Getty images; Tyler Le/BI
There's a weird contradiction happening at the base level of America's real estate market. Faced with high borrowing costs and an uncertain economy, homebuilders — the engines of the country's housing supply — are cutting prices and tacking on freebies in an effort to keep sales moving. At the same time, they're also staking out huge swaths of land in anticipation of the next homebuilding boom. The land grab is a signal of faith in the long-term demand for housing, a bet that the sluggish market will turn around, and a recognition of the country's deep housing shortage. It could also end up paying huge dividends for regular homebuyers.
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.
The typical buyer doesn't know — or care — about these exchanges, which take place long before the foundation is poured. But the rise of land banking will play a significant role in the efforts to chip away at our nation's housing shortage. Real estate is cyclical, which means periods of strong homebuilding activity are often followed by a retreat when the economy takes a turn for the worse. Land banking could help builders quickly ramp up production after these soft periods, delivering homes the moment more Americans are ready to take the homeownership plunge. The result would be a more reliable homebuilding machine, and maybe even cheaper houses. For buyers in the near future, that's great news.
At risk of stating the obvious, land is the most valuable commodity in real estate. As the aphorism, usually attributed to Mark Twain, goes: "Buy land, they're not making it anymore." Even with unsettled economic conditions and a weak spring selling season, competition for prime acreage remains stiff. It usually takes years to turn a vacant parcel into a single-family home, so builders need a steady pipeline of land to keep their businesses moving. Traditionally, they've taken on short-term loans to buy up lots and get them shovel-ready. But this method of grabbing land comes with some downsides. Money tied up paying for idle land could be put to better use. It's also risky: If the costs of readying that land for construction go up, or if the market slows down and it's not profitable to keep churning out homes, builders are left on the hook.
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.
Publicly traded homebuilders have employed this strategy to dramatically expand their land holdings since the onset of the COVID-19 pandemic. In the first quarter of this year, they either owned or controlled nearly 2.4 million lots, up from roughly 1.4 million lots at the same point in 2020, an analysis by John Burns Research and Consulting found. Back in 2017, public builders owned about 64% of their lots and optioned the remaining 36%. Those figures have flipped in the years since. The most recent analysis shows that public builders owned just 26% of their lots and had options on the other three-quarters.
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.
We like to joke about a seven-year cycle and a three-year memory. But I do think the GFC scars ran deepGreg Vogel, CEO of Land Advisors Organization
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, on the other hand, offers a measure of safety and predictability for homebuilders, allowing them to lay claim to home lots without assuming all that risk. Even when the economy hits the skids and builders slow down production, they can rework deals with the land bankers rather than walk away from their land positions altogether.
"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.
That kind of flexibility will come in handy as homebuilders weather another rough spot. The spring selling season, when builders typically move the bulk of their inventory, was "hugely disappointing," Jody Kahn, the senior vice president of research surveys at John Burns, tells me. Prices for new homes during the typical selling season would be up 4% to 6% from the previous year — John Burns' recent survey of builders indicates that prices dropped in June by about 1.5% year over year. Other data is similarly disheartening for developers: There haven't been this many new homes sitting on the market since the summer of 2009, data from the Department of Housing and Urban Development shows. Roughly 119,000 new homes were available for sale in May, more than triple the number at the same point in 2022.
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.
When builders can't get rid of homes they've already completed, they're typically forced to pump the brakes on new construction. In the decade after the housing bubble burst, builders delivered about half as many homes as they had in the three decades prior. That's an extreme example, but we're already starting to see builders pull back given the softness in the market. The number of single-family homes going into construction in June dropped about 10% from a year prior. Permits for new single-family homes — the step before construction begins, and an indicator of builders' plans for the future — were down by about 8%.
It's not an easy machine to turn on and off.Will Frank, land-banking expert at John Burns Research and Consulting
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.
The true benefits of land bankers in this housing cycle are, admittedly, still a bit theoretical. This is the first time that builders and the current crop of land-banking partners are wading through a slowdown in the market, and it could still be a while before we see construction roar back. There's also the open question of just how big a discount could end up in the final sale price thanks to land bankers. After all, these investors are just one piece of the chain that transforms raw land into homes, since they're usually not the ones navigating the red tape of local permitting or doing the early legwork to get the lots ready for construction. The land developers who handle that part of the process play a vital role in shaping the housing supply years into the future.
But land bankers have already aided builders in vastly expanding their land holdings to get ready for demand that may arrive years in the future. "There are deals that just wouldn't get done without a land banker," says Chase Emmerson, a partner at a land-investment firm in Arizona. And while they may not be the cure-all for the cyclical nature of the housing market, they will most likely help builders get their shovels into the ground more quickly when housing demand ramps up. In soft markets, builders can kick the can down the road and work out deals with these investors to delay some of the land purchases until sunnier times. Neither the builders nor the land bankers want those deals to fall through entirely. And when demand inevitably comes back, builders will be poised to respond with the land in their back pockets.
"All these land bankers in the industry, they're in it for the long haul," Rick Palacios Jr., the director of research at John Burns, tells me. "The market comes back, and it's pretty quick: 'Alright, let's turn the taps back on for homebuilders.'"
James Rodriguez is a senior reporter on Business Insider's Discourse team.
