Introduction and summary
The United States is in the middle of a severe housing affordability crisis, largely due to a supply shortage that is difficult to address in a timely manner with traditional subsidies and construction methods.1 Today, home building still relies predominantly on the traditional, site-built construction process. However, the on-site construction industry features growing productivity inefficiencies due to its significant fragmentation and a critical shortage of skilled construction labor.2 In addition, construction costs have increased over time, making it even more challenging for developers to add new affordable units to the housing market, especially in high-cost areas.3 The high cost of building new housing is driven by several factors.4 These can be grouped into three categories: 1) construction inputs, such as land, materials, and labor; 2) land use regulations, which dramatically limit both the location and scale of new housing; and 3) financing complexity, which includes the timing and uncertainty around securing and layering various public subsidies to produce affordable housing units.
Solving the housing affordability crisis will require policy reforms that address all three sources of housing cost escalation. This report focuses on how modular housing can reduce the first category of production costs: construction inputs.
![]()
Modular building, along with the scaling of accessory dwelling units,5 is among the initiatives announced by the Biden administration to lower construction costs while rapidly increasing the supply of affordable housing.6 This practice has also received increasing attention from federal agencies, municipal governments, and housing advocates. Modular building is a construction technique through which the entirety of a building is fabricated off-site at a factory. Its components, or modules, are then transported to the construction site, where they are assembled.7 Modular homes are not to be confused with mobile homes and manufactured homes, which are partially constructed in factories and assembled on a permanent trailer chassis and are subject to the U.S. Department of Housing and Urban Development’s (HUD) design and fabrication standards and different financing requirements.8 Modular homes are constructed off-site, but in contrast to manufactured housing, they are assembled on-site and attached to a permanent foundation. Modular homes are therefore classified as real property like traditional site-built homes.
Modular construction has many potential benefits, including cost savings, shorter development timelines, and an overall safer and more efficient development process.
Modular construction has many potential benefits, including cost savings, shorter development timelines, and an overall safer and more efficient development process.9 Despite these benefits, modular building still represents a relatively small segment of the construction market in the United States, in contrast to other countries where the practice is well established.10 A greater market share in the United States has been limited by several factors, including financing and payment schedules; scarcity of manufacturers; lack of consistency in local jurisdictions’ building codes, zoning regulations, and state transportation requirements; and labor shortage, among other challenges. In addition, a broader acceptance of modular building in the United States has been delayed by the common association of modular homes with mobile homes and manufactured homes, which often carry a negative reputation due to historical stereotypes, low-quality materials, design flaws, and financial issues.11
After providing an overview of the affordable housing shortage in the United States, this report describes modular building, its benefits, and its potential to alleviate the affordable housing crisis—particularly in the multifamily housing space—and the barriers that need to be addressed in order to bring modular building to scale.
This report offers a series of recommendations that could boost the utilization of modular construction. In particular, the report offers the following recommendations.
Expand financial resources for the modular construction of affordable housing
States and localities should be encouraged to explore and adopt funding mechanisms that promote innovations in the construction of affordable, resilient, and energy-efficient housing. Grants should be made available for modular affordable housing projects that meet specific climate and environmental sustainability criteria.
Federal agencies should expand strategies to make tax-exempt private activity bonds (PABs) available for modular affordable housing projects, particularly for multifamily developments. Modular firms often struggle to secure the capital needed to expand production capacity. Access to PABs for affordable housing projects would lower financing costs, potentially helping firms attract additional capital for these types of projects. The Government-sponsored enterprises (GSEs) should continue exploring ways to support the financing of modular affordable multifamily housing—for instance, by incentivizing the securitization of mortgages tied to homes built with modular techniques that meet specific climate and environmental standards. Furthermore, models of construction financing should be restructured to provide builders with substantial funding during the initial phase of modular projects.
Standardize building codes and land use to facilitate production and project approvals
States facing acute housing affordability challenges should work together to develop uniform building code rules governing modular construction. Every state has different code requirements that make each development bespoke, which increases modular construction costs. Standardized code requirements would enable manufacturers to streamline their production. State-level approval processes should be standardized, as more consistent and standardized administrative rules and building codes would improve efficiency, reduce costs, and ultimately facilitate a broader adoption of modular building. HUD could play a key role in standardizing state-level approval processes by developing modular building code language that states could adopt. Local governments should streamline planning approvals and reform zoning to facilitate the adoption of modular construction for affordable construction, particularly multifamily housing in high-density, transit-oriented developments. State departments of transportation should also be encouraged to harmonize regulations for the transportation of modules, at least on a regional basis.
Support a more diverse workforce and higher wages in modular construction jobs
Because modular building utilizes rapidly advancing technologies that increase construction efficiency and productivity, workforce development and targeted hiring should be prioritized. Modular manufacturers receiving government support to construct modular affordable housing should be required to pay prevailing wages and create pathways to jobs for workers from all walks of life.12
Expand the capacity of modular building
Congress should authorize grant and tax credit programs to support the expansion of modular housing construction capacity. Local governments should provide business incentives for establishing modular factories—for example, by purchasing units built off-site; facilitating the use of public land, idle lots, and brownfields for creating modular business opportunities; and promoting public-private partnerships.
