The Key to More Profitable Home-Building? Cheaper Land

The market for new homes is facing a conundrum. Nationwide, a structural undersupply has fueled the lack of affordability we see just about everywhere. We need to build more. Yet, in the short-term, home prices are falling, particularly in the parts of the country that have seen the most construction, putting pressure on industry profits and leading homebuilders to contemplate production cuts and layoffs.

Something has to give. Builders need relief on the cost front to keep breaking ground on new homes if prices are falling. That relief is unlikely to come from construction costs, which last year climbed, on average, to 64.4% of the final price for a typical home from around 56% in 2017, according to National Association of Home Builders’ survey data. Land is the other big cost at 13.7% in 2024. With homebuilders set to exhaust the cheap lots they acquired prior to the run-up in land prices, they can’t afford to key paying up for land in an environment of sluggish demand and profitability.