While the 100 largest home builders in the United States now account for about half of all new single-family home sales compared to a third of sales two decades ago, the majority of these gains reflect the growing market share of the top two builders—D.R. Horton and Lennar—according to a report from the Joint Center of Housing Studies (JCHS) of Harvard University. The JCHS says as a result of the growth, the top two firms now build more homes than the combined total of the nation’s third to tenth largest builders.
These changes are notable because the homebuilding industry has traditionally been one of the most fragmented industries in the US economy, with most companies building only a small number of homes per year. Among the reasons for this fragmentation is the local nature of residential construction.Home builders must respond to local demand and supply conditions, and also navigate a complex web of local zoning ordinances, land-use regulations, and building codes. At the same time, though, they must have the sophistication to address the complexities of land entitlement, coordinate an extensive set of construction workers and subcontractors, and have an adequate financial position to cover their capital-intensive operations. In addition to these requirements for success, builders must cope with the inherent cyclicality of the industry.
Homebuilding is highly sensitive to changes in interest rates, household incomes, and the outlook for the broader economy. All these factors make it especially challenging for builders to scale their operations.
The top two home builders have used two strategies to grow their market share. The first has been to concentrate their efforts in major metro areas across the country. In fact, over the 2019-2020 period fully 80% of all closings by D.R. Horton and Lennar were in the top 50 largest markets. By comparison, the share of single-family closings for all home builders in these markets nationwide was around 60%. In doing so, these builders typically dominate the markets they serve. For example, D.R. Horton ranked in the top ten in terms of volume in 41 of the largest 50 metropolitan markets in 2020. The company also ranked either #1 or #2 in more than half (23) of the markets where it was among the top ten builders. Lennar ranked in the top ten in 35 of the 50 largest markets but held a more dominant position in these markets. The company was ranked #1 or #2 in 77% (27 of 35) of the markets where it was ranked in the top 10.
