Stagflation is an economic rule-breaker. It delivers the double whammy of a market downturn and high prices, both at once. The U.S. homebuilding industry’s mounting financial pressures have similarly coalesced into a riptide that grows harder to paddle against with each passing quarter.
Builders are selling homes more slowly, sacrificing margins to maintain sales volume, and finding that many of the land deals needed to replenish their pipelines no longer deliver acceptable returns and, in an increasing number of cases, barely yield positive net margins.
Yet the land developers supplying finished lots to builders have not faced the same level of financial pressure. Tony Avila, CEO of Builder Advisor Group and Avila Real Estate Capital, says that developers borrowing from his firm generally continue to earn higher margins than the homebuilders who buy their lots, and that the scarcity of finished lots in many markets continues to give sellers room to resist price cuts.
“Today there are more homebuilders than there are vacant developed lots in most markets,” Avila said in a November 2 interview with HousingWire TBD. “That makes it a lot sellers’ market as opposed to a lot buyers’ market.”
The imbalance reflects a growing fault line in the economics of U.S. homebuilding, and the risks on either side of that chasm. Builders must underwrite land based on current home prices, construction costs, incentives, and slower absorption rates, whereas developers with sufficient financial flexibility can wait for multiple bidders willing to meet their lot-price expectations, allowing some give-and-take on terms.
The result is a difficult alignment of interests among homebuilders, land sellers, lenders and investors, each of whom earns a bigger or smaller share of the return from the same ultimate source: the price a household can afford to pay for a new home.
Avila believes the industry is preparing for an indefinitely prolonged period of constrained homebuyer purchasing power rather than counting on a near-term return to the conditions that supported record profitability earlier this decade. His perspective draws on his firms’ work with homebuilders, land developers, capital providers and prospective acquirers, as well as discussions at the October 13 Forum for Housing Executives in Lafayette Hill, Pennsylvania.
“I think that everyone is getting prepared for a different landscape, a more challenging selling environment, and an environment where we are higher-for-longer on interest rates,” Avila said.
The adjustment extends beyond pricing and sales incentives. Builders are reassessing how much land they control, how quickly they can convert their investments into cash, which customers they can serve profitably, and how much financial leverage they can carry while waiting for demand to improve.
A different kind of housing downturn
Avila compares the current environment more closely to the high-interest-rate housing market of 1981 than to the 2007 financial crisis. Appreciating the contrast and its after-effects may give those who do so a competitive jumpstart on a playbook. The GFC followed years of excessive construction, speculative investment and aggressive bank lending for residential development assets.
Today’s pressures differ markedly. The industry faces an affordability problem exacerbated by mortgage rates, inflation, household expenses and construction costs, while conventional bank financing for acquisition, development and construction remains well below the levels Avila recalls from the previous housing boom.
By his estimate, banks had more than $200 billion committed to AD&C lending around 2006, compared with about $90 billion today. Those figures are Avila’s historical comparison rather than a standardized statistical series, but they illustrate his view that the financing structure supporting residential development has changed substantially.
Private lenders and institutional land-capital providers have filled part of the gap. However, their participation does not eliminate the cost of financing land and construction, particularly when slower absorption extends the time between an initial investment and the eventual closing of a home.
Avila says his firm is seeing strong demand for private development financing, even as builders become more selective about new commitments.
“We are being deluged with loan requests right now across the board,” he said.
Financing availability is not the same as the ability to put it to profitable use. Higher borrowing costs, slower inventory turnover, and reduced homebuilding margins can make a project economically unattractive even when a lender is willing to provide capital.
The financial pressure is evident in the industry benchmarks presented at the October Forum, which brought together executives from major public, private, and internationally owned homebuilders, as well as developers and capital providers.
According to the Forum’s survey findings, public-builder gross margins have declined from about 26% at their fourth-quarter 2022 peak to about 20%, while EBITDA margins have fallen from about 18% to 9%. Sales incentives, which accounted for roughly 2% to 3% of home prices in 2021, have risen to about 8% to 12% in the current environment.
The private-builder survey data tell a similar story. Median gross margins declined from about 20% in 2024 to 18% in 2025, while returns on equity fell from about 17% to 6% and debt-to-capital ratios rose from about 52% to 62%.
