Effects of Market Forces on the Adoption of Factory-Built Housing

Effects of Market Forces on the Adoption of Factory-Built Housing

Highlights

• Nearly all housing is currently constructed onsite, but improvements in the quality, design, and cost-effectiveness of factory-built housing could increase its adoption.
• Market pressures from increased land and labor costs could potentially lead to wider use of factory-built components.
• HUD is working to improve access to quality data to better research and understand market entry, innovation, and trends in the factory-built sector.

In 1969, HUD launched Operation BREAKTHROUGH, a $30 million demonstration program to test ways to expand the use of factory-built housing. This experiment produced 2,794 units and tested a number of new industrialization techniques.1 In the end, however, the homebuilding industry largely did not adopt the techniques that Operation BREAKTHROUGH developed due to marketing challenges, conflicting building codes, labor opposition, and transportation costs, among other factors.2 More than 50 years later, is the industry finally primed to make greater use of factory-built components?

Figure 1. Builder Practices Reports on Offsite Housing, 2007 to 2018

Reprinted from: Ed Hudson. 2019. "Builder Outlook on Use of Components and Offsite Housing Technologies: Summary of Findings August 2019 Survey," Home Innovation Research Labs, 6.

Although nearly all housing is constructed onsite, substantial improvements in the quality, design, and cost-effectiveness of factory-built housing during the past decade may increase its adoption. Sometimes referred to as prefabricated or “prefab” housing, factory-built housing systems include modular units, panelized construction, manufactured components such as wall panel systems and roof trusses, and the manufactured homes that HUD regulates.3 Modular housing systems can make the construction of single-family homes and multifamily buildings less expensive, make more efficient use of increasingly costly land, and, ultimately, build vibrant neighborhoods.

We begin this article by illustrating trends in the adoption of factory-built housing and some of the benefits of factory-built components. Following a look at barriers to adoption facing consumers and builders, we discuss two market pressures that potentially could lead to the increased adoption of factory building: land costs and labor costs. We conclude with recommendations for future research to build on our current knowledge in this field.

Current State of Factory-Built Housing

HUD Code manufactured homes represented just 9 percent of homes produced in 2017.4 According to the Home Innovation Research Labs (HI), in 2018 fewer than 2 percent of single-family and multifamily builders used modular housing, whereas roughly 6 percent of single-family builders and more than 18 percent of multifamily builders used panelized construction methods (see figure 1).5

Roof trusses built in a factory setting tend to be popular among a majority in the industry. HI found that in 2017 66 percent of surveyed homebuilders used factory-built roof trusses for new single-family detached homes (see figure 2). The second most commonly used factory-built component is turn-key framing; 31 percent of builders anticipate using it for the next five years. Both factory-built roof trusses and turn-key framing offer builders advantages over traditional methods.

Figure 2. Use of Rafters and Trusses in New Single-Family Detached Homes, 2004 to 2017

Note: SFD = single-family dwelling.

Reprinted from: Ed Hudson. 2019. "Builder Outlook on Use of Components and Offsite Housing Technologies: Summary of Findings August 2019 Survey," Home Innovation Research Labs, 9.

Benefits of Factory-Built Housing

In theory, modular housing can save time and reduce waste because all the framing and a substantial portion of the finishes and systems can be assembled in a factory. Building a home in a factory may reduce the time needed to complete the home. Modular housing, for example, can be built 30 to 50 percent faster than conventional site-built homes (see figure 3).6 Modular homes and their components are built in the factory while site planning is taking place, which significantly shortens the construction schedule.7

Further, because much of the construction process for factory-built housing takes place in a climate-controlled factory, poor weather conditions are not a hindrance, making on-time delivery more likely.8 Building materials can be stored in the factory, safe from unpredictable weather events such as rain and snow, which prevents not only damage to materials but also further work delays.9 Even with these trends, however, the market has not fully realized the benefits of factory-built housing. In the next sections, we explore possible reasons for this.

