LOS ANGELES (AP) — Economic and housing market trends at the start of the year both favored U.S. homebuilders’ prospects for solid sales in 2020.
Sales of new homes rose by the fastest pace in more than 12 years in January, and last month sales of existing homes hit an all-time high as steady hiring, low unemployment and declining mortgage rates stoked demand for homeownership. And with a shortage of previously occupied homes for sale not seen in decades, the spring homebuying season looked strong for homebuilders.
That was then. The National Association of Home Builders now expects an “incredibly disruptive” second quarter as businesses close and lay off workers. The coming weeks will be key in determining the scale of the decline, but some economists surveyed by the National Association of Realtors forecast home sales could plunge up to 35% in the coming months.
Dean Mon, the recently elected chairman of the National Association of Home Builders, says builders are already seeing shortages of some building materials and workers. A builder from Shewsbury, N.J., Mon spoke to The Associated Press about the pandemic’s potential impact on his industry.
Questions and answers have been edited for clarity.
Q: What’s the biggest challenge builders face from this virus outbreak?
A: There are going to be more people that maybe test positive. If that’s the case, that means that we’re going to get more and more of our people being taken off the field and they’ll have to go somewhere for a week or two to wait it out. That is beginning to be a concern. We have a labor shortage to begin with.
Q: Have you heard whether smaller builders are having to shut down temporarily?
A: No, they’re not shutting down. But if they take one or two of your employees, for a small builder it’s easy to really fall behind. But so far, we haven’t seen a lot of that.
Q: Has the outbreak affected builders’ supply chains?
A: It is slowly beginning to affect the supply chain. Lumber, sheet rock, a lot of stuff that we use, especially the midsize builders.
Q: Should buyers expect to see higher prices because of this?
A: Yes, no question about it. A lot of times prices do go up a little bit because we need to spend more for labor and we need to spend more for some of the supply chains that are not working well. Builders sell the house, but we deliver it, especially smaller builders, in nine or 10 months. So, in that time a lot of things can happen.
Q: How worried are you that a recession will hurt home sales this year?
A: It all depends how long this is going to be. We’re optimistic and we like to say six to eight weeks, so we don’t lose the whole summer. We hope that’s the case.
To further explain NAHB’s position on the supply chain, the following was posted on NAHB’s website March 23rd:
The coronavirus pandemic has caused many disruptions and may well impact residential construction in the coming weeks or months. Last week, California issued a far-reaching “stay-at-home order” for its 40 million residents. This order is required except for those needing to get food, take care of a relative, or go to an essential job in one of 16 sectors specifically identified. Other states and cities are following suit.
With this most recent development, companies should evaluate their businesses, including their contracts, and be prepared for the possibility that building materials prices may increase as a result of supply chain disruptions.
As part of an overall contract assessment, one of the most efficient ways to address unexpected price increases in building materials may be to use an escalation clause. If you do not already include an escalation in your contracts, consider adding one.
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.
For companies with existing contracts, if they do not already have an escalation clause or similar provision in place to address increased prices, absent an amendment to the contract adding one, they may have difficulty trying to recover those higher costs. Consider consulting with your attorney for additional guidance and assistance with existing contracts.
Having an escalation clause should not be limited to contracts with a potential home buyer but should also be used in builders’ contracts with suppliers, subcontractors, or others who may be relying on building materials to complete all or part of a project.
Finally, think about your business, evaluate your supply chain and identify other options in the event some of your materials are delayed or your costs increase. Have a plan in place to handle potential supply chain disruptions.
NAHB’s Construction Liability, Risk Management and Building Materials Committee has a sample cost escalation clause contract addendum.
For all of NAHB’s resources on the current crisis, visit the Coronavirus Preparedness and Response page on nahb.org.
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