The YIMBY movement has focused its efforts on increasing housing abundance through a deregulatory agenda of liberalizing land use and reducing housing regulations. Suppose this continues and we reduce the main zoning hurdles to development. Is that going to be enough to get the housing production we want to see?
I have a new piece out in National Affairs with Steve Teles, “Industrial Policy for Housing Construction,” which makes the case for supplementing our land reform efforts with strategic government support for factory-built housing. This would entail a mix of further deregulatory pushes in building codes, along with government funding to collectively address the coordination failures which have prevented the emergence of a competitive factory-built sector.
Why Housing Isn’t Built in Factories Now
We start the piece with the basic facts around construction productivity. As Cardiff Garcia had already outlined over a decade ago, and many others have written and discussed: measured productivity in the construction sector actually appears negative. This is a really surprising fact in light of the tangible productivity growth in other sectors of the economy, and the basic fact that if you visit a construction site, it does look like a lot of things have advanced over time.
The root cause of this, on some level, has to be the fact that most houses are built on site, rather than in factory environments which have formed the basis of productivity advances in other fields. Factories, of course, enable specialization, regulated environments, quality control, capital intensity, and the simplification and standardization of the production process which make productivity improvements over time possible.
And, of course, housing was once built in factories. The Sears homes are just the most prominent example of what used to be a far more expansive system of factory-built houses shipped on site. So why didn’t these techniques take off more?
I think it’s instructive to compare housing to automobiles or planes. These goods all share durability, which is relevant because consumers cut back on durable purchases most of all in downturns (since they can more easily delay these purchases). This generates large boom-bust cycles in production which is deadly for firms considering large capital investments. For this reasons, the housing, auto, and airplane sectors all faced large existential risks when the Great Depression began.
However, autos and ships were able to tap into much larger markets, and importantly enjoyed substantial government support. We did industrial policy for these sectors through R&D, guaranteed purchase support, and and so forth, because they had national security rationales and export potential.
Housing by contrast fell by the wayside. The mid-century developers at Levittown were able to bring back some of the economies of scale in housing construction through massive land assembly. But now we face a world in which land assembly near urban center is much more complicated; the regulatory environment (both land use and building codes) is far more complex; and transportation costs further limit the size of construction marketplaces.
The result is a construction industry which is fragmented geographically and across tasks. Firms have reacted to the boom-bust cycle with capital-light, contractor-heavy workloads which shift the risk of housing ramp-ups and declines onto a more precarious workforce and suppliers.
The Industrial Policy Solution
Our recommendations to change this situation and move us to a different factory-built housing equilibrium fall into a few buckets:
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An ARPA-style R&D program for housing innovation, to kick-start innovation.
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Government procurement commitments to smooth demand (think FEMA stockpiling modular units, military housing contracts), and incentive subsidies for factory-based construction.
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Financial risk mitigation modeled on DOE clean-energy loan guarantees to address some of the downside risk and enable scaling up.
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Reform of the legal treatment of manufactured homes (they’re currently classified as personal property rather than real estate, which limits mortgage access).
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Harmonization of building codes across jurisdictions so firms can more easily access different markets.
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Direct government land banks to help the process of parcel assembly and accumulating land for large-scale development.
The piece also talks about the political economy of this proposal at length. One key insight is that this is an unusual form of industrial policy. Because construction is a purely domestic industry, there’s no global marketplace to distort and no risk of creating a “national champion” dependent on subsidies. The goal is pro-competitive: use federal coordination to break down the patchwork of local protectionism that fragments the market and insulates incumbents from competition.
Broader Connections
Here I want to go a bit beyond the piece to think about some other linkages
The Bitter Lesson in Construction
In my AI in Finance course, I teach students about Rich Sutton’s “Bitter Lesson,” which is the idea that general methods using scale and computation always win out over human-designed domain-specific approaches.
Construction has consistently not applied the bitter lesson. We do construction using the craft approach, with on-site assembly, because that’s flexible and fits local conditions. But the same underlying principle that suggest that neural nets should beat out chess grandmasters suggests that factory methods which leverage standardization, capital intensity, and scale should eventually dominate bespoke on-site construction, if we can figure out the bottlenecks to this deployment.
The Swedish Comparison
One of the things our piece gets into is the comparison with industrial policy experiments elsewhere, particularly in Sweden, where the vast majority of multifamily is at least partially constructed off-site. So how well does Sweden build?
The best evidence I can find suggests that Sweden does indeed have relatively cheap building costs, though it has “spent” some of the gains on relatively demand climate and emissions requirements.
Sweden reports purchase prices of 44,401 SEK/m². This includes VAT (25%) and land costs (let’s say 18%, which was their estimate from 2018). We also need to convert this “usable floor area” definition to the US standard (which reports gross; an adjustment of roughly 17%). This gets to a range of $250/ft², which is maybe more like $290-320/ft², in Stockholm, despite the stringent performance based codes (triple glazing, mandatory HRV, airtightness testing, etc.).
This is comparable to mid-range US markets, but is considerably lower than expensive US coastal markets which range from $400-600/ft². These benefits also don’t fully account for the greater speed of Swedish prefabrication. These aren’t radical differences and I’m open to people pushing back on these estimates; but at a rough glance it does suggest that countries which have coordinated to a more factory-built approach are able to build a bit more cheaply despite high local labor costs.
Remote Work and the Geography of Construction
Another thing which didn’t make it into the piece is a big theme of prior discussion here: remote work. The shift from fully remote and hybrid work are increasing housing demand in secondary metros, suburbs and exurbs, and smaller metros where construction costs are increasingly the binding factor behind housing construction. The geographic dispersion of demand from remote work is therefore expanding the addressable market for factory-built housing in the the places where it’s also most viable.
There’s also a political economy angle here we did talk about in the piece: factory-built housing creates a reciprocal economic relationship between urban and rural areas. Factories located in lower-cost regions (central Pennsylvania, the Central Valley) could ship panels and modules to higher-cost cities. This benefits both rural areas (which get more manufacturing jobs) as well as cities which enjoy cheaper housing. It’s a rare win-win relationships here which might, optimistically, help tie together shared economic prosperity across geographies.
Value Capture for Land Assembly
Our piece proposes land-banking authorities to assemble parcels for large-scale factory-built housing developments. But where does the money come from? This connects directly to the property tax and value capture mechanisms I’ve been thinking about. Tax-increment financing districts, where future property tax increases from development fund upfront land acquisition, can potentially make land assembly self-financing. Some Sunbelt states already aspects of this, such as MUDs in Texas. The question is whether we can get more jurisdictions to adopt these instruments in conjunction with factory-built housing programs that would simultaneously bring down the the cost and speed curve for housing construction.
The Factory-Built Future
The broader goal we have for the piece (again link here) is just to raise the salience of the construction productivity problem in the housing discourse. Which is not to say that zoning and regulatory reform aren’t important on their own: see our earlier discussion on this, and we’ll have more related data products here soon. Instead it’s more that success in addressing some of the bottlenecks around housing production just shifts the constraints elsewhere in the housing pipeline. We are putting out a few ideas to try to address this construction problem: maybe people agree with them, but hopefully it at least inspires people to think creatively as well.
The opportunity I think is huge. Even modest improvements in the cost, speed, or quality of housing will allow for a broader set of housing investments to pencil out, expanding the size, affordability, and scope for our housing future.
Other Links
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You may also want to check out this podcast with the New Bazaar, which went into industrial policy for housing and other topics.