2025’s Land Market

Builders must shift to navigate the complexities of high interest rates and evolving market demand

By Greg Vogel

The United States land and lot market is evolving rapidly, driven by economic shifts, political forces, builder strategies and especially immigration and changing migration trends. Publicly traded homebuilders continue to dominate the housing market and collectively possess moderate to aggressive growth plans. Achieving their growth targets requires carefully managing their supply of land, and lot control, while balancing the quarterly scrutiny of shareholders. The wholesale shift in strategy to a “land-light” approach over the past 36 months has positively impacted the land market and financial metrics for builders. 

Regional Growth Trends

The major metropolitan statistical areas in Texas, Florida, the Carolinas, Georgia, Tennessee and Arizona continue to lead the nation in population growth and housing demand. Thirty percent of U.S. population growth occurs in these states, which offer vibrant economies, relative affordability and lower regulations and taxes. Builders are heavily focused on capitalizing on these markets.

The U.S. is undergoing significant shifts in immigration, with record numbers in 2023-2024 potentially reaching unknown lows due to the new administration’s announced initiatives. This will unfold in the coming year, although interstate migration within the U.S. will persist in these high-growth regions. 

The wholesale shift in strategy to a ‘land-light’ approach over the past 36 months has positively impacted the land market and financial metrics for builders.”

Lot and Land Banking Strategies

Homebuilders will continue refining their land strategies to enhance financial returns. The capital intensity of increasing revenue, combined with Wall Street’s heightened focus on builders providing a higher “return on assets,” has spurred a significant new wave of demand for lot banking. Lot banking enhances all financial metrics, apart from some mild gross and net margin compression. Over the past few years, lot bankers have deployed over $40 billion in equity to hold land on behalf of homebuilders and cover the costs of horizontal development. These lot bankers are achieving an unlevered 10-14% IRR.

On the other hand, land banking for long-term raw inventory has limited capital sources and has not been widely adopted in recent years. Nevertheless, more builders and new capital sources are exploring strategies to bank the raw land needed beyond four years of inventory. Given the longer duration and increased risk profile, higher IRRs (18-25%) and multiples on equity above two times will be demanded. 

Higher Rates for Longer & Its Impact

High interest rates have several impacts, yet their effects on the land and lot market have been surprisingly benign. However, stubbornly high interest rates continue to create affordability challenges for homebuyers, prompting builders to offer creative solutions through interest-rate buy-downs and incentives. Virtually all home builders use interest-rate buy-downs as their main incentive. We are now witnessing the combined effect of current land pricing, mortgage incentives and lot banking, which is putting more pressure on gross margins.

Many private builders are exploring alternative debt and equity sources as capital costs and equity requirements rise for obtaining traditional debt. They are turning to lot banking, joint venture equity and private lenders to bridge the gap left by traditional banking institutions and their demands. Private builders will continue to be challenged to compete with public builders due to the relative difficulty in accessing capital, and due to this, the continued trend of public builders acquiring private builders and builder consolidation is anticipated.

A Move Toward Higher Density Land

To address affordability, builders are migrating quickly to offer higher-density housing across various product types. These higher-density options range from six to 20 dwelling units per acre, with townhomes, row homes and court homes being the most favored. Builders are generally still avoiding condominiums due to the potential for construction litigation. Suburban markets that once primarily featured single-family detached homes on 50- to 70-foot-wide lots are now significantly less affordable. Consumers have few alternatives and are now embracing density as a route to home ownership with affordability challenges. The average square footage of new homes has decreased by nearly 10% since the peak in 2021.

The U.S. land and lot market is navigating a complex landscape characterized by high interest rates and evolving demand patterns. Due to their scale, financial resources and strategic approaches to land acquisition, public builders are well-positioned to capture a larger market share and increase their market presence. Private homebuilders will continue to adapt their strategies, likely shifting toward smaller-scale projects and higher-end homes that offer customization for built-to-order products.  

Greg Vogel is CEO and Founder of Land Advisors Organization.