Consumer Perceptions of Factory-Built Housing

Factory-built housing has undergone many physical changes that have made it more similar to, and in many ways indistinguishable from, conventional site-built housing. In terms of style and design, factory-built homes are growing in square footage, with larger double- or multisection units now more common than smaller single-section homes. Further, because of technological innovations that integrate the chassis with the floor system, as well as the ease of transporting modules and construction materials used for assembly, two-story homes are now being built in climate-controlled facilities and then transferred to the site. Quality improvements in construction and installation practices have increased durability so that the life expectancy of factory-built housing increasingly is comparable to that of site-built or onsite housing.

Even with these advances in factory-built housing and the benefits previously discussed, advocates of factory-built housing still face the common consumer perception that homes built in a factory are not high quality, affordable, or aesthetically pleasing. A recent McKinsey & Company report concluded that increasing the use of modular construction would require consumers and builders to shift their mindsets toward factory-built approaches and understand that these products are “aesthetically pleasing, sound structures — [that] deliver considerable efficiencies.”10 Although there has been some success in changing perceptions, particularly within the modular industry, experts agree that more should be done to raise awareness and educate homebuyers about the evolution of factory-built housing over the past three decades.

Figure 3. Modular vs. Site-Built Construction Timelines

Source: Modular Building Institute. “What is Modular Construction?” (www.modular.org). Accessed 16 March 2020.

As potential homebuyers and renters learn more about factory-built homes, they might be more willing to pursue this kind of housing. In the 2007 study Factory-Built Construction and the American Homebuyer: Perceptions and Opportunities, HUD found that a consumer’s interest in and willingness to purchase a factory-built home is influenced less by the virtues of individual elements than by the overall look of the home.11 This survey was conducted by phone and online. The web-based survey asked respondents to react to pictures of different types of housing that did not include a description of the housing itself, and the telephone survey asked respondents about four housing types (site-built, modular, manufactured, and panelized).12 The respondents rated site-built housing types most favorably; however, based on specific housing features (quality of construction, look and feel of the home), modular and panelized homes were rated only slightly below site-built homes. The study also found that for 92 percent of respondents, construction quality was very important when considering a new home. This finding suggests that an effective marketing strategy would be to emphasize similarities in the quality of factory-built construction, particularly modular and panelized homes, to that of site-built homes. Charles J. Kibert, professor at the M.E. Rinker, Sr. School of Construction Management at the University of Florida, observes that modular home manufacturers are marketing their products based not on lower costs but on other factors — namely, quality.

Figure 4. Current and Expected Use of Factory-Built Components for Single-Family Homes

Data provided to authors by Ed Hudson, Home Innovation Research Labs.

Builder Barriers

Just as consumers have been hesitant to embrace factory-built housing, the building industry has been reluctant to use factory-built components. HI asked builders to explain why they do not use factory-built components.13 Builders expressed concern that if they switched to factory-built components or homes, they risked being unable to switch back to conventional construction methods, a concern compounded by the tight labor market. A builder that no longer employs a framing subcontractor because it switched to a panelized wall system may have trouble finding a new framing subcontractor if it needs one in the future. Builders also noted the challenge of keeping their staff fully employed. Furthermore, builders perceive factory-built components and homes as lacking enough customization options to satisfy customer demand.

Other challenges that builders face are the expense of transporting home modules and factory-built components and restrictive local regulations that increase the cost of transporting components from the factory to the job site.14 Modular homes also may require significantly more preconstruction capital than site-built homes to account for factory operations and material costs — as much as 50 percent of the funding might be required before manufacturing, which could prove too costly for some developers.15 For the risk-averse builder, the opportunity costs of factory-built uptake may be too high.

Embracing Factory-Built Housing

Although current data show that the use of factory-built housing has not increased dramatically since the 2008 housing crisis, a recent survey administered by Ed Hudson, director of market research at HI, provides reason for renewed optimism that now is the time for a real embrace of factory-built housing and components. The survey asked 300 homebuilders about their current and expected use of different types of factory-built components (see figure 4).16

Although drawing conclusions from the small sample size is difficult, the data show that these builders are planning to use more panelized components in the next five years. The chart also shows that roof trusses and panelized systems continue to be the most popular manufactured components in the factory-built housing industry.17 Although anecdotal information suggests that we will see growth in this area, more survey research is needed to confirm these claims.

