In most industries, productivity has risen enormously since 1947. But not in construction, where productivity has not increased at all over the last 75 years. As Market Watch noted in 2017,”While construction has appeared stuck in a time warp, other sectors have transformed themselves. Consider that in the United States between 1947 and 2010, agriculture achieved cumulative real growth in its productivity of 1,510% and manufacturing 760%…U.S. construction-sector productivity is lower today than it was in 1968.”
Why is productivity so low in construction? Partly because high-cost, low-productivity methods are promoted by federal housing regulations and subsidies. The Foundation for Research on Economic Opportunity (FREOPP) explains:
According to the U.S. Bureau of Labor Statistics, construction productivity in 2020 was 40% lower than in 1970, even though productivity in other sectors of the economy more than doubled during that time. While local regulatory policy is unquestionably a factor in this decline, FREOPP Visiting Fellow Jackson Mejia notes that restrictions on the methods of housing production also affect the supply of affordable housing. Prefabricated factory-built housing costs about one-third as much as traditional “stick-built housing,” but it constitutes just 10% of new single-family home construction today. In the 1970s, it was 60%. That dramatic decline is thanks to monopolistic government policies, from mortgage subsidies to federal safety standards, that irrationally favor stick-built methods over factory-built. To make more housing available to more Americans at lower prices, the federal government must get out of the way and allow housing construction to modernize the same way other sectors of the economy have.
Federal policies promote “‘stick-built housing,’ when buildings are constructed on-site by traditional construction methods. This method requires highly skilled, frequently unionized workers to produce homes on-site. Pre-fabricated factory-built housing, by contrast, costs about 1/3 as much per square foot”:
Research by economist Jim Schmitz at the Federal Reserve Bank of Minneapolis highlights that the prevalence of stick-built housing is a function of monopolistic behavior by construction companies and government policy, particularly the National Association of Home Builders (NAHB) and the Department of Housing and Urban Development (HUD). This happened in a couple of steps.
First, HUD developed Section 235 in 1968, a program that substantially subsidized mortgages on stick-built but not factory-built homes. Given the relative inefficiency of stick-built production, this program effectively subsidized a low-productivity technology at the cost of other, more efficient production methods.
Second, HUD and NAHB pushed the National Manufactured Housing Construction and Safety Standards Act of 1974 through Congress. The act effectively operates as a national zoning ordinance and restricts the production of factory-built homes substantially by requiring such homes to meet certain standards. At the time, factory-built housing competed with stick-built housing largely in low-density areas, many of which had no zoning laws to begin with. Before factory-built housing could make headway into urban areas, it was strangled in the crib.
Local building codes that vary from county to county and state to state make housing more expensive by preventing mass production of housing by factories. A factory can’t just come up with cheap, durable modular housing and then sell it everywhere. Imagine how much more expensive cars would be, if they had to be produced by hand in tiny factories located in each individual state or county, rather than (as is currently the case) being mass produced in large factories in a few states (in facilities that use robots and take advantage of economies of scale).
The endless variation in what is required for different locations, makes it hard for factories to produce housing that can be used in many different places. That makes it hard to set up factories that produce large amounts of cheap, high-quality modular homes.
The net result is lower productivity in the construction industry.
Economists support getting rid of many zoning regulations. As Law Professor Ilya Somin observes,
The case for cutting back on zoning restrictions unites economists and housing policy experts across the political spectrum. That includes both pro-free market experts and prominent left-liberals such as Nobel Prize-winning economist Paul Krugman…and Jason Furman, Chair of President Obama’s Council of Economic Advisers.
Japan is very densely populated and poorer than the United States. It has three times as many people as California, but less space. But even in Japan’s capital Tokyo—the center of the world’s most populous metropolitan area—people are able to afford housing. Why? Fewer zoning restrictions.
As Nolan Gray notes at Market Urbanism:
Japanese zoning is relatively liberal, with few bulk and density controls, limited use segregation, and no regulatory distinction between apartments and single-family homes. Most development in Japan happens “as-of-right,” meaning that securing permits doesn’t require a lengthy review process. Taken as a whole, Japan’s zoning system makes it easy to build walkable, mixed-use neighborhoods, which is why cities like Tokyo are among the most affordable in the developed world.
By contrast, zoning regulations make it harder to build in much of the U.S. As the Competitive Enterprise Institute’s Ryan Radia notes, “In 1973, we built one new housing unit for every 33 U.S. households. In 2005: one new home for every 55 households. In 2021: one new home for every 92 households.”