See also
There is an acute shortage of affordable housing in the United States
The United States has been experiencing a severe shortage of affordable housing since long before the COVID-19 pandemic.13 The crisis is particularly acute among renters, who make up 35 percent of U.S. households.14 Rising demand, shrinking availability and underproduction of affordable units, and the concentration of new construction at the high end of the market have contributed to a rise in rental costs for renters across different income brackets.15 In 2021, 21.7 million renters—nearly 50 percent of all renters—spent more than 30 percent of their income on housing costs, exceeding the standard threshold of housing cost burden.16 The number of cost-burdened renters, those who spend more than 30 percent of their income on rent, was the highest recorded since 2001.17 Furthermore, 11.7 million renters—27 percent of all renters—were severely cost burdened, meaning that they spent more than 50 percent of their income on housing. Renters’ housing costs have continued to outpace renters’ incomes as the rental market has become increasingly tighter. (see Figure 1)
Every year, the U.S. housing stock experiences natural losses due to deterioration, obsolescence, and increasingly severe natural disasters. On top of such losses, escalating housing costs result in a further loss of affordable units at the bottom of the housing market. In other words, their prices increase out of reach for their prior residents.18 As rents have outpaced household incomes, housing costs have become a burden for renters across nearly all income levels, mainly due to a shortage of units that renters at different income brackets can afford.19 Table 1 illustrates the gap in the availability of rental units at different rent and income levels.
In 2021, approximately 10 million renter households lived on extremely low incomes, or incomes at or below 30 percent of the family area median income.20 There were approximately 6.4 million rental units, including 325,000 vacant for-rent units, at rents that could be afforded by households with extremely low incomes. However, more than 50 percent of such units—excluding those for rent—were not available to extremely low-income renters because they were occupied by households with higher incomes. As a result, 75 percent of extremely low-income renters occupied homes that rented at levels that exceeded the extremely low-rent level threshold. Similarly, substantial portions of units affordable for households at other HUD-defined income brackets—very low, low, and moderate income—were occupied by renters with higher incomes.21
As rents have outpaced household incomes, housing costs have become a burden for renters across nearly all income levels, mainly due to a shortage of units that renters at different income brackets can afford.
The production of affordable rental units has not been sufficient to close the gap between supply and demand, reflecting trends in the broader housing market, where several years of underbuilding relative to population growth has contributed to the current housing shortage.22 Census data indicate that the growth of the housing stock has not kept pace with the growth of households, resulting in an increasingly tight market and higher housing costs. From 2015 to 2022, the national gap between household formations and housing completions widened to 3.1 million units. (see Figure 2) During that period, approximately 13 million households were formed, while 10.5 million housing units were started and 9.6 million were completed. The latter included 4.2 million units for rent and 5.3 million units for sale. In 2022, there were 15 million vacant homes, which is 13 percent fewer vacant homes than in 2015. Yet only about 3.5 million vacant homes were available for rent or sale in 2022.
The Joint Center for Housing Studies’ latest report on the state of the nation’s housing shows that as the supply of low-rent units has continued to shrink, rental demand has been strongest in high-cost urban centers, where additions to the rental stock have continued to shift to the high end of the market, thus making the affordability crisis in those centers even more pronounced.23 “Filtering” is the process whereby upper-income households vacate homes that are aging and becoming cheaper to move on to better homes, with the vacated units sold or rented to households with lower incomes.24 Research on filtering indicates that the construction of luxury rental units is not sufficient or fast enough to trickle down the housing stock from higher- to lower-income households.
In summary, the private housing market has not been able to keep pace with the demand for housing, especially in the rental space and for households with low incomes. At the same time, federal assistance in the form of tenant-based subsidies that could help make housing affordable for renters with the lowest incomes has continued to fall short.25 The affordability crisis calls for a boost in the overall supply of housing that could ease the housing cost burden for households at different income levels.
Modular building represents a promising tool for increasing affordable housing supply
In May 2022, the Biden administration announced new actions to ease the burden of housing costs.26 Modular building is among the initiatives in the announcement aimed at lowering construction costs while rapidly increasing the supply of affordable housing.27 Modular building is one of the distinct off-site construction types that include manufactured single-family homes and commercial modular construction.28 Like other commercial buildings delivered through permanent modular construction, modular homes are entirely fabricated off-site in a safe and controlled setting.29 Their components, or modules, consist of nonvolumetric—also known as panelized—elements, such as walls and frames, or are prefabricated in volumetric form, meaning that they are built as three-dimensional, enclosed units with finished interior and exterior surfaces, as explained in greater detail below.30 Once completed, modules are transported to the construction site, where they are assembled—stacked, lifted by crane, and placed on a foundation—into residential buildings indistinguishable from traditional site-built homes. In contrast to site-built construction, modular homes are built by constructing the frame first and subsequently adding interior surfaces, electrical, plumbing, mechanical, insulation, exterior sheathing, and cladding.31 Modular homes are typically built with different materials, such as wood (usually for single-family and low-rise multifamily buildings); steel (for especially tall buildings requiring a more robust structure); concrete; and, increasingly, mass timber and structural insulated panels.32
Modular homes, both single-family and multifamily, are classified as real property and depreciate in the same way as site-built homes that meet the International Building Code.33 However, unlike manufactured homes built on a permanent chassis that are subject to the Department of Housing and Urban Development’s standards, modular homes adhere to the building codes in effect where they are assembled.34
Off-site construction
Off-site construction is the process of planning, designing, fabricating, transporting, and assembling building elements in a factory setting—to a greater degree of finish than in traditional on-site construction—to allow rapid on-site assembly.35
Different types of off-site construction can be distinguished based on levels of building completion:36
- 1D kits of parts are systems in which a significant portion of the structure consists of components fabricated in a factory and then assembled on-site to form a specific structure—for example, precut wood kits.
- 2D panelized projects are approximately 60 percent completed off-site and use nonvolumetric, or two-dimensional, building elements such as floors, roofs, and interior and exterior walls. The panels can be open or closed. Open panels do not include any enhancement to the structural element. Closed panels, in contrast, generally contain the conduits for heating, ventilation, plumbing, and air conditioning (HVAC), windows and doors, prewiring, and cladding or siding.
