Why 45 homebuilding markets may not beat six high density ones

The homebuilding industry has a favorite word: Scale. Executives use it. Analysts use it. Investors use it. Consultants use it. Whenever a builder grows, someone inevitably explains why the company has become more “scaled.” I have become skeptical of the word. Not because scale does not matter. It matters enormously. The problem is that scale, too often, is treated as an answer, a solution. Rather, it should be a question. Scale of what? Purchasing? Capital? Corporate overhead? Land? Communities? Labor? Market density? Production? Recent results from K. Hovnanian Enterprises put the issue in sharp relief. Revenue fell to $705.7 million, down from $800.6 million a year earlier, while adjusted EBITDA declined from $77.1 million to $31.9 million. SG&A as a percentage of revenue increased from 11.3% to 12.3%. That illustrates the conventional case for scale. Homebuilders carry substantial fixed and semi-fixed costs. Corporate personnel, technology, finance, land operations, sales infrastructure, and divisional management do not disappear when a house does not close. When volume falls, those costs weigh more heavily against revenue. But a builder cannot simply buy more land to manuf...