As most industry observers know, softwood lumber prices have been extremely high and volatile over the past year. During an unprecedented four-month surge in 2020 prices nearly doubled, reaching an all-time high in September. Since then prices have continued to fluctuate, increasing recently to the point that they are now considerably higher than they were even at last September’s historic peak. In this environment it is not surprising that builders identified prices and availability of building materials as the top challenge they expected to face in 2021.
That raises the question of what, if anything, builders are doing to try to cope with the challenge. NAHB investigated this recently by including a question on reactions to the rising and volatile lumber prices in its April 2021 survey for the NAHB/Wells Fargo Housing Market Index (HMI). In response, 47 percent of single-family builders in the HMI panel indicated that they were including price escalation clauses in their sales contracts.
Although price escalation clauses are by far the most common response to rising lumber prices, in addition at least 10 percent of the builders reported pre-ordering lumber, obtaining lumber price guarantees from suppliers, pausing before starting to frame the structure, otherwise delaying building or sales, and including shared price clauses in sales contracts.
Shared price clauses resemble price escalation clauses that 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.
Among builders who have been successful in locking in lumber prices by obtaining price guarantees from suppliers, 42 percent reported that the prices were typically guaranteed for 15 to 29 days. Also fairly common (reported by 33 percent) were lumber prices guaranteed for 30 to 59 days. The median length of the price guarantee was 28 days.
Neither guaranteeing prices for a month nor any of the other practices cited above completely compensates for the historic surge and volatility in lumber prices the industry has experienced recently. Price escalation clauses seem to offer some protection for builders, but don’t prevent them from losing sales to customers unable to afford the escalated house prices.
Housing starts have been relatively strong lately (although the rising number of unused permits is a sign of some stress in the market). However, as NAHB’s housing affordability pyramid shows, the strength is due largely to demand at the high end of the income distribution, and a large number of households with more modest incomes have been priced out of the market for new homes. A post published last week showed how higher prices create affordability challenges for minority households in particular.