These figures describe an industry in which builders have considerably less room to absorb adverse changes in selling prices, construction costs and land acquisition economics. They also help explain why capital allocation decisions that were relatively forgiving during periods of rapid sales and rising home prices now carry greater financial risk.
The land market has its own economics
The differences between homebuilders’ and land developers’ financial positions have become increasingly evident in negotiations over finished lots. As builders revise their assumptions about selling prices, incentives, and absorption rates, the prices they can justify paying for land are moving further from what some developers are prepared to accept.
For developers backed by patient capital, slower lot sales may be preferable to accepting prices that do not meet their investment objectives. That financial agility can sustain land values even as builders who purchase those lots face declining returns.
“If you’re patient capital and you’re a lot seller, you just wait,” Avila said.
The resulting disagreement over land values is constraining transactions. Avila says the gap between what sellers expect and what builders can justify has become a primary obstacle to closing deals.
The difficulty is compounded when slower sales force builders to revise their expectations about how quickly a community will generate revenue. A parcel that penciled attractively when homes were selling faster may no longer produce acceptable returns if the same investment must be carried for longer.
Avila also sees signs that builders are recognizing some of those changed economics through land impairments and the write-off of deposits on transactions they no longer intend to complete. He characterizes impairments to date as relatively modest compared with the land and work-in-process assets on builders’ balance sheets, though he expects additional charges if margins continue to contract.
That does not necessarily mean a broad land-price correction is imminent. The availability of finished lots, the number of competing builders, the strength of local buyer demand, and the patience of land sellers’ financial backers can lead to very different outcomes across markets.
The customer segments a property can serve factor into the calculation. Builders targeting move-up, second move-up, and active-adult buyers may have different underwriting opportunities than competitors focused on entry-level households, which face more severe down-payment, monthly-payment, and cost-of-living constraints.
The underlying question is how much of the industry’s deteriorating economics will eventually be reflected in land prices, how much builders will continue to absorb, and how long the current disagreement between buyers and sellers can persist.
Capital interest persists, but transactions still have to work
According to Avila, the challenges have not eliminated investor interest in U.S. homebuilding. Avila’s advisory firm has identified 60 prospective strategic, financial, and hybrid acquirers of homebuilding businesses.
That number represents a pool of potential buyers, not completed or pending acquisitions. Still, it suggests that investors continue to evaluate opportunities even as homebuilding profitability has weakened and valuations have become harder to reconcile.
Avila recently returned from meetings in Japan, South Korea, and Singapore, where he says interest in U.S. for-sale housing remained strong. In his assessment, the sector continues to compare favorably with several other real estate investment categories, including segments of the office, retail, and multifamily markets.
That view reflects both his capital markets experience and his firms’ commercial activities. Builder Advisor Group advises homebuilding companies on mergers, acquisitions, and strategic transactions, while Avila Real Estate Capital provides private real estate financing and investment opportunities in a market that also includes institutional land banks, global asset managers, and other specialized capital providers.
Avila therefore has direct visibility into investor inquiries and financing demand, and a business interest in expanding private capital’s role in residential development. His observations offer a useful perspective on investment activity, although the number of interested investors does not indicate how much capital will ultimately be deployed or on what terms.
When prospective buyers and sellers disagree on the value of a homebuilding company, the difference between the number of would-be investors and their ultimate motivation to put capital to work tends to come clearer.
“If your earnings are down, that’ll obviously adversely affect your valuation,” Avila said.
For owners of private homebuilding companies, this creates difficult choices about whether to pursue a sale, seek additional capital, bring in a strategic partner, or continue operating independently while waiting for stronger financial results.
The major Japanese-backed homebuilding companies have been among the most prominent acquirers in recent years. Daiwa House, Sekisui House and Sumitomo Forestry have expanded their U.S. operations through various ownership and integration strategies, supported by long-term investment horizons that can extend well beyond the planning cycles typical of American homebuilding companies.
Avila believes those three companies are now focusing on digesting, integrating and absorbing earlier acquisitions rather than maintaining the same pace of acquisitions. He says other prospective buyers remain active, though he declined to identify the companies involved in confidential discussions.