Multifamily Builders

Studies sponsored under HUD’s former Partnership for Advancing Technology in Housing program noted that adoption of innovations is more likely in the multifamily sector than in the single-family housing industry.18 Factory-built housing firms are taking advantage of potential market gains stemming from the rising demand for multifamily housing units. Although researchers are working hard to develop consistent and reliable data, we currently lack the information necessary to confirm these trends. We do know, however, that the multifamily factory-built housing industry is growing due to the efforts of some of the most well-known manufacturers of both modular and HUD Code manufactured housing. Nationally recognized firms such as OneBuild, Blueprint Robotics, Katerra, and Blokable are implementing innovative solutions for overcoming barriers to entry in the multifamily homebuilding industry, and their business models are well suited for the strengths of multifamily factory-built construction.19

Market Forces

As builders become more receptive to using factory-built components, two market pressures — land costs and labor costs — could potentially lead to more widespread adoption of these components.

Land Prices and Land Use Regulations
Land prices nationwide have been rising steadily since 2012, with some areas, such as California, Nevada, and southern Florida, seeing increases of more than 100 percent (see figure 5).20 The price of land for new construction is driven by demand, but it is also affected by impact fees that local governments impose on developers.21 Impact fees are intended to shift the costs of public financing from the general taxpayer to the market.22 Builders, however, often express concern that the burden of paying for new infrastructure stifles growth in the housing industry or, when imposed, may restrict the supply of affordable housing that otherwise would be available to low- and moderate-income families. In this scenario, impact fees are often viewed as barriers because the cost of doing business generates more risk for the builder when land prices are high.23

Local governments impose land use regulations or zoning requirements to determine the siting, location, design, and construction of housing. Whether intentional or not, these rules can become barriers to housing development when the costs of compliance are too burdensome. The evidence is clear that land use regulations, including excessive impact fees, drive up the cost of land. Those costs, in turn, are shifted to the renter and homeowner in the form of higher rents or housing prices, respectively.24 Seeing little incentive to build more housing for communities that need it, developers might shift their investments toward areas with a more robust tax base or decide against doing business in the industry altogether.

Several jurisdictions have responded to rising land costs and the paucity of new construction by beginning to permit higher-density construction within traditionally single-family communities. A growing number of communities nationwide are also adopting ordinances allowing accessory dwelling units (ADUs), supporting the creation of more affordable housing within existing neighborhoods.

Figure 5. Changes in Land Prices Since 2012

Reprinted from: Joint Center for Housing Studies of Harvard University. 2019. “The State of the Nation’s Housing,” 10. www.jchs.harvard.edu. All rights reserved.

Allowing ADUs could lead to an increase in modular-housing production because the size of ADUs is well suited to modular construction. Although most ADUs — often called “granny flats” or tiny apartments — are existing structures that are already attached to a single-family home, an ADU can be constructed offsite in a factory and transported to the site. In response to the opportunity for creating small homes, a growing number of manufacturers, including companies such as prefabADU, Boxabl, and California Modulars, are offering modular ADUs. Research by the Terner Center on the experience of Portland, Oregon; Seattle, Washington; and Vancouver, British Columbia, with ADUs finds that 56 percent of ADUs built in these cities are freestanding cottages averaging 631 square feet.25 Most ADUs are being built as permanent housing rentals with reasonable rents.

Although accessory dwelling units (ADUs) are being used more frequently, communities may still resist adopting this type of construction. Some opponents believe that blanket zoning changes allowing the siting of ADUs in a community impinge on the expectations other homeowners had when they bought in the area.26

Some property owners in Montgomery County, Maryland, were fiercely opposed to a recent effort to change zoning laws to make it easier to construct ADUs on single-family lots, citing concerns with increased traffic, pressure on already strained street parking, and reduced property values.27 As more communities attempt to embrace ADUs, stakeholders need to ensure that community concerns are heard and addressed.