- 3D volumetric modular systems consist of enclosed three-dimensional structures, up to 95 percent of which are completed in the factory. Modules contain enhancements such as prewiring, insulation, windows, doors, plumbing, and exterior finish, among others. Once modules arrive on-site, final assembly involves lifting them into place on a foundation and connecting services. Modules can exist as complete units or be stacked vertically and connected horizontally to create a unit or a multiunit building.37 Volumetric and panelized methods are often combined into hybrid models.38
- 3D service pods consist of nonstructural three-dimensional bathroom and kitchen service pods that integrate mechanical, electrical, and plumbing systems. They are common in multifamily housing building types.
- Manufactured homes consist of single- or double-wide sections on permanent trailer chassis built in a factory and subject to HUD code. In contrast to all other off-site construction types, HUD supersedes local building codes for manufactured homes.
Modular building offers several benefits compared with traditional on-site construction. These include construction cost savings, workers’ safety, environmental benefits, and flexibility for solving short-term housing issues.
Construction cost savings
The costs of building housing, especially multifamily developments, present a critical barrier to addressing the current shortage of affordable housing units and have increased over time, even for properties developed with federal subsidies, especially in high-cost areas.39 High building costs are driven by several factors, particularly hard costs such as land acquisition, labor costs, and building materials. Hard costs are estimated to constitute 65 to 73 percent of total development costs for a typical apartment building. Approximately 10 to 20 percent of that total consists of land acquisition alone.40
High costs in construction are also due to labor scarcity.41 Associated Builders and Contractors’ research estimates that 342,000 additional workers, on top of the normal pace of hiring, are needed in 2024 to meet the demand for construction labor.42 Labor scarcity contributes to workers’ higher costs and productivity by causing longer build times and delays. Following a post-COVID-19 rebound in home building and remodeling, hiring in the construction sector has slowed in recent months—to 4.6 percent in August 202343—and layoffs have increased.44 According to the most recent Commercial Construction Index report, building contractors are concerned about the growing difficulties in finding skilled workers.45 The Commercial Construction Index report also indicates that contractors have been struggling with the shortage and prices of materials, especially steel.46 In addition, the National Association of Home Builders and the National Multifamily Housing Council indicate that regulations, such as a broad range of fees, standards, and other requirements imposed by government entities at different stages of the development and construction process, significantly add to the total costs of multifamily development.47
Another reason housing advocates and policymakers are increasingly considering modular building to solve the national housing crisis, besides its nominal costs, is because the average construction timeline of a multifamily project built off-site is much shorter than traditional on-site construction. Figure 3 shows that the average time from authorization to completion of new residential buildings has increased in the past decade, most likely due to a shortage of construction labor. In 2022, for example, it took more than 20 months to complete a multifamily building with 20 or more units, compared with 16 months in 2015. It takes eight months from approval to occupancy to complete the average multifamily modular project.48 Modular building can accelerate project timelines by 30 to 50 percent for various reasons, including simultaneous site development and building construction; reduction of weather delays; automation; enhanced quality control; and greater efficiency in the supply of building materials.49 According to McKinsey research, projects that are most likely to result in significant construction cost savings are those that are easily repeatable and feature high proportions of labor-intensive activities.50
Workers’ safety
Compared with traditional on-site construction, modular building is usually safer for workers. In modular construction, most of the work is performed in a climate-controlled facility where workers are not exposed to the weather, heavy machinery, heights, and hazardous materials.51 According to the U.S. Bureau of Labor Statistics,52 approximately 62 percent of construction laborers are exposed to heights and are at risk of falling. In 2020, construction laborers experienced their highest annual fatality injury count (308) compared with the previous five years and experienced nearly 12 percent of all fatal falls, slips, or trips in construction and extraction occupations. Moreover, the rate of nonfatal injuries was higher for construction laborers—52.5 per 10,000 full-time workers—than for all workers, with construction workers more likely than other workers to experience transportation injuries. Construction labor also has demanding physical requirements: 93 percent of construction laborers experience higher rates of injuries and illnesses from overexertion than other workers. In addition, construction laborers are more likely than other workers to be exposed to hazardous contaminants that can affect their health and lead to fatal injuries. Finally, 81 percent of construction laborers work outdoors more than two-thirds of the time, where their work schedules and conditions are weather dependent.53
A brief history of modular building in the United States
Modular construction is not a new building method. In fact, it has been practiced since the mid-1800s, when prefabricated homes were produced and sold to support migration to the West, particularly during the California Gold Rush.54 During the first decades of the 20th century, Sears, Roebuck and Co. sold thousands of prefabricated homes, known as “catalog houses,” which were two-thirds the cost of conventionally built homes.55 The demand for prefabricated homes increased during World War II to accommodate military personnel. It continued in the postwar years when the United States, like postwar Europe and Japan, was experiencing a severe housing shortage as soldiers returned home. Later, in 1969, HUD launched a demonstration called Operation Breakthrough to support the off-site construction of single-family suburban homes. The demonstration project generated 2,794 units on nine prototype sites but failed to yield the expected large volume of factory-built units.56 In the 1970s, modular construction techniques began to be increasingly applied to schools, hotels, apartment buildings, health care facilities, and other large buildings. Since the 2000s, thanks to technological advances, such as those in computer-aided design and 3D printing, sustainability concerns, ease of assembly, and a growing adoption by the industry,57 modular building has received increasing attention.58
![The exterior of a two-bedroom Craftsman-style bungalow built from a Sears house kit.]()
The exterior of a two-bedroom Craftsman-style bungalow built from a Sears house kit in Boston, July 2017. (Getty/The Boston Globe/Pat Greenhouse)
Environmental benefits and energy efficiency
According to data from the U.S. Environmental Protection Agency (EPA), the residential sector is responsible for 15 percent of total gross U.S. greenhouse gas emissions and accounts for approximately 21 percent of total U.S. energy consumption.59 Buildings, which are commonly built on-site, are responsible for the emission of a large proportion of greenhouse gases, contributing to the problems associated with climate change.60 Modular homes usually have a smaller construction footprint than homes built on-site.61 Existing Life Cycle Assessment research on the environmental impact of residential construction indicates that modular buildings provide a better life-cycle performance and the average environmental impacts of modular construction are smaller than those of conventional site-built homes, especially with regards to material production and transport, energy use, worker transport, and waste management.62 Modular construction favors materials that are easier to transport and have better eco-credentials—such as steel and cross-laminated timber—whereas in conventional construction, concrete and bricks are the dominant materials. In addition, off-site construction uses different and fewer tools and for shorter durations than conventional construction.
