for empty lots and contracts. For example, homebuilding giant D.R. Horton recently sent a notice to local real estate pros in the Austin area announcing a final phase of a new subdivision. The company gave buyers a week to submit bids on the yet-to-be-built homes. “Due to demand, we anticipate receiving multiple offers on many of our properties and are advising customers to put forth their highest and best offer for consideration,” read D.R. Horton’s notice.

In another example, a couple in Austin told Bloomberg that they offered a bid $17,000 above the $330,000 starting price for a contract on a new home in D.R. Horton’s Tiermo community and were turned down. The couple says company officials told them: “You weren’t even close.”

Home builder Lennar recently sent an email to brokers in Punta Gorda, Fla., announcing that in its brand-new Babcock Ranch community, the company would accept open-ended bids on homes instead of publishing specific sales prices.

Builders also are finding ways to protect themselves legally against fluctuating prices. Some construction contracts in Atlanta, for example, now include opt-out clauses for both the builder and buyer, local real estate pro Trish Byce told Bloomberg. “Builders cannot give you a firm price today,” she says.