Where Are the Economies of Scale in Homebuilding?

Over the last few months we’ve examined the extent of the construction industry’s productivity problem. We’ve looked at a variety of construction productivity metrics, both for the US and for countries around the world, and found that construction productivity almost always rises much less in construction than it does in industries like manufacturing; often, it doesn’t improve at all. We’ve analyzed trends in construction costs in the US and around the world, and noted that construction almost never gets any cheaper: construction costs almost always rise at or above the level of overall inflation. And we’ve considered the most obvious strategy for solving this problem — moving the construction process into a factory — and we saw that the cost savings from prefabricated construction are frequently much less than hoped, often never materializing at all.Now that we’ve mapped the contours of the problem, we can begin to explore its deeper nature to understand why, specifically, construction productivity is so resistant to being improved, and why construction costs stubbornly refuse to fall.We’ll start by looking at one of the most important mechanisms by which production processes can get cheaper: economies of scale. Many processes have lower unit costs as production volumes rise, thanks to a variety of scaling effects: fixed costs can be spread more thinly, equipment gets cheaper on a per-unit basis due to area-volume relationships, improved production methods are developed as a result of learning-by-doing, and so on. However, in construction these effects are modest at best, even in sectors like homebuilding with very large production volumes.In homebuilding, we’ll see that the limits to these economies of scale are in large part dictated by the nature of the production process. Economies of scale work by eliminating the difference between the costs of the raw inputs to a process and the final costs of production. In a highly efficient, high-volume production process, the costs of the output will gradually approach the costs of the material inputs. But in conventional homebuilding in the US, this difference is already small, giving scale-based strategies relatively little margin to close.We’ll examine economies of scale in construction through the lens of housing construction in the US. For many sectors of construction, difficulty in achieving economies of scale could be attributed to the fact that only a small number of buildings of a particular type get built in the US each year. There were, for instance, only 10 skyscrapers taller than 200 meters built in the US in 2025.

Semiconductor fabs, urban subways, and airports are similarly built in very small numbers. It’s hard to achieve economies of scale when there’s no scale to be had. Houses, on the other hand, are built in very large numbers. There were over 1.3 million housing starts in the US last year, including 942,000 single-family homes. This isn’t large compared to other types of manufactured goods — the US consumed over 7 billion cans of vegetables in 2025, for instance — but it’s certainly large enough for economies of scale to appear.However, evidence suggests that homebuilding in the US exhibits relatively modest economies of scale. For one, the level of concentration in the homebuilding industry is relatively small: housing construction in the US is done by a large number of comparatively small firms. A 2022 study by Harvard’s Joint Center for Housing Studies (JCHS) found that the US had over 65,000 firms engaged in homebuilding, and that even the 100 largest firms combined were responsible for less than 50% of the homebuilding market. In homebuilding, the four largest firms held around 18% of the market, compared to 90% in aircraft manufacturing, 86% in wireless telephone service, and 58% in automobile manufacturing. Concentration in the homebuilding industry has been rising over time (primarily due to the growth of the two largest builders, Lennar and D.R. Horton), but it’s still much lower than in many other industries. This level of concentration isn’t what you’d expect to see if economies of scale in homebuilding were substantial.Another, earlier JCHS study that looked at US homebuilding in the late 1990s and early 2000s found that construction costs were actually higher for the largest US homebuilders than for smaller US homebuilders. It also found that large and small homebuilders had similar gross margins on homebuilding (the difference between the costs to produce a home and what they sold it for). If there were major economies of scale in homebuilding, all else being equal we’d instead expect to see larger firms have lower construction costs and greater gross margins.More recent data suggest these trends have continued.

If we look at the gross margins of public homebuilders, we see virtually no relationship between gross margins and number of homes produced. Lennar, which built over 80,000 homes in 2025, has similar gross margins and average home selling prices to United Homes Group, which sold just 1,192 homes in 2025. LGI Homes and D.R. Horton had nearly identical selling prices and gross margins, but the former sold 4,685 homes in 2025 and the latter sold over 84,000. Looking at different years doesn’t alter the picture much.This isn’t a smoking gun, as there are other reasons why larger firms might not have higher gross margins than smaller firms. Large firms might be deliberately selling at a lower price to try to capture or maintain market share, as Lennar states it does. But it’s consistent with there being few economies of scale in the homebuilding industry.In his history of the US homebuilding industry, homebuilder Ned Eichler describes the economies of scale available to homebuilders through the end of the 20th century. While he notes that homebuilders building several hundred homes per year could achieve substantial cost advantages compared to much smaller builders, there appeared to be little advantage in increasing scale beyond that. Writing in the 1980s, Eichler noted that “[n]ot even the largest firm has any of the advantages of dominant companies in other fields… What little technology exists is available to all.”In the late 1940s and 1950s, as large-scale merchant builders (100 units per year or more) became the dominant suppliers of homes, most of the postwar improvements in production organization and techniques were made. As unit costs began to rise rapidly in the 1960s, because of higher quality, high land and site development costs, and inflation, there was heightened interest in the possibility of another round of increased efficiency from greater scale and technological breakthroughs. Many firms did grow, mostly by geographic expansion. Several broke out of the 100 to 1000 unit range to annual volumes over 5000. By 1980 US Home brought its unit production to 15,000. However, there were no significant changes in technology or even methodology.

