Layla Zulfa
In 2024 and early 2025, homebuilders, irrespective of their size, were captivated by the strategic allure of "land light," a philosophy emphasizing minimal land ownership to reduce financial exposure. However, by 2026 and looking towards the immediate future, the industry’s focus has dramatically pivoted to "land right." This signifies a critical evolution in how builders approach land acquisition and development, driven by the urgent need to navigate a challenging market characterized by aging speculative inventory and a struggle to stabilize pricing and sales pace. Many of the United States’ most active new-construction markets are currently undergoing a period of recalibration, aiming to clear existing stock and establish a firmer foundation for future pricing.
The concept of "land right" encapsulates a more judicious approach, prioritizing control over the precise locations, lot counts, and delivery schedules necessary to support upcoming community launches. Crucially, this strategy aims to prevent the balance sheet from being overextended by acquiring excessive land prematurely, especially when internal rates of return are contingent on home prices and sales velocities that current market conditions may not support. Homebuilders are grappling with a complex web of interconnected goals—preserving sales pace, maintaining gross margins, reducing speculative inventory, sustaining or growing community counts, and simultaneously securing land for homes that might not break ground for several years, potentially as late as 2028 or 2029. This necessitates finding an elusive "strike price" or baseline that balances pricing, sales velocity, and predictable, stable margins in a highly volatile and uncertain economic backdrop.
The recent quarterly results from Forestar Group and Five Point Holdings offer contrasting yet illuminating perspectives on how this strategic shift is manifesting upstream in the homebuilding lifecycle, specifically within residential land development. Forestar, a majority-owned subsidiary of D.R. Horton, operates as a national finished-lot production platform across 65 markets in 24 states. In contrast, Five Point primarily focuses on the ownership and development of large-scale, master-planned communities in California, a market known for its scarcity of developable land. Five Point’s Hearthstone platform further diversifies its operations by offering national land banking and asset management services.
The Shifting Landscape of Land Demand
Forestar’s operational model requires the continuous movement of thousands of lots through its national development pipeline. This necessitates a consistent pace of development and delivery. Five Point, on the other hand, often unlocks greater value by controlling the timing and terms of monetizing its scarce, hard-to-permit, and often irreplaceable entitled land. Analyzing the financial and operational outcomes from both companies suggests that while builder demand for land has softened, it has not collapsed. This adjustment is primarily evident in slower absorption rates, delayed transaction timelines, revised takedown terms and structures, and a reduction in capital exposure, rather than a widespread, dramatic decline in land prices.
Forestar reported selling 3,659 lots in its fiscal third quarter, a modest 1% increase compared to the previous year, generating $407 million in revenue. However, year-to-date lot deliveries saw a 9% decrease, totaling 8,541 lots. Sales to customers other than D.R. Horton declined significantly, with 289 lots sold in the quarter compared to 530 in the prior-year period. It’s important to note that the earlier figure included 331 lots sold to a lot banker, which were ultimately intended for D.R. Horton. These results highlight a lot-production platform that remains active but is heavily reliant on the strategic decisions and pace of its largest customer.
Jim Allen, CFO of Forestar, stated that 14% of the homes D.R. Horton started over the past 12 months were built on Forestar-developed lots. This figure represents progress toward the companies’ long-term objective of having one in every three D.R. Horton homes built on a Forestar lot. "D.R. Horton is our largest and most important customer," Allen remarked during an earnings call. "14% of the homes D.R. Horton started in the past 12 months were on a Forestar-developed lot. With a mutually stated goal of 1 out of every 3 homes D.R. Horton sells to be on a lot developed by Forestar, we have significant opportunity to grow our business with D.R. Horton." This close relationship provides Forestar with a clear, albeit somewhat concentrated, path to sustained growth. However, it also introduces vulnerability when D.R. Horton scales back its housing starts, limits inventory investments, or prioritizes profitability over incremental sales volume.
Trevor Allinson, an analyst at Wolfe Research, characterized Forestar’s near-term challenge as a direct consequence of its largest customer’s reduced volume. Wolfe Research anticipates lot sales to conclude at the lower end of Forestar’s fiscal 2026 guidance range, while maintaining a long-term "Outperform" rating and a $33 price target.