ADU under construction.Boxabl

Labor Costs and Shortages
In a recent study, 82 percent of single-family builders rated the cost and availability of labor as the most important factor affecting the cost of homes.28 The cost of labor for residential building has increased steadily since 2011 (see figure 6).29

This labor shortage can be seen in the large number of unfilled construction jobs in the industry. In September 2019, there were 338,000 job openings in construction, a slight decrease from the peak of 404,000 available jobs in the years following the economic downturn that ended in June 2009.30

The construction industry has been experiencing shortages in both subcontractors and labor directly employed by builders for many years (see figure 7). In July 2019, roughly 68 percent of builders experienced a labor shortage, and 72 percent of builders experienced a subcontractor shortage.31

The U.S. Bureau of Labor Statistics projects that the number of construction jobs will increase by 11 percent between 2018 and 2028, from 1,645,700 to 1,819,000.32 Even as the number of construction jobs is increasing, the availability of skilled workers has declined because of the large numbers of workers who left the industry between 2009 and 2011, a lack of interest in the field among young workers, and an aging workforce.33

Labor shortages lengthen construction timelines and therefore increase the cost of the entire project. Delays can increase both direct costs, such as building supplies, labor, and equipment, and overhead costs, such as onsite project management, support services, and related costs that are spread across multiple projects. As the process takes longer, some builders may forgo new residential projects, leading to fewer homes being built. In addition, having fewer available laborers leads to higher wages and subcontractor bids, which in turn leads to increases in average home prices.

Figure 6. Cost of Labor for Residential Building, 2009 to 2019

Source: U.S. Bureau of Labor Statistics. “Employment, Hours, and Earnings from the Current Employment Statistics survey (National)” (www.bls.gov/data/). Accessed 19 March 2020.

Rose Hoyle, a commentator for the International Risk Management Institute, recently wrote, “The risks [associated with a skilled labor shortage] range from unskilled workers performing skilled tasks, new workers not trained in safety procedures, aging workers getting injured on the job, schedule slippage due to unrealistic expectations of available labor, and errors/accidents due to lack of adequate supervisory oversight.”34 Construction quality issues resulting from the use of inadequately trained laborers often are realized during inspection. Correcting these defects, called “rework,” can be costly and time consuming. A recent McKinsey & Company report stated that reducing or eliminating rework can potentially shorten construction schedules by several months.35 The construction process for residential projects, unlike that for commercial or industrial projects, rarely has provisions for penalties in the event of delays, leaving the increased costs to be borne by renters and homeowners in the form of higher prices or by homebuilders as decreased profits.36 As Robert Hazelton, chief executive officer of Dominion Due Diligence Group, puts it, “Industrialized housing savings are not only in the hard construction costs but also in the monetization of a more efficient construction timeframe, including less construction interest, less construction waste, and [an] increased absorption rate.”37

Figure 7. Labor and Subcontractor Shortages

Reprinted from: National Association of Home Builders, Economics and Housing Policy Group. 2019. “Housing Market Index: Special Questions on Labor and Subcontractors’ Availability,” 13.

In a survey for the July 2019 National Association of Home Builders/Wells Fargo Housing Market Index, respondents were asked to rank their concerns associated with labor shortages. The most pressing concern, expressed by 87 percent of respondents, was higher wages and subcontractor bids. Other concerns respondents cited were difficulties in completing projects on time (81%), difficulty finding subcontractors with well-trained workers (79%), and higher home prices (75%).38

These concerns are not new. Over the past five years, builders have reported an increase in housing projects that do not generate profit, so the rates of uptake and sales have slowed and more deals are lost. Figure 8 further details how labor shortages and project delays have negatively affected the industry.39

Factory-built homes and components offer a less labor-intensive alternative to traditional site-built construction because factories often use an assembly line and modern tooling that requires fewer laborers and a less-skilled workforce. In addition, some builders noted that as the pool of qualified laborers shrinks, they were more likely to rely on subcontractors for prefab work, such as using more factory-built components. In addition, more individuals may choose to work in the factory homebuilding industry because the work is more consistent; its location is fixed, reducing commuting and other costs; and the working conditions are indoors and climate controlled. Workers also may need to supply fewer tools or personal equipment, which makes entering the industry easier.

Figure 8. Impact of Labor Shortage on Homebuilders

Source: National Association of Home Builders, Economics and Housing Policy Group. 2019. “Housing Market Index: Special Questions on Labor and Subcontractors’ Availability,” 17. *Data not available for July 2019.

Note that the skilled labor involved in setting and finishing modular homes in the field is unique and would degrade if the pace of installations wanes. Builders therefore will need to have a work backlog that can support the effective utilization of the skills and equipment needed to install modular products.

