Secret #72 – Most Developers Today Don’t Want to Build Inexpensive Houses

They Want to Build More Profitable Houses

Developers want to build the most expensive houses they can sell on the limited amount of land they own because, today, they make more money that way.

If developers build less expensive houses on the land they own, they can't build more expensive, more profitable houses on that land. They have to choose one or the other. They will tend to build more expensive houses until they can’t sell them. 

They can’t build more land. That land constraint changes the economics completely. It's not like most every other product. 

If you build more cars that are less expensive, you can also build more cars that are more expensive. Housing developers can't do that because they only own so much land. They have to choose one or the other on the land they own. 

If car makers were like housing developers and had to choose between small cars and big cars, they'd mainly build big, more expensive, more profitable cars. In reality, car makers can build and sell more small cars in addition to more large cars. 

A housing developer only owns so much land to build on so they tend to build the largest, most expensive, most profitable houses they can sell on that land and they sell them slow enough that they can keep prices up and, if prices are rising, slow enough that they can sell more homes in the future after prices increase. Housing developers are partly land speculators.

This isn’t the 1940s anymore when land wasn’t such a constraint. A housing developer could buy a 4,000 acre potato farm on Long Island and make more money by building a ton of small, inexpensive houses very fast and selling them very fast because nearby vacant land was cheap and abundant. When nearby vacant land is expensive and scarce, however, and a developer only owns 40 acres, it changes the economics of what type of houses to build to make the most money.