Nor is there clear evidence that US Home, Ryan, Pulte, or other multicity builders have yet achieved economies of scale.Today, large homebuilders continue to use the same basic homebuilding methods that much smaller builders do, and builders like Lennar and D.R. Horton effectively subcontract all of their actual homebuilding to local contractors. (Lennar’s 2025 annual report, for instance, notes that “[w]e hire subcontractors for site improvements and virtually all of the work involved in the construction of homes.”) Large homebuilders do note that they’re able to achieve some scale economies by getting volume discounts on material purchases, but evidence suggests that these savings are relatively modest. Group purchasing organizations, such as CBUSA, pool material orders together in order to receive volume discounts from suppliers; CBUSA boasts that it gives independent builders “the purchasing power of a top 10 National Builder.”1 But the savings it offers works out to around $9,500 per house for the builders who use it, or around 6% of the material costs of an average new home.You sometimes see claims that economies of scale in homebuilding could be achieved with assembly line-style construction, building hundreds or even thousands of homes at once on enormous tracts the way the US did in the 1940s and 50s. But evidence suggests that savings from this style of construction are somewhat modest, and may not materialize at all. Older versions of Craftsman’s National Construction Estimator provide percentage cost deductions for some tasks if they’re done on “tract work,” but these reductions are typically modest (10-20%) and are only available for a small handful of tasks.2 (One exception is carpentry, which does see large labor cost reductions for tract construction in some editions, but this on its own isn’t enough to shift the overall cost of a house substantially.) Likewise, Levitt and Sons famously built thousands of houses in enormous “Levittowns” using a sort of “reverse assembly line”: worker teams would go from house to house, performing a particular set of tasks and then moving on to the next one. But the cost of Levittown houses doesn’t appear to be all that different from those built by other, much smaller homebuilders at the time.

We can sharpen our understanding of economies of scale in homebuilding by looking at one particular subset of housing construction: manufactured homes. Manufactured homes, formerly known as mobile homes, are built using largely the same technology as conventional homes, but instead of being built on-site, the homes are produced in a factory, mounted to a steel chassis, and transported to their final location via truck. Roughly 100,000 manufactured homes are produced in the US each year.Manufactured homes are a useful lens for understanding economies of scale in homebuilding, because they eliminate so many factors that might be expected to restrict them. Economies of scale require repetition — making approximately the same thing over and over again — and such repetition is particularly achievable with manufactured homes:Conventional homebuilding is subject to different building code requirements in different jurisdictions, depending on what version of the code has been adopted. But manufactured homes are built to one set of national requirements, the federal HUD code.Conventional homes are constructed on-site, and those sites might have substantial variation between them. But manufactured homes are produced repetitively within controlled factory locations.Conventional home construction takes place on constantly changing jobsites, with constantly changing construction crews, a constant churn that might disrupt opportunities for learning-by-doing. Manufactured home construction, which takes place within a single location, should be less susceptible to this sort of disruption.There’s some evidence for greater economies of scale in manufactured home construction compared to conventional homebuilding. Specifically, the manufactured home industry shows substantially higher concentration than the conventional homebuilding industry. The three largest manufactured home producers are Clayton Homes (49,000 units per year), Cavco (about 20,000 units per year), and Champion (roughly 26,000 units per year).3 Together, they make up roughly 90% of the US manufactured home market, similar to the level of concentration we saw in other industries.However, despite this level of concentration, actual production economies of scale in manufactured home building appear relatively modest. We can see this by looking at the operations of four public manufactured home companies. The first two, Champion and Cavco, produce around 26,000 and 20,000 homes per year, respectively. The third, Legacy Housing, makes around 1,700 manufactured homes a year.