Homebuilders face margin pressure as lot sellers hold power

Public homebuilders are navigating a challenging financial landscape as gross margins have contracted to approximately 20%, down from 26%. This decline is accompanied by an increase in buyer incentives, which now account for 8% to 12% of home prices as companies attempt to maintain sales volume.

The industry is currently contending with a market environment described as stagflation. Builders are finding it increasingly difficult to replenish their land pipelines while dealing with a persistent scarcity of finished lots. These financial pressures have left many builders managing land deals that yield minimal or no positive net margins.

In contrast, land developers who supply finished lots have maintained stronger financial positions. Tony Avila, CEO of Builder Advisor Group and Avila Real Estate Capital, noted that the current market dynamics favor those selling land rather than those buying it. According to Avila, there are more homebuilders than vacant developed lots in most markets, which allows lot sellers to resist price reductions.

This disparity in market power means that while homebuilders are sacrificing margins to keep operations moving, lot sellers continue to command higher margins. As of Nov. 3, 2026, the scarcity of developed land remains a central factor in how risk is priced across the sector.