According to the EPA, 144 million tons of construction and demolition debris were disposed into landfills in 2018.
When working in a centralized build location, workers may be able reduce fuel and parking costs as well as time spent in their commute to and from the workplace.63 By minimizing workers’ travel to the construction site and limiting the amount of construction vehicles on-site, modular building can reduce carbon emissions from transportation.64 Furthermore, off-site construction can address environmental risks, as modular homes are typically built in more sustainable ways than those built with conventional methods. For example, copious material waste is usually generated in conventional construction and needs to be removed from project sites to landfills. According to the EPA, 144 million tons of construction and demolition debris were disposed into landfills in 2018.65 Modular building produces less waste on the assembling site and reduces strain, such as noise, air pollution from construction vehicles, and water contamination, on the surrounding neighborhoods. In modular construction, building materials are kept in more controlled environments, are processed with precision cutting, and yield a tighter building envelope which, in turn, reduces energy consumption over the life of the building.66 Fewer risks of spills and damage occur during the transportation of completed modules, and recycling and repurposing of wasted material can be done in the same facility.67 In modular construction, factories are protected from the weather and module envelopes are typically tighter than those of conventionally built homes. These features can reduce leaks and moisture, thereby preventing the development of mold and mildew that can cause health problems for home occupants.68
Modular homes are generally designed and developed with energy efficiency in mind.69 The construction of modular buildings typically requires 67 percent less energy than the conventional construction of equivalent products.70 The environmental impact of modular construction is often further reduced by the increasingly common use of alternative, renewable power sources by modular manufacturers.71 The common reduction in the amount of lumber used for framing a modular home promotes insulation, and the frequent use of cool roofs—highly reflective materials that absorb less heat from sunlight—contributes to heat mitigation.72 Modular construction is also relatively more energy efficient due to its increasing use of high-quality and sustainable materials, LED lighting or Energy Star appliances, increased insulation, and thermal-efficient windows.73 The energy efficiency of modular housing can greatly benefit those who can least afford high energy bills.74
Flexibility
Compared with traditional construction methods, modular building offers more flexibility in addressing short-term issues related to the affordable housing shortage. For instance, modular homes are increasingly utilized as temporary solutions to meet the short-term housing needs of certain populations—such as the homeless,75 students, older adults, migrants, and asylum-seekers76—and can be disassembled and redeployed to different locations.77
The flexibility potential of modular building, however, is not confined solely to short-term housing supply solutions. Modular construction is very suitable to the flexible housing model, as it can incorporate flexibility, including universal design, into the design of homes from the onset. Flexible housing refers to housing that can adapt to the changing physical needs of its residents, accommodate varying household sizes, or incorporate new technologies.78 It provides the ability to alter a home’s room configuration with minimal effort and expense by allowing, for example, non-loadbearing interior walls and movable partitions.79
When purposedly planned and designed, modular construction offers the possibility of future spatial or structural modifications of homes to meet the changing needs of their occupants. As demographics and populations change, household sizes, family structure, and user-group needs change as well. The current affordability crisis, coupled with demographic changes such as an aging population,80 shifting household composition and patterns in living arrangements—particularly, the growth of single-person and extended households81—and changes in the activities performed in living spaces, makes housing flexibility more relevant than ever. As the recent pandemic crisis underscores, the existing housing stock was not designed to accommodate lockdown-related school and business closures. During the COVID-19 lockdown, the ability of isolating in one’s dwelling was critical to minimize exposure to the virus, but not all homes—especially small and overcrowded homes—could offer the possibility for infected household members to have their own separate bedrooms and bathrooms. Published research demonstrates a relationship between COVID-19 case rates and area-level measures of overcrowded and multigenerational housing.82
The slow adoption of modular building in the United States mutes its impact on housing affordability
Despite the benefits of modular building, several challenges—including financing and payment schedules, scarcity of manufacturers, regulatory overlap, zoning, state transportation requirements, and labor wages concerns, as discussed below—have prevented this construction approach from being adopted widely enough to make an impact in the United States.83
The Modular Building Institute indicates that in 2022, the multifamily sector was the largest market for the modular industry in North America.84 In 2022, however, only 1 percent of multifamily buildings were constructed with modular or panelized construction methods. In the same year, the market share of single-family homes completed using modular methods was just 2 percent, down from 6 percent in 2000. (see Figure 4) The Midwest features the largest share of housing units built with volumetric and panelized construction methods—10 percent of the region’s housing units completed in 2022.85
The United States has not kept pace with other countries where off-site construction is used extensively to address housing and labor shortages and where modular building represents a much larger share of the market than in the United States.86 In Finland, Norway, and Sweden, 45 percent of all housing production occurs off-site. In Japan, off-site construction accounts for 15 percent of homes built annually. And in Germany, 10 percent of housing is built off-site.87 Off-site construction is also expanding in China, Singapore, Australia, and the United Kingdom.88
Increasing the supply of affordable housing represents a monumental task, leading to the question of whether modular building is a realistic option to quickly address the affordability crisis given the small scale at which this approach is currently adopted in the United States.