Conclusion

Despite the recent technical improvements to factory-built homes and the benefits this housing offers, the industry still faces significant challenges in the production and market uptake of this type of construction. For various reasons, builders and consumers have been reluctant to embrace factory-built homes as a viable option for affordable housing. Solutions for addressing market imbalance, including increasing land supply, reducing burdensome land use requirements, and improving workforce access and skills, could potentially speed up the adoption of factory-built housing.

Future research efforts should be directed at better understanding market entry, innovation, and trends in the factory-built sector. Access to quality data will go a long way toward accomplishing this goal. HUD is currently sponsoring three studies on factory-built housing to close some of these information gaps. These studies examine ways to reduce the challenges manufacturers face in gaining market share, such as reducing the regulatory burdens that often impede innovation and disseminating information to consumers and the homebuilding industry. These studies will offer guidance to both manufacturers and consumers about the benefits of factory-built housing as a cost-effective option for expanding the supply of affordable housing in the United States and beyond.

— Jagruti Rekhi, HUD Staff
— Michael Blanford, HUD Staff

Disclaimer: This article was written before the emergence of coronavirus disease 2019 (COVID-19) in the United States. Although possible impacts of COVID-19 were not known at the time of publication, some of the trends discussed in this article may change because of the pandemic’s potential effect on the global housing market.

