America's housing market paradox: Homebuilders slash prices amid economic uncertainty, yet aggressively buy land, betting on future demand. This land grab signals confidence in long-term housing needs and could ultimately benefit homebuyers. Learn how this strategy, potentially involving billions in land banking investments, impacts new home prices and availability
Whether these bets pay off, and whether Americans see the benefits, will depend on a little-known breed of investor known as a “land banker.” These companies scoop up construction-ready land on behalf of builders (for a fee, of course) and then hang tight, biding their time until their patron is ready to put shovels in the ground. The setup allows builders to “control” land for years before technically owning it, preserving a pipeline of new developments and freeing up cash to, you know, actually build more houses. In recent years, builders big and small have latched onto this maneuver. There’s no clear data on the prevalence of this model since land bankers are, by and large, private companies, but investors are most likely setting aside tens of billions of dollars’ worth of home lots at builders’ behest. In the second quarter of this year alone, Lennar, one of the largest homebuilders in the country, bought nearly 22,000 lots from land bankers for a whopping $2.7 billion.
Land Banking: Solving America's Housing Shortage? The booming practice of land banking could be the key to easing the nation's housing crisis. By strategically acquiring and holding land for future development, land bankers help homebuilders quickly ramp up production during housing market recoveries. This proactive approach ensures a steady supply of homes, potentially leading to more affordable housing and a more reliable homebuilding industry. While this behind-the-scenes activity might seem obscure, its impact on future homebuyers could be significant. Learn how land banking is transforming the real estate market and its potential to deliver more homes to eager buyers
Land: The Most Valuable Real Estate Asset. With limited supply and high demand, securing land is crucial for homebuilders. While traditional short-term land loans pose financial risks and tie up capital, innovative land banking offers a solution. This strategy allows builders to control prime acreage for future development, freeing up funds for construction and mitigating market uncertainties. Learn how land banking impacts the housing market and benefits both builders and future homeowners
The answer to this conundrum is what builders call a “land-light strategy.” Instead of buying up land outright and holding it until they sell the finished homes, they bring in a land banker to purchase construction-ready lots and then pay that investor for the option to build on those lots at a later date. The builder will typically put down a nonrefundable deposit of between 10% and 20% of the land’s value and work out a schedule for buying those lots from the land banker sometime in the future, usually two to four years down the road. Without a land banker, a typical land purchase might require a builder to put down, say, 35% of the total value and get a loan for the rest. They’d also have to keep up with pesky line items like taxes and maintenance on the lots. A 10% deposit, on the other hand, allows builders to claim more land with less risk and fewer dollars. That’s an especially attractive option for big, publicly traded homebuilders whose financials are scrutinized every quarter by Wall Street.
Homebuilder Land Grab: A Massive Increase in Lot Holdings Since 2020. Publicly traded homebuilders dramatically expanded land holdings since the COVID-19 pandemic, owning or controlling nearly 2.4 million lots in Q1 2024, up from 1.4 million in Q1 2020 (John Burns Research & Consulting). This shift reflects a change from owning 64% of lots in 2017 to only 26% in the latest analysis, with options controlling the remaining 74%. This land banking strategy signals long-term housing demand confidence and addresses the nation's housing shortage
Land bankers have been around for decades, but they’ve really only risen to prominence in the past four or five years. In the past, land bankers were a constellation of small companies or prospecting dreamers that would buy up land in far-flung locations, betting that it would grow more valuable as homebuilders continued to build deeper into the suburbs and exurbs. These days, land bankers are much more buttoned-up, and the industry is now dominated by huge organizations like Walton Global, which says it has $4.5 billion in real estate assets, including 89,000 acres that it plans to feed to builders. The land itself is different, too. Rather than a rocky scrabble or wooded mess that hasn’t yet seen a bulldozer, the lots that builders buy from land bankers are typically all set for construction, with the land smoothed over and the roads paved. This leaves builders to focus on what they do best: managing the construction process and selling those homes to consumers.
It’s not just land bankers who have evolved, though — the entire homebuilding industry has shifted over the past couple of decades. While the size of the current land-buying spree is substantial, it’s still far less frenzied than in the years leading up to the global financial crisis in 2008, when builders were hoovering up land the old-fashioned way: using traditional debt to buy the properties outright. Builders absorbed a brutal lesson back then. First, they were stuck with too much land that was suddenly a lot less valuable when the bubble burst. A bunch of builders went belly-up or were forced to offload lots at low prices. Then the remaining builders were forced to play catch-up and seek out more land when housing demand rebounded. The mistakes of that era were a crystallization of the short-term thinking that so often screws over people in the real estate industry.
“We like to joke about a seven-year cycle and a three-year memory,” says Greg Vogel, the CEO of Land Advisors Organization, a land brokerage firm based in Scottsdale, Arizona. “But I do think the GFC scars ran deep.”
