Bryan Caplan  

From Religion to Real Estate

Four Bad Role Models... Past Performance and Probabili...

My colleague Larry Iannaccone is not just the world's expert on the economics of religion. He's also got some intriguing views on real estate.

Cars have been mass produced on assembly lines for a long time, and the cost savings over one-at-a-time craftsmanship are considerable. But if you take a look at residential construction, we have yet to reach the age of mass production. Homes today are still usually "stick-built" on site, though admittedly many components are mass-produced in a factory. Why haven't we switched to low-cost, high-quality modular construction? (For more info, see here).

Larry's speculation is that local building codes are to blame. It is hard to mass produce a product when you face a patchwork quilt of regulations. His idea immediately struck home with me, because my friend in the insurance business regularly laments the costs associated with divergent state-level regulation. If 51 sets of regulation are a burden, thousands could be crippling.

But what about trailer parks? How have they thrived? The Apex Homes website succinctly explains the relevant regulatory minutiae:

I get confused when I see the terms "manufactured home" and "modular home." What's the difference?

"Manufactured homes," often referred to as mobile homes or trailers, represent an entirely different type of building system than modular homes and are constructed to a different building standard. This standard, the Federal Construction Safety Standards Act (HUD/CODE), unlike conventional building codes, requires manufactured homes to be constructed on a non-removable steel chassis. Many communities have placed restrictions on where manufactured homes may be located.

Unlike manufactured homes, however, modular homes are constructed to the building codes required by your state, county, and specific locality and are not restricted by building or zoning regulations. Modular homes are inspected during every phase of construction, and evidence of this inspection is normally indicated by a State or inspection agency label of approval.

Is this consistent with Larry's story? Maybe. Perhaps manufactured homes have thrived because the industry faces a uniform building code. And maybe modular homes would be a lot cheaper if they did not have to be tailored to local building codes.

On the other hand, if the problem were really analogous to state regulation of insurance, I'd expect there to be some "redlining" - localities or states that modular home makers do not serve because their regulations are unusually onerous. And at least my initial study does not confirm this. Halliday Homes lists the main drawbacks of modular construction:

  • Severely limited flexibility in terms of floor plan and design options
  • Cannot be built in many locations, such as treed properties or waterfronts, because wide road access is required
  • The trucks and cranes required to ship and assemble the home are costly and may be subject to permits and restrictions
  • Modular homes may not be allowed in many residential developments
  • Costs may be difficult to control because you are not able to choose the labour
  • Notice that redlining or delays due to building code variation do not make the list.

    So is Larry barking up the wrong tree? Or are the most knowledgeable minds in the construction industry busy building houses, not speculating about how the effects of drastic regulatory changes that aren't likely to happen?

    Comments and Sharing

    COMMENTS (5 to date)
    Jim Erlandson writes:

    Manufactured housing is quite popular in Europe and Japan and neither is known for being light on regulation.

    From July 17, 2003 Realty Times:

    "Factory building has come of age," says Penson. "If we look to places like Japan and throughout Europe where factory-built housing is comprising at least half of the new homes being constructed, we get a sense as to where our industry should be heading in Canada."

    Canada's small local builders are so efficient that it's a tough market for manufacturers to crack.
    Canadian firms exported $561 million in manufactured housing in 2001, a 14 per cent year-over-year increase, and the CMHI says 2002 shipments to the United States were more than 30 per cent higher than in 2001.

    The article "Why Build a Modular Home?" doesn't mention building codes or transportation as problems but gives an indication of where the homebuilding business is heading.

    Virtually all of the best products in the world, from computers and appliances to automobiles and planes, are manufactured in factories. That is why both consumers and industry professionals in Japan and Scandinavia consider the modular method of home building superior to site-built construction. This makes it ironic that the country that has led the world in the design and mass production of manufactured goods, the United States, took until the 1980s to embrace prefabricated houses. Today, there is still a bit of a romantic notion that building custom home floor plans on site piece-by-piece is somehow superior. This belief lingers even though consumers would reject new appliances and automobiles that were built in someone's backyard, with the materials exposed to the weather and with no one watching over the assembly.

    Yet the romance with custom stick construction is starting to lose some of its bloom. Many stick builders have converted to modular houses, driven in part by the severe shortage of skilled construction workers. This shortage is being caused by older, experienced workers retiring or choosing less physically demanding work and by younger people choosing other careers. In an ABC News study of 10,000 high-school students that rated their interest in potential careers, the construction trades ranked 251st, right behind cowboy.
    jaimito writes:

    The issue has been recently debated in my Dept. and the answer is that real estate is the most important investment that people will make in their lifes, so they want something "solid".

    People will not invest in (I mean, they do not buy) prefabricated, plastic/metal accesories, fragile, temporary looking objects. Even for making redistribution of the space they will reject chalk or plastic walls and prefer traditional brick or block walls.

    On the other hand, industrial structures are a different story, they are much more rationally built and less expensive.

    Regulation is restrictive, but the answer is lack of demand.

    jimbo writes:

    People look down on modular housing and neighbors think it affects the value of their own property. For example, deeds to lots in my subdivision contain a restriction on modular homes. Before buying in this area (Mount Desert Island, Maine), we investigated modular housing. Cost of the modular home is about one third the final cost of the house, with site preparation accounting for a third and land accounting for the rest; but all varying greatly of course depending on location and specific site conditions. Just about all the modular homes on the market here are built in Canada. The cost of land, however, is what is driving housing costs. In metropolitan areas, people with children drive up costs by demanding to be located in good school districts. Those without children drive up costs by demanding to be located in safe areas with lots of amenities. Municipal governments are very reluctant to take on the environmental burdens of expanding and extending public water and sewer lines so new houses have to be built on large lots.

    Mr. Econotarian writes:

    For a lot of new houses in the DC area, generally the company doing the development is a builder, so you can't buy the land without buying their built house. There are many different developments owned by an individual company for slightly different markets, but in general they are trying to maximize the value of house per square foot of land they are selling. There is little incentive for them to sell cheap houses on their land.

    The builders provide a tremendous amount of customization, mainly in quality and coloring of internal fixtures, floors, and molding, which allows the house to really meet your needs & desires, as well as providing amazing upsell possibilities. Indeed, I'd call it "mass customization."

    But the regulation issue is important. The builder pointed out about five changes in the plan that was required for our jurisdiction.

    Something like mass production has already happened. It's called the housing development.

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