Homebuilders have struggled to attract buyers for their product in recent months, even with incentives such as mortgage rate buydowns and lower prices. That’s led them to cut back on acquiring land for housing development.
A report last month by John Burns Research and Consulting found that 28% of land brokers had reported strong demand in their markets in this year’s second quarter, compared to 76% at the same point in 2024. The drop-off in builder interest is likely to persist until mortgage rates come down enough to draw a wave of new buyers, according to one analyst. Builders need home prices to be high enough for them to cover what they paid for the land and make a profit.
“That is one of the factors that’s been troubling builders,” Brad Hunter, a consultant with Hunter Housing Economics, told Homes.com. “If rates are lower, then builders can charge more for their homes, and that helps drive their business.”
The situation has created a disconnect between the amount of money landowners want for their property and what builders are able to pay, according to the John Burns report. Nearly 40% of builders reported in a new National Association of Home Builders/Wells Fargo survey that they have cut their prices this month. Yet lot prices rose 4 to 6% in this year’s second quarter compared to one year earlier, John Burns said.
One of the factors driving high land prices, according to the report, is that available property is in short supply in many parts of the U.S. The Trump administration has floated the idea of opening up federally owned land for development. While much of that land is in remote parts of the western U.S., there’s enough close to existing urban centers to entice land developers, Adrian Foley, chief executive officer of land developer Brookfield Residential, said in an interview last week on the cable news network CNBC.
Foley said the country could use a “CHIPS Act equivalent for housing” to free up land for development and stimulate deals with builders. He was referring to legislation passed during the Biden administration that gave financial incentives to semiconductor companies to build in this country. It’s possible the current federal leadership could make such a move to boost the market by declaring a national housing emergency and offering some form of aid to land developers and builders.
Median lot prices are highest in New England, on West Coast
The National Association of Home Builders reported on another sign of builders’ challenges in obtaining land in July. Even as companies are carving developments into smaller and smaller lots to make homes more affordable, new single-family house lots rose in value faster than inflation in 2024, the NAHB said. Median lot prices were highest in New England and in states on the Pacific Coast, where they exceeded $150,000. That is compared to $50,000 to $60,000 in the South.
Some builders are canceling deals to buy land or trying to renegotiate contracts, according to the John Burns report. In some cases, they are using “land banking” deals in which investors buy parcels on a builder's behalf and hold them until the builder is ready to use them.
“The price disconnect is an age-old problem, but definitely right now,” Hunter said. “But it’s not an option for the big public companies to stop building for a couple years. They’ll ultimately pay the price for land, but it is the case that land sellers are quite aggressive in what they want these days.”