Where Are the Economies of Scale in Homebuilding?

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Where Are the Economies of Scale in Homebuilding?<br>Brian Potter<br>May 28, 2026

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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.<br>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.<br>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.<br>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.<br>Economies of scale in homebuilding

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.<br>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...