1. $30 million in 1969 dollars is the equivalent of more than $200 million today; Michael H. Moskow. 1970. "Prototype Construction and Demonstration. Operation Breakthrough Part II," U.S. Department of Housing and Urban Development, 20.
2. Elmer B. Staats. 1976. "Operation Breakthrough: Lessons Learned about Demonstrating New Technology," U.S. General Accounting Office.
3. Manufactured housing refers to HUD Code housing and formerly was used interchangeably with the term "mobile homes." Manufactured housing is an important part of the nation's housing stock and is particularly important in the supply of affordable housing for low-income Americans. The Manufactured Home Construction and Safety Standards Program (HUD Code) established national design, performance and installation standards for manufactured homes built after June 15, 1976; "Manufactured Home Construction and Safety Standards," 2015.
4. Manufactured Housing Institute. 2018. "2018 Manufactured Housing Facts, Industry Overview."
5. Ed Hudson. 2019. "Builder Outlook on Use of Components and Offsite Housing Technologies: Summary of Findings August 2019 Survey," Home Innovation Research Labs.
6. Nick Bertram, Steffen Fuchs, Jan Mischke, Robert Palter, Gernot Strube, and Jonathan Woetzel. 2019. "Capital Projects and Infrastructure Modular Construction: From projects to products," McKinsey & Company, 10–1.
7. Modular Home Builders Association. "Why Choose A Modular Home?" (www.modularhousing.com/Html-Page.aspx?name=why_modular_homes). Accessed 20 December 2019.
8. Michele Lerner. 2018. "Prefab houses were once the 'holy grail of design.' So why aren't there more of them?" Washington Post, 20 June.
9. Modular Home Builders Association.
10. Bertram et al., 10.
11. Kenneth Temkin, Grace Hong, Lauren Davis. 2007. "Factory-Built Construction and the American Homebuyer: Perceptions and Opportunities," U.S. Depart- ment of Housing and Urban Development.
12. Manufactured housing, or HUD Code homes, include housing that is at least 320 square feet with a permanent chassis to ensure the initial and continued transportability of the home. HUD Code is a national standard that overrides all local building codes.
13. Home Innovation Research Labs operates as a wholly owned independent subsidiary of the National Association of Home Builders.
14. Carol Galante, Sara Draper-Zivetz, and Allie Stein. 2017. "Building Affordability by Building Affordably: Exploring the Benefits, Barriers, and Breakthroughs Needed to Scale Off-Site Multifamily Construction," Terner Center for Housing Innovation, University of California, Berkeley.
15. Alexandra Stein. 2016. "Disruptive Development: Modular Manufacturing in Multifamily Housing," master's thesis, University of California, Berkeley, 30.
16. Hudson.
17. "Panelized systems" are precut framing packages; factory-built open or closed wall panels; and panelized, preassembled floors.
18. C. Theodore Koebel, Maria Papadakis, Ed Hudson, and Marilyn Cavell. 2004. "The Diffusion of Innovation in the Residential Building Industry," U.S. Department of Housing and Urban Development, 38.
19. Erica Barnett. "Modular Construction: A Housing Affordability Game-Changer?" Sightline Institute, 2 August.
20. Joint Center for Housing Studies of Harvard University. 2019. "The State of the Nation's Housing 2019," 10.
21. Impact fees are a one-time tax that local governments levy on developers to control excessive growth; they cover the cost of providing new infrastructure to support housing, such as roads and public services.
22. American Planning Association. "APA Policy Guide on Impact Fees" (www.planning.org/policy/guides/adopted/impactfees.htm). Accessed 20 December 2019.
23. We define a "barrier" as any state or local law, regulation, or policy that adversely affects the supply, availability, development, and/or cost of providing affordable housing.
24. Sanford Ikeda and Emily Hamilton. 2015. "How Land-Use Regulation Undermines Affordable Housing," Mercatus Center at George Mason University, 4 November.
25. Karen Chapple, Jake Wegmann, Farzad Mashhood, and Rebecca Coleman. 2018. "Jumpstarting the Market for Accessory Dwelling Units: Lessons Learned from Portland, Seattle and Vancouver," Urban Land Institute, 15.
26. Conrad Swanson. 2019. "Accessory dwelling units should be attached with owners living on site, Colorado Springs City Council suggests," Colorado Springs Gazette, 11 June.
27. Kate Masters. 2019. "Updated: After Zoning Changes for New Accessory Dwelling Law, Council Focusing on Legal Amendments," Bethesda Magazine, 16 September; University of Southern California. 2019. "Housing Typologies Toolkit," 7.
28. Kent Colton and Gopal Ahluwalia. 2019. "A Home Builder Perspective on Housing Affordability and Construction Innovation," Joint Center for Housing Studies of Harvard University, 11.
29. U.S. Bureau of Labor Statistics. "Average hourly earnings of all employees, residential building, seasonally adjusted" (www.bls.gov/ces/data/home.htm). Accessed 6 April 2020.
30. Julia Falcon. 2019. "NAHB: Construction job openings are increasing," HousingWire, 6 November; National Association of Home Builders. 2019. "Unfilled Construction Jobs at Post-Recession High," NAHB Now, 13 June; U.S. Bureau of Labor Statistics. "What Construction Laborers and Helpers Do" (www.bls.gov/ooh/construction-and-extraction/construction-laborers-and-helpers.htm#tab-2). Accessed 6 April 2020.
31. Paul Emrath. 2019. "Labor Shortages Still Hurting Affordability," Eye On Housing, National Association of Home Builders, 5 August.
32. U.S. Bureau of Labor Statistics. "Construction Laborers and Helpers: Job Outlook" (www.bls.gov/ooh/construction-and-extraction/construction-laborers-and-helpers.htm#tab-6). Accessed 20 December 2019.
33. Feby Abraham, Jack Cahn, Brendan Fitzgerald, and Ezra Greenberg. 2019. "Strategy in the face of disruption: A way forward for the North American building-products industry," McKinsey & Company.
34. Rose Hoyle. 2019. "Dealing with the Construction Workforce Shortage," expert commentary, International Risk Management Institute.
35. Bertram et al., 12.
36. Construction projects in the industrial or commercial sector often include liquidated damages if the construction effort exceeds the contractually agreed-upon schedule.
37. Email communication with Robert Hazelton, 19 November 2019. 38 National Association of Home Builders. 2019. "Housing Market Index, Special Questions on Labor and Subcontractors' Availability," 16; Only concerns cited by more than 50 percent of respondents are listed here; other concerns included needing to seek labor from a wider geographical area, having some projects be unprofitable, needing more time to accept other orders, and losing and canceling sales.
38.  National Association of Home Builders. 2019. "Housing Market Index, Special Questions on Labor and Subcontractors' Availability," 16; Only concerns cited by more than 50 percent of respondents are listed here; other concerns included needing to seek labor from a wider geographical area, having some projects be unprofitable, needing more time to accept other orders, and losing and canceling sales.
39. Paul Emrath. 2018. "Labor and Subcontractor Costs Outpacing Inflation, Raising Home Prices," Eye On Housing, National Association of Home Builders, 10 September.