Gripe if you must about extended entitlement periods and long, drawn-out approval processes. They may be maddening, but according to a yet-to-be-published-study by Harvard's Joint Center for Housing Studies, land is still where most builders see their highest gross margins,

“Gross margins are highest in the West and the Northeast, where the time required for subdividing is the longest,” says former NAHB executive vice president Kent Colton, who is now a senior scholar at the Joint Center.

It's not that builders charge more because of the headaches involved in obtaining all the requisite permits and approvals, though they'd probably like to. Rather, just like everyone else who owns land, they get to ride the wave of appreciation, Colton explains. In other words, they get to sell at today's prices subdivided land they often acquired five or six years earlier.

Colton gave a preview of the on-going survey of 400 large, medium and small builders at the Midwinter Conference, an annual gathering of housing finance executives held in early March in Park City, Utah. The final results won't be released for several months, he says.

So far, the study has “clearly identified land acquisition and development” as the key aspect of profitability in recent years–by an unusually wide margin. Some 63 percent of the corporate officers who responded to the survey rank land acquisition and development as “most important to profitability,” whereas just 13 percent said customer service was most important. Only 8 percent named the ability to purchase materials in volume under national contracts.

“Land is what it's all about. It contributes most to the bottom line,” Colton told the conference. And it's the reason the nation's largest builders have years' worth of ground under their control. At current production levels, for example, Toll Brothers owns and has options for more than nine years' worth. Pulte Homes has almost nine years' worth of lots in inventory, while Centex has almost eight.

But it's when builders own the land from beginning to end that they do best. And they do better on the coasts than anywhere else–sometimes much better. In California, gross margins are often as high as 50 percent because it takes so long to gain the necessary approvals to start construction, Colton says. “That's why the big builders are there in spades.”

On average, builders in the West rank land as a bigger factor in profitability than builders elsewhere. When building trade-up homes, the typical gross margin reported on land in the West is 29.7 percent. For builders in the entry-level market, the average reported gross margin on land is 28.4 percent.

Builders in the Northeast said they do almost as well—27.6 percent in the move-up market and 24.2 percent in the first-time buyer sector. Surprisingly, the lowest gross margins reported on land are in the hot Southwest markets. There, reported gross margins on land are 20.6 percent for move-up houses and 19.7 for entry-level units.

Acknowledging that it's likely that appreciation will not climb at the rates experienced recently, Colton expects that there will be “some leveling off” in aggregate housing prices starting in the first quarter. But the survey itself includes no specific questions related to any possible concern over whether the margin of profitability for “land acquisition and development” will shrink.

Sneak Preview of Land Survey