Pandemic Demand Causes Unprecedented Building Supply Shortage
The COVID-19 pandemic caused supply chain interruptions across industries, from toilet paper and cleaning supplies, to red meat. Although most states have resumed close to “normal” capacity and operations, the nation still faces an historic and unprecedented lumber shortage. The shortage is the result of growing demand for bigger homes, new construction, and a surge of new DIY-ers amid the pandemic, coupled with supply chain disruption caused by the virus as production cuts and government shutdown orders stifled production at both domestic and foreign mills. As a result of this perfect storm, prices for lumber and other building materials have skyrocketed since the start of the pandemic, and have only just begun to fall, as the increasing supply struggles to catch up with still very high demand. According to the National Association of Home Builders (NAHB), the average price of a newly constructed single-family home has increased by about $36,000 since April 2020, and the “price per thousand board feet” went from $350 to over $1,400 in May 2021.
While the lumber industry has taken one of the hardest hits, the shortages extend to building materials in general, as the demand for new homes has increased. A survey conducted in May 2021 by the NAHB found that more than 90% of builders reported shortages of appliances, 87% reported a shortage of windows and doors, and more than 50% of builders reported shortages of steel beams, insulation, roofing materials, vinyl siding, copper wiring, and plumber fixtures, among other materials. Since May 2020, the cost of steel mill products has risen over 75%, including a 59.4% increase in 2021 alone, and the cost of prepared asphalt and tar roofing and siding products has risen nearly 15%.
The ramifications of the shortage have rippled through the industry, as the increasing costs are passed from supplier to the builders and contractors, and onto consumers themselves. Soaring lumber prices have impeded contractors’ ability to perform building contracts for the originally agreed-upon price, and hindered consumers’ ability to pay the new, increased costs. In North Texas, one couple who had signed a building contract for $525,000 got an unpleasant surprise when the builder came back to them with a dramatically increased price, based in large part on the mounting cost of materials. Unable to pay the more than $200,000 increase from the original estimate, the deal was called off pursuant to a no-cause termination clause in the contract. This is hardly an isolated incident, and while such clauses are common in building contracts, the pandemic-related shortage no doubt has led to more and more parties having to take advantage of them, or take their disputes to court. In an attempt to mitigate the rising lumber prices and avoid contract disputes, builders have increasingly included similar termination and price escalation clauses in their sales contracts.
Litigation arising from the shortage is not limited to consumer contracts, however, as the shortage has contractors and builders struggling to find materials in the first instance, let alone finding materials they can afford. This challenge leaves suppliers susceptible to allegations—especially by developers, builders, and other contractors—that they may be using pandemic-related shortages to their advantage by unfairly raising prices. The potential for litigation continues to loom large, as ongoing shortages are causing payment delays and increased prices. Experts predict that supply will be unable to catch up to demand until late 2021 or early 2022. In the meantime, we are sure to see parties attempting to utilize termination, price escalation, force majeure, and other contract terms to mitigate the impact.