At Five Point, the slowdown in demand is more subtly reflected in the absorption pace within its California communities and the timing of negotiated land sales, rather than in lot delivery figures. During the second quarter, builders sold 56 homes at Great Park, a decrease from 82 homes sold in the first quarter. In Valencia, builders sold 78 homes, down from 90. Five Point executives indicated that builders remain actively engaged in negotiations and due diligence, but they consistently cautioned that prevailing market conditions could influence whether forecasted land sales materialize within the current year.
"Builders are still selling in our communities, [but] not as fast as they might have been 12 months ago, but we also think that there will be a turn in that market," stated Dan Hedigan, CEO of Five Point. "I cannot predict the timing. But to answer your question, we are trying to balance, more than anything, optimizing land value. We are watching and working with the builders. They are engaged." The overarching signal from the land market is not a cessation of builders’ need for lots, but rather a diminished willingness to commit capital in anticipation of visible homebuyer demand or to accept delivery schedules based on outdated absorption assumptions.
Terms Take Precedence Over Price Reductions
Homebuilders are seeking to reduce overall costs to bridge the affordability gap that has stalled many potential buyers. This includes a desire for lower land prices, reduced development expenses, and more affordable finished lots. To date, Forestar’s leadership has not observed a significant reset in land prices.
"Land market has been relatively stable. I have not seen much change in land price," commented Andy Oxley, CEO of Forestar. "We have seen a little bit of improvement on being able to negotiate terms, for example, getting land on takedowns, getting through full entitlement and permitting. So, we are able to focus on shovel-ready deals." Oxley’s remarks provide a clear insight into the current residential land market dynamics: the adjustment is occurring through a reallocation of risk rather than a direct reduction in headline prices. Sellers are increasingly amenable to phased takedowns, extended closing periods, or undertaking more of the entitlement and permitting work. Builders and developers, in turn, can reduce upfront capital requirements without formally altering the stated value of the land.
Five Point is applying a similar principle to its high-value, supply-constrained California properties. "For now, the builders are looking at absorption that kind of supports moving forward, but we’re also always trying to realize that our most important thing is to really optimize our land value, and we’re not prepared to compromise on land value," Hedigan explained. "But if I can help a builder a little bit with some structure, we’re prepared to have those conversations."
Both Forestar’s national lot development and Five Point’s California communities are converging on a similar negotiating stance from different vantage points. The objective is to preserve the nominal value of the land asset while concurrently offering flexibility in timing and transaction structures to align with builders’ reduced risk appetite.
Strategic Approaches: Velocity vs. Timing
Forestar’s business model hinges on efficiently converting raw land into finished lots and then turning over this inventory at a pace that generates acceptable returns. In the third quarter, Forestar’s gross margin stood at 20.7%, positioning it at the lower end of its recent performance range. Allen attributed this performance directly to prevailing home sales conditions: "It’s primarily mix and just a slower absorption environment as we manage price and pace on a project-by-project basis. Our margins have been in the lower end of our historic range over the last 3 or 4 years." Despite this, Forestar’s gross margins remain competitive compared to many homebuilders currently offering incentives, price reductions, and substantial financing concessions. Wolfe Research forecasts that many builders within its coverage universe will experience gross margins below 20% in 2026.
However, Forestar is not benefiting from significant declines in horizontal development expenses. "Our costs have stabilized, I would tell you, over the past 12 months," stated Mark Walker, COO of Forestar. "I mean we are seeing some reductions in some categories, and we are seeing some increases in others. But I would say relative to direct costs, they are pretty stable. We have not seen a big decrease in cost." This presents a challenge, as a lower finished-lot basis is difficult to achieve when neither raw land values nor development expenses are significantly decreasing.
