In the current housing shortage, the cost to build new homes increased 32 percent between 2019 and 2022, increasing home prices overall and leaving fewer affordable homes for low- and moderate-income households. But one long-promised alternative—modular construction—could offer a solution to reduce both building costs and time needed to construct single-family and multifamily dwellings.
Modular construction is the process of manufacturing a home in a factory and then assembling it on site, which differs from manufactured housing, which is both manufactured and assembled off site and then trucked to the site. We use the term modular construction broadly to also include panelized and precut construction. In all cases, modular construction must conform to state and local building codes. Manufactured housing, however, does not adhere to local codes and is built instead to a federal code, which requires the chassis (trailer) be permanently retained.
Recently released results from the 2023 Survey of Construction confirm that modular production saves money and time, allowing for the construction of more affordable units. But the survey also shows that even though modular technology has increased in prevalence for multifamily homes, it is not increasing on the single-family side.
To encourage the use of modular construction and thus increase the affordable housing supply, two changes are needed. First, federal policymakers should consider changing the definition of manufactured housing to allow modular single-family housing to conform to national building codes. Second, construction lenders could better tailor financing terms to modular home suppliers’ needs.
Why should policymakers encourage modular construction?
Modular technology reduces construction time and allows for more affordable construction. In fact, the difference in construction time for single-family modular homes and stick-built homes is actually increasing.
In 2023, a modular home took just over eight months from permit authorization to completion, nearly two months faster than a stick-built home. In 2019, however, the difference between the two construction types was less than one month. Although both construction types took longer in 2023 than they did in 2019, modular homes’ time to completion increased by a month less than stick-built homes did, making modular construction the more time-efficient option.
Modular construction also allows for more affordable construction, with nearly 20 percent of new modular homes sold for less than $300,000, compared with 14.2 percent of stick-built homes. This share has declined for both modular and stick-built construction since 2019, but it has declined more for stick-built construction.
Modular homes may be more likely to be affordable in part because of the current trend of homebuilders building smaller homes. The median square footage on new modular homes has declined faster than it did for stick-built homes, dropping by 14.0 percent between 2019 and 2023, whereas the square footage on stick-built homes declined only 4.4 percent.
Because these units are more affordable, modular home buyers disproportionately use government financing. Federal Housing Administration (FHA) and US Department of Veterans Affairs (VA) loans finance 38.6 percent of modular homes, compared with 17.5 percent of stick-built homes. This discrepancy arises because modular home buyers are more likely to be first-time homebuyers with lower incomes and credit scores—people who make up a larger share of clients for the FHA and, to a lesser extent, the VA.
Perhaps because of these time and cost savings, multifamily modular construction as a share of completions hit a high—at 7 percent of total units completed—in 2023, a year in which multifamily completions were the highest they had been since the 1986 Tax Act. But the number of single-family modular completions held steady, sitting at 2.7 percent after hovering around 3 percent in recent years. Before the Great Recession, single-family modular construction made up roughly 6 percent of completions, but its share in the single-family housing market has not recovered since and, like most single-family housing starts, has remained well below prerecession levels.
The effects of this increase have not been evenly distributed nationwide. In the single-family arena, modular construction composes 5.8 percent of construction in the Northeast and 5 percent in the Midwest but less than 2.5 percent in the South and the West. For multifamily homes, modular construction was roughly 15 percent of total construction in the Midwest and the West but 1 percent or less in the Northeast and the South. Large multifamily builders, such as Factory OS, ramped up in the West, increasing the share of modular homes, whereas multifamily completions as a whole are lowest in the Midwest, so fewer modular and panelized units can make up a larger share of completions relative to other regions.
How can policymakers encourage more modular home construction?
Although modular multifamily construction is picking up, modular single-family construction is not, despite the evidence indicating that it saves time and money. Further, single-family modular construction allows for smaller, more affordable units, to the benefit of first-time homebuyers, who are generally less affluent and have lower credit scores.
If policymakers want to better take advantage of the benefits of modular housing in the single-family housing market, a small change in the US Department of Housing and Urban Development (HUD) code could stimulate more modular construction. Currently, HUD code allows manufactured housing to be built to federal standards but requires modular, panelized, and precut construction to be built to state and local standards. This difference makes it hard for manufacturers to expand, as neighboring states generally won’t certify construction from an out-of-state factory, requiring costly inspections. If federal policymakers eliminated the requirement that manufactured housing be mounted on a permanent chassis, modular housing could be subject to a national code.
Mortgage and construction lenders can also better encourage modular construction by offering more tailored financing. In construction financing, funds are not released until the relevant part of the construction is completed and inspected. But modular suppliers want to be paid when the materials are delivered. If lenders allowed for a more flexible release of funds, they could spur more modular construction.
Ultimately, by making single-family modular construction easier and more efficient, policymakers and lenders can help provide the much-needed supply of affordable new starter homes, making a dent in the critical housing supply deficit.
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