Estimates of the deficit between housing demand and the supply of available units vary based on the data, methods, and assumptions employed to perform such calculations.89 Estimates also vary based on whether they are calculated at the national level or at more granular levels. The Center for American Progress estimated the 2021 housing deficit at the Public Use Microdata Area (PUMA) geographic level following the methodology used by the nonprofit organization Up for Growth.90 According to CAP’s estimates, which considered historical household formation rates and a targeted 5 percent vacancy rate, the United States is short 3.8 million units, both for rent and for sale. Underproduction is particularly pronounced in the West and the South, where there have been the greatest increases in population and where cost-burdened renters are largely concentrated.91 (see Figure 5)
Numeric estimates of the overall housing deficit, however, do not provide information on the types and quality of units needed not just to close the current affordability gap but also to promote long-term affordability, resilience, and sustainability while meeting other housing needs based on the demographic characteristics and living arrangements of households. To illustrate this point, Table 2 shows selected characteristics of the intersection of housing affordability with household composition and living arrangements. In 2021, 52 percent of renter households with a housing cost burden were single individuals, compared with 32 percent of those paying affordable rents. Rent-burdened households with more than one person were more concentrated in smaller homes than all other non-single renters. Sixty-nine percent of non-single renters with unaffordable rents resided in one- or two-bedroom housing units, compared with 54 percent of all other non-single renters.
This disparity is reflected in the share of underhoused renters and the types of units they occupied. Underhoused renters would have to move to a different unit to meet the occupancy standard of two people per bedroom.92 In 2021, 14 percent of non-single renters with a housing cost burden were underhoused, compared with 9 percent of all other non-single households. Meanwhile, 57 percent of renters with a cost burden lived in multifamily housing units, compared with 40 percent of all other renters.
The shortage of affordable housing may partly explain the larger percentage of extended families among renters who can afford their rents (19 percent), compared with 11 percent among rent-burdened households.93 Subfamilies, often called “doubled-up families,” show similar trends.94 Cohabitation, in the case of extended families and doubled-up families, usually allows members of households to help each other with housing costs.95
Challenges to modular construction
Several challenges, including the negative stigma associated with off-site construction,96 have prevented U.S. modular construction from becoming an industry standard and from achieving the scale necessary to meaningfully increase the supply of affordable housing.97 Critical challenges are addressed below.
Upfront capital and payment schedule
In contrast to conventional on-site construction, where funds are usually disbursed based on completion benchmarks,98 the payment schedule for modular building requires large upfront capital to cover the costs of procurement and materials. Lenders often regard modular construction as high-risk compared with traditional construction because of its relatively immature market and short track record of success.99 Financial institutions are generally concerned with the inability to identify any collateral or to secure real estate in a setting where materials can be used for multiple modules, which only become real property once they are delivered and assembled on-site. Construction lenders, who generally assess draws based on work completed, often consider such upfront costs too high and are willing to provide loans only when the modules arrive on-site.100 Lenders are also concerned with the project needing to be completed in case the manufacturer becomes insolvent.101 Construction lenders generally require modular builders to provide a subcontractor default insurance or a performance bond to guarantee they will complete the project. This means modular companies must provide additional working capital, which ultimately adds to their total costs.
There are specific challenges for publicly funded projects, such as local requirements related to procurement that generally vary by state.102 The availability of funding is challenging for developers of modular affordable housing, as public funding is still primarily structured around traditional construction. Affordable housing developers generally need to layer multiple financing sources.103 This can add to the costs of the projects and result in significant construction delays. For example, affordable housing developers largely rely on the low-income housing tax credit (LIHTC) program, the largest source of new construction funds for affordable rental housing for low-income households.104 The LIHTC offers developers tax credits to subsidize the construction and rehabilitation of affordable housing developments. The IRS allocates tax credits to state housing finance authorities. These, in turn, establish their guidelines for allocating credits, based on affordability standards set by the Department of Housing and Urban Development. The program is characterized by a critical funding complexity that influences both direct and indirect project costs and affects the program’s efficiency in providing affordable housing.105 The LIHTC entails layering multiple financing sources, the average number of which has increased over time.106 The funding complexity of LIHTC projects lengthens their development timeline.107 In general, the program rewards higher costs because tax credits are proportionally based on total development costs.108
Yet the LIHTC program has come under increased scrutiny due to reports of high or fraudulent development costs for some LIHTC projects.109 The program allows developers to charge a developer fee to develop properties.110 As the Government Accountability Office explains:
Allocating agencies use measures such as cost and fee limits to oversee LIHTC development costs, but few agencies have requirements to help guard against misrepresentation of contractor costs (a known fraud risk). LIHTC program policies, while requiring high-level cost certifications from developers, do not directly address this risk because the certifications aggregate costs from multiple contractors. Some allocating agencies require detailed cost certifications from contractors, but many do not. Because the Internal Revenue Service (IRS) does not require such certifications for LIHTC projects, the vulnerability of the LIHTC program to this fraud risk is heightened.111
In addition, because the various intermediaries involved in financing LIHTC projects need to be compensated, the federal tax subsidy per unit of new construction is usually higher than it needs to be and does not directly support the creation of new rental housing stock.112 LIHTC practices and regulations must be updated to better meet the Biden Housing Plan and incorporate modular housing.