Five Point faces a different set of challenges. Its financial results can be influenced by a limited number of high-value transactions and the accounting treatment of its joint ventures. In the reported quarter, the company generated $13.9 million in consolidated revenue and $29.9 million in consolidated net income. However, only $10.9 million of this net income was attributable to Five Point after accounting for non-controlling interests, with a substantial portion of the economic outcome flowing through equity earnings and distributions from unconsolidated ventures. A significant transaction during the quarter exemplified both Five Point’s strengths and the inherent lumpiness of its business model: Great Park Venture sold 17.7 acres designated for senior housing for $159.3 million, averaging approximately $9 million per acre.
Forestar manages its returns by optimizing inventory velocity across over 200 active projects. Five Point, conversely, safeguards its land value through scarcity, flexibility in land use, and strategic patience. While Forestar must maintain momentum in moving its land inventory, Five Point can often find greater value in waiting for the opportune moment.
Financial Fortitude Enables Strategic Patience
Both Forestar and Five Point enter this market slowdown with robust balance sheets that provide a degree of insulation against the pressures of forced selling. Forestar concluded the quarter with $1.1 billion in liquidity and a net debt-to-capital ratio of 17.7%. The company controlled 91,700 lots, including 62,200 owned lots, and had an additional 23,500 lots under contract, representing approximately $2.3 billion in future revenue. During the quarter, Forestar invested $312 million in land and development, with 80% allocated to development and 20% to acquisitions. This allocation suggests a strategic focus on completing projects already in its pipeline rather than aggressively acquiring new properties in an uncertain demand environment.
Five Point concluded the quarter with $565.9 million in liquidity, including $348.4 million in cash. Its debt-to-capitalization ratio stood at 16.2%, with a net debt-to-capitalization ratio of a mere 4.2%. This financial flexibility empowers Five Point to continue its infrastructure development, engage in creative negotiations with builders, and avoid establishing a lower land value benchmark solely to facilitate a transaction. "Maintaining development momentum during periods of slower home sales activity positions us to respond efficiently as demand strengthens and allows our builder partners to move quickly when they’re ready to commit additional capital," Hedigan commented. In this context, liquidity serves not just as a defensive buffer but as a significant negotiating leverage point.
Evolution from "Land Light" to "Land Right"
Five Point is also actively working to reduce its future earnings’ dependence on the timing of individual California land sales. Its Hearthstone platform manages approximately $3.4 billion in assets, providing Five Point with exposure to land banking, capital solutions, and recurring management income beyond its three core California communities. Kim Tobler, CFO of Five Point, reported that Hearthstone continues to receive consistent opportunities from builders, with minimal demands for renegotiated pricing or terms. "They’re still seeing good flow from the builders," Tobler noted. "We’re not seeing builders coming back to them generally and asking for changes in terms or anything like that. It is holding up well. That is a statement about their underwriting more than anything else and the nature of the transactions that they engage in."
This trend helps explain why the "land light" philosophy has not entirely disappeared as an operational objective. Builders still favor preserving capital and increasingly rely on land developers, lot bankers, and option structures. What has fundamentally changed is the industry’s tolerance for land strategies primarily driven by financial optics or the pursuit of rapid volume growth.
"Land right" mandates the acquisition of land based on the correct basis, entitlement status, appropriate delivery timing, market suitability, product fit, and a reliable capital partner. It must preserve a builder’s access to future communities while limiting exposure if sales pace remains sluggish. Forestar and Five Point exemplify two distinct strategies for managing this evolving demand. Forestar is aligning its finished-lot production more closely with builder starts, leveraging its scale and liquidity to gain market share as less capitalized developers withdraw. Five Point, conversely, is utilizing its scarce entitled assets and balance sheet strength to protect land value, while its Hearthstone platform expands its participation in builders’ capital-light strategies.
Neither company’s latest financial results indicate the level of price correction that builders may ultimately require to restore affordability and normalize profit margins. For the time being, the adjustment is manifesting in time. Builders are adopting a more deliberate pace, committing later in the development cycle. They seek greater certainty regarding entitlements, enhanced structural flexibility, and a reduced capital outlay before committing to purchases, all contingent on the visible appearance of robust homebuyer demand.
"Land light" once described the quantity of land builders wished to own; "land right" now defines the land they cannot afford to acquire incorrectly.
