Modular Homes: A Solution to the Housing Crisis?

In 2020, Freddie Mac estimated that only 65,000 new entry-level homes were completed. This is less than one-fifth of the entry-level homes constructed per year in the 1970s. The shortage has increased from 2.5 million homes in 2018 to 3.8 million homes in 2020. By the end of 2022, it is estimated that the U.S. will have a housing shortage of 5.5 million homes. WSJ reported that new home construction fell 6.8% in 2020. More than 90% of home builders surveyed by the National Association of Home Builders expressed issues of material and labor shortages. Conventional home building has not changed in 100 years - it is unpredictable, expensive, and slow. Delays are common and the shortage of skilled workers, supply chain issues, and weather all lead to extended timelines with conventional construction. 

The average amount of time to build a new construction home is about 7.7 months, according to data from the U.S. Census Bureau. JP Morgan disclosed that over the past two decades, capital and labor productivity in construction has plummeted by 32% and 22%, respectively, leading to a housing deficit. The housing shortage is resulting in skyrocketing home prices. Case-Shiller U.S. National Home Price Index, the leading measurement of U.S. home prices, showed that home prices jumped 19.1% in January 2022. The U.S. Census Bureau reported construction costs increased 17.5% year-over-year from 2020 to 2021, the largest spike in this data since 1970. Costs in 2021 were more than 23% higher than pre-pandemic levels in 2019. We are in unprecedented times and at the current trajectory, most Americans are going to be priced out of the American Dream. Cars are not built in your garage; why do home building operations occur on-site?

Cars became affordable for the masses when the assembly line was used to build more efficiently. Modular Construction can be the affordability solution for housing. Modular construction is a process in which buildings are manufactured off-site in factories under strict quality controls, but using the same building codes and standards as conventional construction methods. These buildings are made in modules or small parts, which are transported to the construction site and assembled. Imagine the economies of scale a company like Lennar or Toll Brothers could achieve if they centralized their operations and built off-site. The quality, speed, and cost-efficiency of modular construction make this a strong solution to the housing crisis. Building homes in an environmentally controlled facility prevents weather delays and weather- related issues, centralizes the location where materials and workers meet and allows for predictable production regarding the process, space, and materials/machinery.

 In 2020, Google, Facebook, Citi, and Morgan Stanley participated in the $55 million series B round of Factory_OS, a modular construction company that is bringing efficiency to a profoundly inefficient industry. Factory_OS can build homes year-round, leverage lean manufacturing, improve quality control, and keep workers safer. Their projects indicated modular homes can result in 40% less waste due to precision cutting and indoor material storage. Additionally, carbon emissions are reduced due to fewer transportation requirements. Overall, the process is 40-50% faster and has cost savings of 20-40% compared to conventional construction.

Modular construction is significantly more resource-efficient than conventional construction. There is almost no waste of time, energy, and material resources. Research done by ARUP found that modular construction can reduce energy consumption by 67%, also saving energy costs for occupants.Modular buildings are low-maintenance and constructed to be more durable than conventional construction. Screws are used instead of nails, and joints are reinforced with glue to maintain structural integrity during transport. Each module of the building is built in an environmentally controlled facility. Because of this, modular construction is often of higher construction quality than conventional buildings. There is plenty of discussion about 3-D printed homes. However, 3-D printing homes still face issues with being on-site. Weather can impact construction and materials still need to be shipped to the site. Also, 3-D printing lacks sustainability, currently using significantly more concrete and water than modular construction.

According to McKinsey & Company, modular construction can speed construction by as much as 50% and cut costs by 20%. Recent modular projects have already established a solid record of accelerating project timelines by 20-50%. Modular construction could claim $130B of the market by 2030 in the U.S. and Europe. This could save $22B annually and help fill a $1.6T productivity gap. Countries such as Finland, Norway, and Sweden already construct 45% of housing off-site. Currently, the U.S. only constructs 3% of housing off-site, indicating there is significant room for improvement and growth. Common misconceptions of modular homes are that they are not customizable and are lower quality than conventional homes. Demonstrably, this is not the case. As an example, below is an image of a completely customized high-quality modular home. Modular construction can do for homes what Tesla did for cars: simplify the process, improve efficiency, and build a higher quality and more sustainable product. Achieving cost and speed improvements to deliver affordable housing on a large scale will require, above all, a shift in mindsets.

This article was previously published in the Spring 2022 (Issue No. 3) of Schack’s Blueprint Magazine. Republished with permission from the authors.

Contributor(s): Ben Haggard and Ben Korol