Transportation from factory to construction site
Modular building encounters several challenges related to the transportation of modules from the factory to the construction site. Most modular home companies are in the regions they serve.113 Companies that produce multifamily modular buildings are concentrated on the East Coast and in the West. (see Figure 5) Because of structural bulkiness, modules generally require large, heavy vehicles for transportation and assembling. Moreover, lifting and pounding modular building units often damages the individual components.114 Each state issues its own set of transportation regulations for heavy haul, oversize, and overweight shipments and permissible travel times.115 Some states also issue permits for oversize and overweight vehicles that can result in delayed delivery schedules. Therefore, if modules are built in a state different from the construction site, the transportation of modules must comply with different codes.116 Standardizing and increasing weight limits may result in high infrastructure costs and greater road safety and environmental risks.
Building codes and zoning
The modular construction industry must comply with the same building codes that pertain to conventional on-site construction. Modular building is regulated primarily at the state and local level based on the modules’ final location. Some states, such as California and Florida, have amended their codes to meet the needs of their climate and geography.117 Only 39 states have state modular programs that ensure modular homes meet state building codes and amendments.118
Only 39 states have state modular programs that ensure modular homes meet state building codes and amendments.
The remaining states rely predominantly on local jurisdictions’ officials for approvals and to determine compliance and safety. In the case of states with modular administrative programs, such programs are not consistent from state to state, especially regarding approvals. While some states allow the use of third-party inspection agencies, others do not and instead rely on in-house staff, which can result in slower turnarounds.119 Once delivered to the final site, modular building units are subject to the same local land use regulations and zoning as housing units conventionally built on-site.120 Local zoning regulations, which determine development eligibility for construction sites, represent a critical barrier to constructing multifamily affordable housing in many jurisdictions across the United States.121
Even when multifamily projects are allowed, other building restrictions, such as building height caps, can challenge adopting multifamily modular building. There is a concern that height limits may decrease the financial viability of projects that do not contain enough units.122
Labor shortages and costs
Due to the labor shortage and increasing labor costs in the construction industry, expanding modular building may promote a cost-efficient and predictable utilization of manufacturing labor.123 This is mainly due to the level of industrialization of modular building, along with the controlled environment of modular building factories—especially when it relates to reduced schedule interruption due to the weather—and the reduced need for subcontractors, since modular building companies generally hire their own factory workers.124 Typically, wages in the modular building industry are lower than in conventional stick-built construction, mainly because modular building factories are not unionized.125 In contrast to conventional on-site construction, the various tasks of the off-site construction process are not performed by individual trades where unions represent a significant share of workers, such as plumbers, electricians, and carpenters, among others.126
The U.S. Department of Labor (DOL) is considering regulations to clarify that the Davis-Bacon and Related Acts’ prevailing wages are required to be paid to workers at off-site modular factories where significant portions of federally assisted projects are built.127 Under the proposed rulemaking, such off-site facilities, which are currently excluded from coverage, would be considered sites of the work of a federally procured project.
Yet the modular building industry has opposed the proposed rulemaking by arguing that the expansion would increase the cost of modular construction projects, prevailing wages would make modular companies less competitive in the marketplace, and modular builders of affordable housing would be deterred from seeking federal funding.128 The DOL, however, maintains that such potential cost increases would be minimal and would not affect the modular construction industry since the final rule applies only to sites dedicated exclusively or almost exclusively to a single federally assisted contract and will not encompass modular facilities engaged in more than one project or area.
According to the DOL:
Most modular construction facilities are engaged in more than one project at a time and therefore will not be considered “sites of the work” under this rule. Conversely, at secondary worksites that are dedicated exclusively or nearly so to a single DBRA [Davis-Bacon and Related Acts]-covered project for a period of time, application of the appropriate wage determination to workers at the site during that period of time should not be appreciably more difficult or burdensome than the application of a wage determination at such a site established specifically for contract performance, which is required under current regulations.129
Despite challenges, modular building is a promising tool to increase affordability and meet housing needs
With proper planning and coordination, modular building has the potential to reduce construction costs and increase cost predictability, helping address the housing affordability crisis.130 It is estimated that, at present, the off-site construction of a low-rise multifamily project can save 20 percent of total construction costs relative to traditional on-site construction by reducing labor costs, time, and procurement costs as well as by achieving economies of scale in the use of building materials.131 Reducing hard costs makes building new homes more affordable, especially in cities with severe housing shortages where rents continue to increase. It also makes it easier for nonprofit affordable housing developers to produce more units with limited public funding opportunities and incorporate sustainability features into their projects.132
Delivering homes quickly is important for housing individuals and families who are cost burdened and would otherwise be displaced or become homeless. Development and operating expenses typically are not covered by the rents paid by very low-income households. Even when the nominal costs of modular building are comparable with those of conventional construction, shorter construction timelines generate revenues earlier and potentially outweigh disparities in initial capital costs.133 Earlier occupancies and cash flows can result in more units available for low-income renters and possibly reduce the need to use federal tax subsidies, the complexity of which generally lengthens project development timelines. A quick increase of housing supply may have a cooling effect on rents, especially at the high end of the market, thus taking pressure off the rest of the market.134 At the same time, the increased efficiencies associated with modular building could be attractive to public housing authorities looking for ways to build more homes with limited funding.135
With proper planning and coordination, modular building has the potential to reduce construction costs and increase cost predictability, helping address the housing affordability crisis.
The potential of modular homes to improve energy efficiency is important to make housing more affordable by reducing heating and cooling costs and lowering electricity bills.136 Furthermore, by incorporating flexibility, modular building can potentially provide greater diversity in accommodation and suit the needs of a broader segment of society, particularly in housing cost-burdened groups.137 Finally, moving construction to factories outside of expensive cities can benefit construction workers who cannot afford to live where they work.138
Read more
Policy recommendations for increasing the prevalence of modular building
For the benefits of modular building to be fully realized and brought to scale, it is essential to promote the expansion of the modular construction industry by enhancing its capacity and competence and by addressing the critical challenges that modular building still faces today. CAP offers the following recommendations.