The October Forum noted 12 announced homebuilder M&A transactions in 2026, compared with 17 in all of 2025, with Japanese-backed companies accounting for approximately five of the current year’s deals.
Those figures do not telegraph a new wave of imminent acquisitions. They do suggest that the industry’s ownership structure remains in flux as investors assess the relationship among current earnings, future growth potential, land positions and the price required to acquire an operating platform.
When homebuilders become investors
Another development Avila describes is homebuilders’ participation in private real estate credit.
He says that approximately 15 public and private homebuilding companies, including U.S. businesses owned by Japanese parents, have invested in AREC’s debt fund. These investments are among several ways financially stronger builders are deploying available cash, alongside share repurchases and acquisitions.
The arrangement shows how some homebuilders are financing residential development beyond their direct construction operations. It also highlights differences in financial flexibility among builders, particularly between companies generating substantial cash and those relying on outside financing to support their existing land and construction commitments.
Private credit, institutional land banking and other financing structures offer different combinations of cost, control, risk and flexibility. Their attractiveness depends on whether they improve a builder’s overall return on invested capital after accounting for the cost of obtaining and using the financing.
In some circumstances, keeping land off a builder’s balance sheet can preserve liquidity and reduce exposure to declining land values. In others, the cost of such flexibility can erode too much of the margin available from selling the completed home.
The upshot is that expanding financing alternatives does not resolve the industry’s underlying economic problem. Capital providers must earn returns, land developers must recover their investment and earn a profit, and homebuilders must deliver houses at prices customers can afford while generating sufficient earnings to sustain their businesses.
Right now, those three root business drivers have gone out of sync.
The builders best positioned to adapt
Avila’s observations on the characteristics of successful builders offer a useful way to connect the capital-market discussion to decisions within homebuilding companies.
He identifies stronger margins, lower leverage, attractive finished-lot positions, higher returns on capital and the ability to serve a broader range of buyers as key indicators of financial strength. Geographic diversification can provide additional protection, although he notes that builders operating in individual markets with favorable supply-and-demand balances and dynamics can also perform well.
The strategic adjustments he describes are already underway among the builders and borrowers his firms serve.
Some companies that historically focused on entry-level buyers are re-platforming products and land positions into higher price points and move-up segments to reach households with greater purchasing flexibility. Others are reducing their reliance on speculative construction and placing greater emphasis on build-to-order sales.
Avila says that the shift toward build-to-order has become increasingly visible among his clients and borrowers.
The appeal is straightforward. When homes take longer to sell, reducing speculative inventory can limit the capital tied up in completed or nearly completed homes without buyers, though it may also require changes to sales operations, construction scheduling and customer expectations.
At the same time, builders are reviewing overhead, direct construction costs and the pace of land acquisition and monetization. The objective is not simply to cut spending but to preserve financial capacity to continue operating and investing when demand remains uncertain. For acquisition candidates, operating capabilities may increasingly shape how investors assess earnings durability and future growth potential.
Avila says prospective homebuilding company acquirers favor operators with growing earnings, strong lot positions, strong margins, and high returns on capital and equity. The ability to control or bank land for future development can also make a target more attractive.
Those criteria reinforce the distinction between having access to capital and having a business that can earn an acceptable return on that capital. Meanwhile, builders must operate within the purchasing power of today’s customers rather than on demand that may emerge under more favorable conditions.
That is the common challenge facing the industry’s capital providers and operators. The long-term need for housing may attract investors, but the immediate economics of building and selling homes determine whether their investments generate acceptable returns.
For homebuilders, the near- and medium-term future may reward companies that can preserve financial flexibility, secure land at workable prices, adapt their product offerings and improve operating performance without relying on a rapid recovery in demand.
For land developers and capital providers, the challenge is related yet distinct. Their opportunities ultimately depend on builders’ ability to convert land and financing into homes that customers can purchase profitably.
The industry has begun adjusting to that reality, Avila suggests, although the process remains spotty across markets and companies. In his view, the next phase of homebuilding’s capital cycle may be shaped as much by the terms on which builders, land sellers and investors agree to do business as by the timing of the next increase in home sales.
