Signs of strain among private homebuilders are beginning to reshape the strategies of large national public homebuilding enterprises.

Armed with lower-cost, longer-term debt, public builders are leveraging the current environment of sustained high borrowing costs to edge out privately held operators struggling to replenish lot supplies. This trend — originating in 2023 and continuing into 2024 through the present — underscores a deliberate strategy by large public firms to lock down local scale and market share, capitalizing on smaller builders’ limitations in accessing affordable capital to sustain growth.

LGI Homes, Inc., a prime example of this tactical approach, highlights how public builders harness operational discipline and strategic expansion to consolidate their market position.

Competitive Edge: Capital Access Drives Community Growth

In Q3 2024, LGI Homes demonstrates its approach to winning market share, emphasizing disciplined community growth, efficient lot control, and the ability to self-develop land for sustained cost advantages. CEO Eric Lipar states in an earnings call with Wall Street investment research analysts,

We’re seeing growing opportunities to acquire finished lots from private builders who lack the capital to hold and develop them.”

This availability of finished lots, often acquired through costlier land banking by private and some public firms, now presents LGI with fresh community growth potential at favorable costs.

LGI’s community count — currently at 138, a 30% increase year-over-year—continues to drive the firm’s long-term strategy.

Community count growth is one of our most important drivers,” Lipar remarks, underscoring LGI’s plan to reach approximately 150 communities by year-end 2024 and add another 10-20% growth in 2025.

As private builders face capital pressures and rising costs, LGI’s trove of owned and controlled lots (totaling 68,564) positions it to expand its footprint and capture market share at a crucial moment in the housing cycle.

Market Share Play: Leveraging Cost-Controlled Lot Supply

LGI’s approach to lot control sets it apart. In a period when many private builders are financially stretched, LGI avoids expensive land banking. Lipar explains,

Land banking is costly, and we’re able to keep our lot costs lower by self-developing land. This allows us to capture both development and homebuilding profit, creating a distinct cost advantage.”

This direct control enables LGI to support higher gross margins while retaining flexibility in pricing, which has become essential as the entry-level buyer segment faces affordability pressures.

Further, LGI’s ability to self-finance its lot and land positions bolsters its resilience against current market conditions. With 54,029 owned lots — 38,734 of which are classified as raw land or in early development — LGI has both the inventory and the operational capability to continue expanding without the high borrowing costs that strain private builders.

We see a strong pipeline for future community count growth without having to lean on costly debt,” Lipar notes, emphasizing LGI’s low reliance on land banks, unlike its private competitors who have increasingly turned to land banking under tighter financing terms.

Margin Management Amid Affordability Challenges

LGI’s gross margin of 25.1% and adjusted gross margin of 27.2% in Q3 reflect its ability to balance profitability with selective pricing strategies. Rather than engaging in broad-based discounting, LGI focuses on targeted incentives and managing cost bases carefully.

Our strategy is about maximizing profitability over the long term, not immediate output,” Lipar says, emphasizing a deliberate “pace versus price” philosophy.

This approach protects margins and allows LGI to keep its absorption rates at a sustainable level as affordability challenges persist, particularly for households earning between $60,000 and $100,000 annually.

Despite rising rates that have priced out many entry-level buyers, Lipar points out that demand remains structurally strong due to limited resale inventory and a shortage of available listings.

Even with current affordability constraints, the long-term demand fundamentals are solid,” he observes, citing steady interest from buyers ready to enter the market as conditions eventually ease.

A Strategic Outlook for 2025: Consolidating Market Position

Looking ahead to 2025, LGI remains focused on consolidating its gains in community count and leveraging its operational strengths to enhance profitability further. The company expects to maintain similar gross margins and average selling prices (ASP), driven by its continued land development and efficient use of capital. LGI’s emphasis on executional excellence is evident in its strategy to foster operational growth while maintaining high standards for its sales and development teams.

Our new hires are positioned for even better performance next year, as they mature into their roles,” Lipar notes, highlighting LGI’s investment in talent as a core part of its growth plan.

This growth outlook is bolstered by LGI’s readiness to adapt product offerings to market demand, particularly as the move-up segment gains strength amid affordability constraints. LGI’s higher-end Terrata line complements its entry-level homes, offering flexibility in meeting market needs without compromising brand standards.

We’ll continue to look at growth opportunities for Terrata as well as LGI Homes products, adapting based on demand,” Lipar adds.

Strategic Expansion in a Changing Market

LGI’s focus on community growth, disciplined cost management, and long-term profitability presents a model for public builders to seize market share amid a challenging economic backdrop. As private builders feel the pressures of high borrowing costs and dwindling affordable capital, LGI’s self-reliant strategy positions it to withstand these challenges and capitalize on them.

This operational and financial discipline focus ensures that LGI is prepared to navigate a shifting landscape while consolidating its position within a more constrained, competitive market.

LGI Homes exemplifies how large public builders are turning current market headwinds into strategic gains, securing new land and community growth opportunities at the expense of private competitors. With the foundation of solid community count growth, a high degree of lot control, and steady gross margins, LGI is poised to maintain profitability and solidify its standing in a market where private builders face narrowed and more harrowing options.