Accelerate IHD to Increase U.S. Housing Supply
With support from the U.S. Department of Housing and Urban Development (HUD), the National Institute of Building Sciences (NIBS), and others, MOD X has developed a model for effectively accelerating IHD for housing at any scale based on lessons from internationally evolved offsite construction contexts. The model can serve as a tool for increasing housing supply and making a positive contribution to the U.S. housing crisis with two primary actions: (1) regulatory reform, and (2) demand aggregation. Combining regulatory reform with demand aggregation has proven effective at accelerating IHD in more evolved industries abroad including Japan, Sweden, and the UK. Harmonizing regulations across as large a market area as possible and shifting away from prescriptive codes towards performance-based specifications has proven to be an impactful strategy.
Over the past 50 years, Japan and Sweden have employed both regulatory reform and demand aggregation to accelerate and scale IHD. Over time, the growth of this sector has encouraged increasing technological capacity, allowing the sector to expand and contract its supply of new housing in-line with demand. This sort of flexibility is already common in mature automotive, aerospace, IT, and food production sectors, but need to be further adapted and adopted by the housing sector in the U.S. to truly treat housing as an industry.
Regulatory reform without demand aggregation has eliminated many of the barriers to the acceleration and scaling of IHD. However, increased supply often materializes slowly to address a housing crisis. Demand aggregation without regulatory reform can provide an immediate increase in housing supply but can also create an IHD industry sensitive to fluctuations in demand and highly dependent on government programs and subsidies. Demand aggregation without regulatory reform can also lead to a lower-quality product to meet a short-term goal from the public sector, leading to long-term market stigmatization of offsite construction. As such, regulatory reform and demand aggregation go hand-in-hand.
Regulatory Reform Action
The frameworks regulating housing development and construction in the U.S. evolved over more than a century and will likely take many decades to further evolve with strong state and local action. These historical frameworks unintentionally prescribe the conventions of onsite construction, inform other institutional frameworks regarding labor, contracts, financing, and insurance, and, in turn, require offsite construction to conform with practices and standards developed for a different kind of construction method. Like conventional construction, these regulatory frameworks are highly localized and varied, presenting barriers to IHD. Without institutional and structural transformation, offsite construction and IHD will continue to be regulated by logics based on onsite construction methods and will continue to struggle to outperform conventional construction.
In contexts where IHD has successfully accelerated and scaled, direct government action has been essential for implementing and refining effective long-term policy reforms. Sweden and Japan have completed this process with a regulatory framework placing offsite and onsite construction on equal footing. In the UK, Australia, New Zealand, the European Union (EU), and several other countries, this regulatory transition is underway. In the U.S., various regulatory reforms, directly initiated by HUD or other governmental and non-governmental entities, have significantly improved the situation. One of the first successful attempts to reform the U.S. regulatory environment was the introduction of state industrialized building programs, starting with California in 1968. These programs ensure that a regulatory framework appropriate for offsite construction exists in more than 30 states. The most impactful national-scale regulatory reform was HUD’s revision of mobile home industry standards into a federal standard that supported the creation of the higher-quality but equally affordable manufactured housing sector in 1976. The shift in the regulatory framework from a multiple regional model code to two in 2000, managed by the International Code Council, also had a harmonizing impact on all construction. Most recently, following recommendations made by MOD X to the Modular Building Institute (MBI), MBI teamed up with the ICC to develop procedural standards for the inspection and permitting of volumetric modular construction. However, additional reforms are required to continue moving the industry forward and addressing the current housing crisis.
Based on international precedents from forthcoming MOD X research, effective regulatory reform occurs via three, often related policy initiatives:
Harmonization of Building Code and Land Use Regulations Over a Substantial Market Area: Current U.S. land use codes are fragmented across thousands of local governments, and often restrict housing size, shape, and density such that standardized IHD products are unsuitable. Additionally, prescriptive-based building codes are often implemented differently across jurisdictions, which may have their own amendments to national model codes. Locallybased inspection and building permit processes require developers to navigate complex regulatory environments. Harmonization of building codes and land use regulations over a large market area eliminates arbitrary differences in specifications and can improve the efficacy of both conventional and offsite/IHD construction methods. Harmonization can occur through the preemption of a national regulation over local regulations (e.g., Japan in 1950, Sweden in 1960, and the US in 1976 via the HUD Code) or through the introduction of model regulation incentivized for adoption by local governments (e.g., Eurocode in the European Union since 2010, International Residential Code (IRC) and International Building Code (IBC) developed by the International Code Council since 2000). In Sweden and Japan, comparable harmonization of land use codes nationally during the early postwar period positively impacted offsite construction housing quality and housing supply more broadly. At the state level, the Commonwealth of Virginia has attained a high regulatory harmonization level by essentially requiring all authorities having jurisdiction to adopt the state versions of model codes and industrialized buildings model code with no revisions.
