Builders have started auctioning new homes to the highest bidder

Home builders are fending off so many interested buyers that they have had to stop signing new sales contracts in order to focus on catching up with existing orders.

That’s according to a report in Bloomberg this week, which said that builders have been overwhelmed as buyers turn to the new home market to make up for a lack of options in the existing home market. Some larger home building firms have even started shifting away from fixed prices and are now experimenting with blind auctions, while others are simply telling customers to wait.

Builders aren’t helped by the rising costs of building materials such as lumber and the shortage of home appliances, which have led to delays in numerous projects throughout the U.S.

A survey by the National Association of Home Builders in April found that builders are dealing with the market pressure in several ways. Around 19% said they’re delaying making sales and new home starts, while 47% said they’re adding escalation clauses to their contracts to protect themselves against any increase in the prices of building materials.

“We’ve shut off sales until homes are nearly completed,” said Greg Yakim, a partner with Texas-based CastleRock Communities. “We have huge waiting lists.”

For buyers who’re wanting to purchase a new home, financial flexibility is becoming an important requirement. Traditionally, the sales price of a new home that’s under construction or hasn’t even been started is locked in with a contract. But with rising materials costs, builders have found that they’re losing money. So they’re responding to this by limiting the number of contracts they sign each month. It helps builders to mitigate the building of their rising expenses, which can jump quite significantly between the time the contract is signed and when the home is actually completed.

A second survey by the real estate advisory firm Zonda found that 63% of home builders in the U.S. are limiting the number of contracts they sign each month.

“It’s something that we’ve never seen before,” said Zonda regional director Vaike O’Grady. “The builder’s job has gone from trying to sell homes to trying to build homes.”

Other building firms have chosen to start accepting bids on empty lots. D.R. Horton, one of the biggest home builders in the U.S., recently sent a notice to real estate agents based in Austin, TX., that announced the final phase of a new subdivision. It gave interested buyers one week to submit an offer on homes that haven’t even broken ground yet. It said that due to high demand it anticipates that it will receive multiple offers on many of its new homes so it was “advising customers to put forth their highest and best offer for consideration.”

One couple told Bloomberg that they offered $17,000 more than the $330,000 starting price for a new home in D.R. Horton’s Tiermo community in Austin only to have their offer rejected. They said that company officials had told them that their bid “wasn’t even close” to some of the other offers it had received.

Another home building giant, Lennar, recently emailed real estate agents in Punta Gorda, Fla., to tell them that it’s accepting open-ended bids on new homes in its Babcock Ranch community instead of its traditional practice of publishing sales prices. It’s a tactic that could attract criticism though, as some desperate buyers may bid well above the home’s value in order to clinch the deal, and the builders will be unlikely to turn them down over any ethical concerns.

Some builders have found other ways to protect themselves legally against rising prices. Atlanta-based real estate agent Trish Byce told Bloomberg that she is now seeing a lot of construction contracts there include opt-out clauses for both the builder and the buyers. The clauses ensure builders get the price they need, while the buyer can walk away if the costs go above their budget.

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