Expand financial resources for the modular construction of affordable housing
States and localities should be urged to explore and adopt funding mechanisms that encourage innovations in constructing affordable, resilient, and energy-efficient housing. Some states and local governments are promoting innovations in new construction methods, including modular construction, to address housing affordability and reduce the carbon footprint. Cities such as San Francisco and New York, for instance, have invested in modular construction to accelerate the production of much-needed affordable units.139 In 2019 and 2020, the Washington State Department of Commerce, which administers the state’s Housing Trust Fund, issued notices of funding availability for affordable projects using modular construction.140
However, more initiatives are needed at the national level to bring modular building to scale. Federal agencies should expand strategies to make tax-exempt bonds widely available to modular manufacturers of multifamily affordable housing, who generally need to secure large upfront capital. Private activity tax-exempt bonds, which are often used in conjunction with the low-income housing tax credit, play a crucial role in developing affordable housing. Their affordability requirements should be enhanced, and more bonds should be available for new construction of multifamily affordable housing, including buildings constructed with modular techniques, especially in states experiencing severe affordable housing shortages. Existing volume caps should be expanded, and unused PAB volume caps should be reallocated to a national pool that can assist states that need additional resources to develop affordable housing, including affordable and energy-efficient housing produced by modular manufacturers.
Furthermore, federal agencies across the board—HUD, the EPA, and the Department of Energy, among others—should align the scope of federal grants for clean energy investments to include modular affordable housing, particularly in areas at elevated risk of natural disasters, provided that modular projects meet energy efficiency standards. Affordable modular building projects, for example, should be eligible for the Greenhouse Gas Reduction Fund, which the Biden administration recently announced.141
The Government-sponsored enterprises should continue exploring ways to support the financing of modular affordable multifamily housing, particularly in conjunction with their initiatives to advance sustainable communities and increase the supply of affordable housing options. The GSEs should incentivize the securitization of mortgages tied to homes built with modular techniques and meeting specific climate and environmental standards. For example, modular multifamily housing should be made eligible for such products as Freddie Mac’s Green Advantage, given its emphasis on energy efficiency.142
Models of construction financing should be restructured to provide modular builders with substantial funding during the initial phase of modular projects. Some financial institutions are working with modular companies to develop new strategies such as a phased bonding approach.143 Another way lenders can facilitate modular construction financing is promoting a digital tracking system to identify materials designated for specific modular projects, as the Terner Center for Housing Innovation recommends.144 Financial institutions would then be able to take collaterals or security interests in those materials. Tracking assembly progress and material usage in modular construction would mitigate financial institutions’ concerns over the lack of collateral and ability to oversee the building process, especially in factories with more than one modular product line.145 In March 2023, Fannie Mae announced that it will transition to new valuation techniques to enhance collateral risk management.146 Valuation modernization may make the lending process to modular companies more efficient.
Standardize building codes and transportation requirements
State-level approval processes should be standardized with more consistent administrative rules and building codes that would improve efficiency, reduce costs, and ultimately facilitate a broader adoption of modular building.147 The Biden administration’s Housing Supply Action Plan includes financing through several federal agencies to advance building codes and reform zoning and land use regulations that could support modular construction adoption.148 The National Institute of Standards and Technology and HUD should continue providing states with evidence-based standards and best practices for building materials and building codes. HUD could play a crucial role in standardizing state-level approval processes by developing modular building code language that states could adopt. The Modular Building Institute is currently working with the International Code Council to create new industry standards that, once adopted, will address how modular buildings are approved, especially for regional manufacturers who ship products to different states.149 State departments of transportation should also be encouraged to harmonize regulations for the transportation of modules, at least on a regional basis.
At the local level, governments should streamline planning approvals and reform zoning to facilitate modular construction adoption for developing affordable construction, particularly multifamily housing in high-density, transit-oriented developments.150 Local government regulations often increase the soft costs of construction, such as impact fees, and add time to the development process.151 Local governments should reduce regulatory barriers to multifamily development and adopt zoning allowing multifamily housing to be approved and built as-of-right, including affordable multifamily projects built with modular techniques.152 Reforming local zoning could also optimize available space in cities where the scarcity and cost of available land represent major barriers to the development of affordable housing. Government officials should encourage modular buildings for infill development, especially in sites that are difficult to access for traditional on-site construction and brownfield sites that need environmental remediation.153 Modular housing construction is consistent with the EPA’s Brownfields and Land Revitalization Program goals.154
Support a more diverse workforce and higher wages in modular construction jobs
While recruiting, job training, and expanding the skilled labor pool are critical for improving productivity in the construction sector, off-site building, if brought to scale, could further increase productivity. Given the continuing shortage of skilled labor in the construction industry, which contributes to rising housing costs, adopting modular construction is increasingly seen as a necessary step to address the scarcity of available skilled labor. More can be done, however, to boost job quality and employment in the modular building industry.
Workforce development and targeted hiring—especially among women, young workers, and workers of color—are two top priorities. The median age of the construction skilled workforce has been rising as the number of construction workers ages 25 to 54 has declined, and it is difficult for employers to replace the retiring workforce with skilled younger workers.155 Since modular building utilizes rapidly advancing technologies that increase construction efficiency, a new workforce must be trained. In modular construction, job training initiatives—such as the expansion of registered apprenticeship and apprenticeship utilization requirements on publicly supported projects—could attract a new generation of workers.156
In addition, diversifying the modular building industry can potentially make the gender composition of the construction workforce more diverse. Women represent approximately 10 percent of the construction workforce.157 Professional opportunities in the modular industry may become more appealing and available to women.158 In modular construction, automation and the controlled environment allow workers to complete several tasks without the physical strains and risks of the typical construction worksite.159
The affordable housing crisis in the United States undermines the ability of individuals and families to achieve economic stability and calls for new strategies to increase the supply of affordable, sustainable, and resilient homes in a timely manner.