Complete Transition From Prescriptive-Based to Performance-Based Specifications: In addition to the harmonization of regulations, shifting from a prescriptive- to performance-based building code specifications has proven highly effective in accelerating both IHD and improving onsite construction outcomes. Today, the U.S. largely uses a prescriptive building code framework — which dictates the types of building materials and techniques given the size and use of a building — rather than a performance-based building code that focus on how building materials and construction techniques should perform. However, the complete transition from prescriptive- to performance-based building codes takes time to achieve. The ICC is developing a major update to their current performance-based building code for the 2027 update.
Housing System Certification: An intermediate step towards performance-based specifications. The transition from a prescriptive to a performance-based code environment occurs over a period of time. For example, the 27-member state European Union is still in the process of fully transitioning to this regulatory framework, although some member states like Sweden have already fully transitioned. For this reason, several countries have implemented a housing system certification approach to create an alternate means of code compliance for innovative homebuilders. These companies are rewarded for requisite upfront investment in personnel, equipment, R&D, and resultant intellectual property through a fast-track code compliance process more attuned to a product than a project approach to delivery. HUD, working in close collaboration with the National Institute of Standards and Technology (NIST), pioneered system certification more than 50 years ago. Since that time, Japan has progressed furthest in scaling this approach with 1 in 3 homes moving through this streamlined path of code compliance. While Sweden and other European countries have not currently implemented full housing system certification processes, similar streamlined code compliance routes exist for new materials and prefabricated building components. In the U.S., ICC’s Evaluation Services (ICC-ES) could also serve in a similar capacity.
Demand Aggregation Action
Comparable to other capital-intensive manufacturing sectors, offsite construction and IHD require a steady pipeline to amortize requisite investments. Housing demand is highly varied in specifications and oscillates with macroeconomic variables. Demand aggregation in IHD acceleration can be defined as some form of government support including incentives, subsidies, and/or project contracts to create a more consolidated and stable production pipeline for the offsite manufacturing sector. Demand aggregation programs are particularly important in keeping factories in business during downturns. In Sweden, manufacturers often turn to public housing authorities (PHAs), which tend to build during economic downturns. In the U.S., Dynamic Homes, a Minnesota-based volumetric modular manufacturer, maintains a close relationship with various Native American tribes, who in turn benefit from specific subsidies.
Demand aggregation for IHD can be direct or indirect and typically occurs via three distinct forms:
- Direct demand created by the procurement of IHD for government-financed projects. Example: State Emergency Management Agencies (SEMAs) procurement of offsite manufactured housing to support emergency response efforts.
- Indirect demand created by the government-coordinated procurement of IHD by other entities. Example: Encouraging PHAs to prioritize innovative construction methods that include IHD approaches.
- Indirect demand created by coordinated award criteria for government-financed projects and subsidies. Example: Japan Housing Finance Agency (JHF) mortgage rate reduction program closely tied to the national housing system certification.
This sort of demand aggregation works best when the public sector procurement and coordinated award criteria focus on the areas where IHD can perform best: bringing down costs, decreasing time to completion, and increasing consistency across housing developments. To the extent that the public sector can create standard design criteria, this too brings down cost as the offsite manufacturers are able to streamline unit development and achieve economies of scale. Demand aggregation can further drive down costs when paired with pre-approvals and other expediting permitting.
Demand aggregation creates substantial impacts on IHD. First, it allows for the effective cost amortization to support capital-intensive innovation investments in R&D including technology, intellectual property, automation, etc., and critical labor resources. Second, it creates consistent and predictable product specifications, smoothing demand for new units over time and limiting customization at the unit level that typically exists in a highly fragmented housing market sensitive to long-term financial variables. Third, it signals to the private sector and to the general public that IHD is at least as high quality as conventional construction, if not more so, to consumers, end-users, financial and insurance sectors.