The Industrial Organization of Housing Supply: Market Activity, Land Supply and the Size of Homebuilder Firms

Existing studies of housing markets assume that homebuilding is a homogeneous, perfectly competitive industry. This paper uses MSA‐level data on the average size of homebuilder establishments and homebuilder market concentration to test the appropriateness of this paradigm. The data reveal a wide and systematic variation across metropolitan‐area housing markets in both the average size of builders and the market share for the largest builders in an MSA. These results are more consistent with treating homebuilders as monopolistically competitive suppliers of a differentiated product than with treating them as perfectly competitive homogeneous firms. Builders are larger in more active housing markets and where there is a greater supply of readily developed land suitable for large developments. Builder size and concentration are sensitive to the type of regulating jurisdiction imposing land‐use regulation. Both are lower when land‐use regulations are imposed by smaller jurisdictions, and this is particularly true when the smaller jurisdictions impose more intense regulation.