Land banking provides homebuilders with a secure, predictable way to acquire land for future development, mitigating financial risk. This strategy allows builders to maintain a land pipeline even during economic downturns, renegotiating deals with land bankers instead of abandoning projects. This ensures a steady supply of homes in the long term, potentially benefiting homebuyers
“They learned last time that they’re in a much worse position having to go scramble and find land when the market did come back,” Katie Hubbard, an executive at Walton Global, tells me.
Homebuilder Inventory Surge: Prices Drop as New Home Sales Plummet. Facing a disappointing spring selling season and record-high unsold inventory (triple the number from 2022), homebuilders are slashing prices and offering incentives. June saw a 1.5% year-over-year price drop, a stark contrast to the typical 4-6% increase. This market slowdown, however, hasn't deterred land banking investments, suggesting confidence in future housing demand despite current challenges
That glut of new homes may help consumers to some degree. Builders are tossing in a bunch of deal sweeteners to get buyers through the door, and some are finally starting to cut prices (typically the option of last resort). But the fact they’re even having to do that points to a bigger issue: Many would-be buyers can’t afford a new place, and the ones who can are wary of making the leap. The typical mortgage rate is stuck near 7%, up dramatically from the sub-3% rates seen early in the COVID-19 pandemic, which means homebuyers these days are most likely shelling out hundreds, or even thousands, of dollars extra each month on interest payments alone. Many homeowners, who either bought homes or refinanced during the pandemic, don’t want to move and give up their cushy low rates. Home prices in most places haven’t fallen enough to make a meaningful difference in the affordability picture. Other prospective buyers, having scanned the headlines about tariffs and a wobbly job market, may decide to wait until the economic outlook is less cloudy.
Housing Market Slowdown: New Home Construction Dips as Builders Cut Prices. Facing high interest rates and market uncertainty, new single-family home construction dropped 10% in June compared to the previous year. Building permits, a key indicator of future construction, also fell by 8%, signaling a potential slowdown. This follows the post-2008 housing crisis, where construction plummeted by 50%. While builders offer incentives to boost sales, this recent data suggests a cautious approach to new projects
A boom-and-bust cycle isn’t good for anyone. Builders felt the pain after the housing market collapsed in 2008, but so did millennials, who were starting to reach their prime homebuying years right as home construction waned in the aftermath of the Great Recession. That case of bad timing has plagued them throughout their adult lives. In the 2010s, builders started work on just 21,000 single-family homes per 1 million people, compared with a rate of more than 41,000 homes in each of the three decades prior. With fewer homes reaching completion and more people trying to climb onto the housing ladder, price spikes were inevitable. While home prices rose about 46% in the 2010s, compared with about 31% in the 1990s, the problem really came into focus during the pandemic frenzy. Home prices jumped more than 50% between the spring of 2020 and the same point this year, even as builders played catch-up to try to meet the wave of demand from millennials.
“It’s not an easy machine to turn on and off,” says Will Frank, a land-banking expert at John Burns.
Land Banking in a Slow Housing Market: Unpacking the Benefits for Homebuyers. While the full impact of land banking on home prices during this market slowdown remains uncertain, its role in shaping future housing supply is undeniable. These investors, who acquire land for builders, are a key link in the home construction chain, allowing builders to secure land and manage cash flow. Although they don't handle permitting or site preparation, their strategic land acquisition helps maintain a pipeline of future housing developments. The extent of price discounts resulting from land banking partnerships is still unknown, but their influence on the long-term housing market warrants attention
Land banking: How it speeds up home construction and benefits buyers. Facing market uncertainty, homebuilders are strategically acquiring land, fueled by long-term housing demand and a growing shortage. Land bankers play a crucial role, enabling builders to secure large land holdings now, delaying purchases until market conditions improve. This partnership allows builders to quickly respond to increased demand, getting projects underway faster. Experts like Chase Emmerson highlight the land banker's vital role in facilitating deals, ensuring a steady pipeline of new homes and potentially lowering prices for buyers. While not a market cure-all, land banking offers a strategic advantage, accelerating construction when the market rebounds
Land banking: a key to future housing supply? Industry experts, like Rick Palacios Jr., Director of Research at John Burns, confirm land bankers are long-term players. They strategically acquire land, anticipating a quick market rebound and resuming home construction. This approach ensures a steady pipeline of new homes, mitigating current market slowdowns and potentially benefiting future homebuyers. The significant land acquisition by major builders like Lennar ($2.7 billion in Q2 alone) highlights the growing importance of land banking in addressing America's housing shortage
James Rodriguez, a senior reporter at Business Insider's Discourse team, covers the real estate market
Business Insider: In-depth analysis and expert perspectives on today's most critical issues. Understand the complexities of current events through insightful reporting
Source: Original Article