Small homebuilders in the Raleigh metro area are losing ground at the bottom of the market, and the reason is cost, not demand. Large national homebuilders have a cost advantage that no small operator can match: the purchasing power that comes with building hundreds or thousands of homes a year. For a 15-home-a-year operation competing in the entry-level and lower-middle price tiers, that per-square-foot gap is too wide to close with modest efficiencies. The question for small builders is no longer how to compete at the bottom, but where else to compete.
“It’s really hard, especially for a small builder, to lower the cost of construction enough to compete with the big players,” says Howard Jacobson, a residential developer with Stronglast Companies who has been building in the Raleigh area for 23 years. “They have such buying power, their cost to build per square foot – we can’t touch it, can’t even get close.”
That dynamic is pushing some small builders into a deliberate retreat upmarket, where national builders are less active, and margins are wider. Jacobson describes a strategic pivot that began after interest rates started rising. The initial instinct – shrinking the home’s footprint to lower costs – didn’t work.
Stronglast’s earlier homes were built at a lower price. When the rate environment shifted, the company’s first move was to make homes smaller and more affordable. That strategy ran into a structural wall: publicly traded builders such as Lennar can offer $40,000 to $65,000 in buyer incentives per home to maintain their sales pace – figures Jacobson can’t always match.
That is the core problem with competing on price for small builders. A smaller home at roughly the same price, without an incentive budget to match, is a worse deal for the buyer, and the builder risks being left with homes that don’t sell at the target price. Stronglast turned several of its smaller homes into rentals, which Jacobson says has been a reasonable investment. In the current rate environment, he adds, building to hold may be one of the few paths to a decent yield.
The company’s response was to move into the mid-$500Ks to mid-$600Ks, well above the national builders’ average sale prices of under $375K – a tier where they are mostly absent. At that price, Stronglast redesigned its homes around features that set them apart from national builders’ homes: 10-foot first-floor ceilings, three-car garages, upgraded cabinetry and flooring, and solid wood shelving throughout. “We get a much better margin at the higher price point than we could at a lower price point,” Jacobson says.
The move upmarket also changed the buyer profile. Typical purchasers are dual-income households in their mid-30s to mid-50s, with household income in the high $100,000s and above – close to double the Raleigh metro’s median household income of about $96,000. Three of the company’s most recent sales were to empty nesters who relocated to Raleigh to be near adult children – two of them paying cash.
Moving upmarket gets small builders away from national builders on price, but not on costs. They still compete for the same land, and the same labor, and national builders’ capital and volume let them win both. On land, small builders are left with what the large builders pass over – mostly parcels without public water and sewer, which Jacobson calls effectively the only path open to companies his size.
Labor is harder to get and more expensive. Immigration enforcement has shrunk the pool of framing crews, and national builders can promise a crew 100-plus homes a year – a volume a company building 15 to 25 can’t match. Materials cost more, too. Jacobson says prices rose during COVID supply shortages and never came back down once the shortages ended – cabinetry in particular.
The retreat matters beyond any one builder. As small builders move upmarket, the entry-level and lower-middle tiers are left more and more to national builders, whose prices there depend on how long they can keep funding large incentives out of already narrowing margins.
Small builders, meanwhile, are pulling back rather than expanding. Mortgage rates have climbed back up over the past year, undoing much of the relief buyers had seen, and buyer traffic has slowed. Builders like Jacobson are shifting from speculative homes to pre-sales. “We’ll just do enough to keep the lights on,” he says, “until we have a better sense for where the housing market is heading.”
The likely result is fewer new homes from small builders at the bottom of the market, and slower building above it, until rates and costs ease.
About the Expert: Howard Jacobson is a residential developer with Stronglast Companies in the Raleigh, North Carolina, metro area, focusing on single-family homes.
This article is based on information provided by the expert source cited above. It is intended for general informational purposes only and does not constitute legal, financial, or real estate advice. Readers should conduct their own research and consult qualified professionals before making any real estate or financial decisions.
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