Another crucial step is to provide prevailing wages to modular construction workers in federally financed projects. Raising modular laborers’ wages and benefit standards—which may entail expanding prevailing wage requirements on publicly supported work and strengthening bargaining rights for all workers—is a necessary step to attract more workers and enhance productivity.160 Research on prevailing wages laws consistently indicates that such laws help blue-collar workers earn middle-class incomes, boost worker productivity, and increase apprenticeship training.161
In addition, modular workers who want to form a union should be allowed to unionize, as the Protecting the Right to Organize (PRO) Act would help them to do. Some trade unions have reached agreements with modular building companies. The agreement implemented by the Northern California Carpenters Regional Council (NCCRC) serves as a good example of what could be done to enhance collaborations between modular companies and unions. The NCCRC created a “wall-to-wall contract” with two modular factories in California in an effort to train workers to do all aspects of the work, so that the carpenters’ union can cover all the work in the factory.162
If modular construction is brought to scale, the costs sustained by modular companies to compensate labor would be outweighed by other cost- and time-reducing benefits associated with modular building.
Expand the capacity of modular building
Modular manufacturing capacity should be expanded by establishing new factories or consolidating existing ones. The expansion of modular manufacturing capacity would offer the opportunity to create more jobs and address the cyclical nature of residential construction. Currently, the modular home industry in the United States lags far behind that of other countries, and it needs to be clarified whether existing modular facilities are sufficient and large enough to ensure the outputs necessary to achieve economies of scale.163
For these purposes, local governments could provide business incentives for the establishment of modular factories—for example, by purchasing modular units,164 by facilitating the use of public land or idle lots for creating modular business opportunities, or by promoting public-private partnerships, as the city of Milwaukee has done. In July 2021, Milwaukee released an updated request for information to establish a public-private partnership to build an off-site construction factory to create jobs and provide workforce training.165 Other initiatives supporting the expansion of modular factories include Fannie Mae’s Sustainable Communities Innovation Challenge. Among the five winners of the nationwide competition announced in January 2023 is Module, a modular company based in Pittsburgh that will partner with Enterprise Community Partners to demonstrate the feasibility of locally owned modular construction micro-factories to complete energy-efficient affordable housing in urban communities of color.166 Module’s Last Mile Network project aims to expand the modular micro-factory concept to Prince George’s County, Maryland, and Richmond, Virginia, to benefit Black homeowners and renters.167
The establishment of new modular factories can potentially address the jobs-housing mismatch.168 Besides increasing the efficiency of affordable housing development, establishing modular factories in areas characterized by high housing costs would benefit construction workers, who usually face long commutes to the workplace due to the shortage of affordable housing.169
In addition to establishing more modular factories, diversifying their products is critical to achieving more reliable pipelines.170 Additional research is needed to explore more strategies for bringing modular building to scale to address the urgent shortage of affordable housing.
Related read
Conclusion
The affordable housing crisis in the United States undermines the ability of individuals and families to achieve economic stability and calls for new strategies to increase the supply of affordable, sustainable, and resilient homes in a timely manner.171 Modular building, if brought to scale, has the potential to reduce construction costs and make it more affordable to build new homes, especially in areas experiencing severe affordable housing shortages. Most importantly, modular building can deliver housing quickly to meet the needs of cost-burdened individuals and families who would otherwise be displaced or become homeless. With coordinated initiatives by governments at all levels, bringing modular building to scale could also contribute to making the housing stock more resilient and sustainable relative to the challenges presented by climate change.
Methodology
The statistical analysis presented in Table 2 was performed with data from the American Community Survey’s (ACS) Public Use Microdata Sample (PUMS). ACS PUMS files provide estimates of socioeconomic and housing characteristics at the individual household and person levels. The data are published annually by the U.S. Census Bureau and are available in one-year, three-year, and five-year files. This analysis is based on household-level information on housing tenure, income, and housing costs from the 2021 ACS one-year PUMS dataset. The analysis focuses on housing units that are either renter-occupied, vacant, and available for rent or rented but not occupied.
Renter households were classified into five income brackets based on county-level income limit data from the Department of Housing and Urban Development.172 Since PUMS data do not report information by county—instead reporting it by Public Use Microdata Areas (PUMAs)173—it was necessary to transform the data to assign the correct county-level HUD family area median income (AMI) information to each household record. PUMAs were matched to counties through the Missouri Census Data Center’s MABLE/Geocorr 14 online crosswalk.174 The author derived PUMA-level 2021 family AMI cutoffs for a four-person family using two methods: 1) determining the portion of counties corresponding to PUMAs based on a housing unit weight; and 2) weighting HUD family AMI data based on the number of families residing in each PUMA. After adjusting family cutoffs by the number of people in each household, the analysis categorized households by their income relative to the adjusted family AMI cutoff. The cutoffs were:
- Extremely low income: up to 30 percent of HUD family AMI
- Very low income: 30.1 percent to 50 percent of HUD family AMI
- Low income: 50.1 percent to 80 percent of HUD family AMI
- Moderate income: 80.1 percent to 120 percent of HUD family AMI
- High income: greater than 120 percent of HUD family AMI
The author determined the affordability cutoff of a given unit based on the minimum amount of family AMI that a household would have to earn to spend no more than 30 percent of its income on renting a housing unit, adjusted by the number of bedrooms in that unit.175 Housing units were categorized as extremely low rent, very low rent, low rent, moderate rent, and high rent based on their cost relative to affordability cutoffs.176