In his essay “Where Are the Economies of Scale in Homebuilding?”, Brian Potter, engineer and author of the Construction Physics newsletter, continues his broader examination of construction productivity and housing economics.
Over a series of essays, he has shown that construction productivity tends to lag far behind manufacturing, often failing to improve at all, and that construction costs rarely fall in real terms. He has also examined whether shifting work into factories could address this issue, finding that prefabrication delivers far less cost savings than often expected.
Having outlined these constraints, Potter turns to economies of scale. He argues that they have a limited impact on homebuilding costs and asks why larger builders do not appear to build homes more cheaply than smaller firms.
The evidence is striking. Despite over 1.3 million U.S. housing starts per year — more than enough volume for scale effects to emerge — the homebuilding industry remains highly fragmented. The four largest builders hold just 18 per cent of the market, compared with 86 per cent in wireless telecommunications, and 90 per cent in aircraft manufacturing. More tellingly, data on public homebuilders shows virtually no relationship between volume and gross margins. Lennar, which built over 80,000 homes in 2025, has margins similar to those of United Homes Group, which built just 1,192.
Potter then examines manufactured homes as a more controlled test case. Factory-built homes eliminate many of the variables that might otherwise suppress scale effects, including differing building codes, variable jobsite conditions, and the constant turnover of crews and environments that can disrupt repetition and learning. Manufactured homes are instead built to a single national standard under the federal HUD code, in fixed factory settings that allow for more consistent, repetitive production.
Yet even in this environment, the industry’s three dominant producers operate dozens of small factories, each producing only a few hundred homes annually, rather than consolidating production into large-scale facilities.
More strikingly, profit margins show little relationship to size. Nobility Homes, which produces just 391 homes per year, achieves higher margins than Clayton Homes, which produces roughly 49,000.
The core explanation lies in what Potter calls the “idiot index” — the ratio of a product’s final cost to its raw material inputs. For oil refining, this ratio is about 1.2-1.3; for BMW’s i3 subassemblies, around 1.8. For a U.S. single-family home, where construction costs are roughly split between labour and materials, the ratio is about 2, already comparable to what a high-volume manufacturing operation achieves through massive automation.
The key distinction, Potter argues, is that homebuilding reaches this low ratio not through sophisticated machinery or process efficiency, but because relatively little transformation is required to convert lumber, drywall, and concrete into a finished house.
When the gap between input costs and output costs is already small, there is little room for automation or scale to extract further savings. As Potter puts it, “Bubba and his truck” — a small contractor with hand tools — can already be surprisingly difficult to beat on cost.
A joint study by CMHC and Statistics Canada found that labour productivity in Canada’s residential construction sector, measured as real gross output per worker, declined by a cumulative 37.3 per cent between 2001 and 2023, equivalent to an average decline of 2.1 per cent per year. Ontario accounted for more than half of the national decline.
It is difficult to believe that construction workers themselves have become less efficient. Instead, a range of structural factors may be contributing to the trend, including construction delays and longer project timelines, evolving building codes and regulatory requirements, and a growing focus on infill and higher-density development.
More broadly, if Potter’s analysis of manufactured housing is correct, it suggests that efforts to promote modular construction may deliver more limited efficiency gains than often assumed.
Independent Opinion
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