Housing is so hot that U.S. builders have to stop taking orders

Across the U.S., house prices are skyrocketing, bidding wars are the norm and supply is scarcer than ever. Now the market is too hot even for homebuilders.

Demand is so fevered — and construction costs are climbing so quickly — that overwhelmed builders are suppressing orders and shifting away from fixed prices. Companies including D.R. Horton Inc. and Lennar Corp. are experimenting with blind auctions in areas such as Texas, Florida and southern California. Some smaller firms have stopped signing contracts altogether.

“We’ve shut off sales until homes are nearly completed,” said Greg Yakim, a partner at CastleRock Communities, a privately held builder in Texas. “We have huge waiting lists.”

In a global economy roiled by supply shortages, the U.S. housing market is struggling with a collision of pandemic-related forces that’s holding back new inventory just when it’s needed most. Buyers are stampeding for new homes as remote work upends employment, while soaring lumber costs and a shortage of workers are slowing construction. The result is home prices, already reaching unaffordable levels for many Americans, are set to keep rising.

Homebuilders are stationed right where they need to be, in the lower-cost cities and suburbs where buyers are heading for more space and job shifts. But they’re waiting as long as possible to take orders because delays are common and future costs uncertain. And why lock in specific prices into contracts when they’re likely to be much higher when homes are completed?

“They’re selling the homes for as much as they can get, just like every home seller in America,” said John Burns, a national homebuilding consultant in Irvine, California.

About 19% of builders are delaying sales or construction and 47% have added escalation clauses into contracts, allowing them to lift prices as costs increase, according to an April survey by the National Association of Homebuilders. U.S.housing starts tumbled 9.5% last month, government data released this week showed, suggesting the industry is being held back by supply-chain constraints.

Builders are so overwhelmed with backlog, and current demand is so strong, that they’re having to slow sales or force buyers to bid up prices, said Vaike O’Grady, the regional director in Austin, Texas, for real estate advisory firm Zonda. About 63% of respondents to a nationwide industry survey by her firm said they are limiting the number of contracts per project that they sign each month.

“It’s something that we’ve never seen,” said O’Grady, who has been in the industry for 30 years. “The builder’s job has gone from trying to sell homes to trying to build homes.”

Companies are facing delays for everything from sheet rock to cabinets and kitchen appliances. As a result, homes are taking about a month longer to build, according to Alex Barron, a homebuilding analyst with the Housing Research Center. Lumber prices have soared as much as fourfold in the past year, though they have dropped in recent weeks as traders speculate costs have climbed so high that they’ll push down demand.

The shifts mean that builders are more frequently turning to speculative homes constructed without a buyer, Barron said, so they can capture the highest price by listing only when houses are nearly ready.

Some also are following a practice that’s increasingly widespread in the existing-home market: setting a quick deadline for bids and then choosing the best one.

“We are very excited to announce that we now have homes available in the final phase of Pioneer Crossing East!,” D.R. Horton, the largest U.S. builder, wrote in an email to local agents in Austin on May 3, giving buyers just a week to get bids in. “Please note — 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.” A representative for D.R. Horton didn’t return messages seeking comment.

Lennar is taking a similar tack for some projects. A recent email to Florida brokers promoting its Babcock Ranch project in Punta Gorda said the builder “will entertain offers on certain homes in this community rather than publish a specific sale price.”

Lennar said setting bids is beneficial for homebuyers who otherwise would be sitting on waiting lists and wouldn’t have a chance to make an offer on a house.

The company’s offers program “gives everyone a fair and equitable opportunity to make an offer on the right home for their budget,” said Darin McMurray, president for Lennar’s southwest Florida division.

For a buyer who manages to nab a deal, the terms can change. Some contracts in the Atlanta area now have opt-out clauses for both builders and buyers, said Trish Byce, a local agent and a former homebuilder.

“Builders cannot give you a firm price today,” Byce said.

In Texas, the land of open spaces, builders suddenly are running short of lots. The pandemic migration has brought in out-of-state buyers with big bank accounts who are crowding out locals with outsized bids, especially in the state’s two hottest markets, Austin and Dallas.

Texas builder Highland Homes now meters out about three homes per community at the start of each month, especially in hot areas like Austin, said Aaron Graham, a senior vice president at the company. The builder doesn’t want to get overwhelmed with business because buyers already in the pipeline need attention and it takes time to replenish lots, he said.

Highland’s wait list at one Austin community reached 140 for just 10 available lots. The company has increased prices by about 25% from a year earlier in the city, which has seen an influx of technology workers as firms such as Oracle Corp. move from the West Coast.

“At the beginning of the month, we release our homes and start at the top and go down the wait lists,” Graham said. “Sometimes prices have gone up and they get priced out.”

It took Kenny Albert and Caitlin Mack three offers before they were able to win a contract for a home at D.R. Horton’s Tiermo community, about 12 miles east of Austin’s center. In their first bid, they offered $17,000 over the starting price of $330,000 and were told “you weren’t even close,” said Albert, 26.

They were turned down for another home two weeks later and finally landed a deal this week, offering about $14,000 over the asking price of $321,640. “I think it was pure luck, honestly,” Albert said.

Some buyers have had small, local builders cancel deals even after contracts were signed, or ask for more money, said Ram Konara, a real estate broker in Dallas. His clients keep losing bidding wars for existing homes and finding a newly built property is even harder, he said.

“Some builders aren’t even opening the doors in their model homes for buyers,” Konara said. “There’s no point in opening the door. If there is any home right now, it will sell within an hour.”