I've always wondered that. Here in Ohio, a new house of 2500 square feet on a decent lot might sell for $275,000. It costs the builder about $240,000 to build. I've always wondered if that same house in CA or Northern VA still costs the same to build, but sells for $700,000 giving the builder that much more profit, or if the labor/material costs are higher too.
Don't forget the cost of the land; in Northern Virginia they're not making much of that any more, and the cost of an infill lot (with or without a house to tear down) can be in the high six figures before you even build anything on it.
OH YA. I've seen them do it here in AZ and I can take you right smack dab to some of those houses.
We were asked to put a bid on a job where we had to prep three lots (1.5 acres each) and build a speck road. So we went out, did all the leg work such as shooting the grades, estimating the materials and machinery time. We submitted the bid and we found out later that we lost because the As%^&le developer added another 100% onto the bid. I went down there and G' Dammed near tore his greedy head off asking him why he added that on the top.
His answer? "Well I need to make some money on this too!"
The greedy bastard already was making over three hundred grand on the three houses he had planned to build on those sites.