Key takeaways
- HUD’s recent recommendation to regulate modular housing using objective standards for safety and performance could spur innovation and productivity growth in residential construction.
- Regulatory fragmentation and processes designed for site-built housing are important barriers to broader adoption of modular and other offsite construction methods.
- National standards such as ICC/MBI 1200 and 1205 are an important step toward reducing fragmentation and streamlining modular housing production.
- Beyond national standards, housing system certification and performance-based building code reform are the next frontiers of modular housing regulation.
HUD recently issued a set of best practices for state and local governments to improve affordability by reducing the overall costs of construction, increasing land available for construction, and reducing the development timeline. By identifying specific regulatory and administrative barriers, HUD has taken a step toward a federal framework for encouraging housing production.
Some of HUD’s recommendations, while worthwhile, are well-trod ground. Calls to streamline the permitting process for housing developments, for example, have been a staple of the housing supply agenda for years. On the other hand, some of the report’s most compelling recommendations could fundamentally change how much housing gets built across the country. Chief among them is HUD’s guidance to regulate housing using objective standards focused on health, safety, and performance rather than prescribed construction methods.
Over time, this shift could spur innovation and ignite productivity growth in an industry that has been short on both for decades. Still, while best practices are an important starting point, HUD will likely need to offer incentives to encourage state and local governments to adopt them to see meaningful progress.
Catalyzing innovation and productivity growth
Most homes in the United States today are built “on site,” meaning that the building is constructed at its final location. This method also means that homes are usually built one at a time, largely by hand. The alternative is offsite construction, in which entire or significant portions of homes are constructed elsewhere and then transported to their final destination.
Two of the most common types of offsite construction are manufactured and modular housing. Although both are built in factories (and sometimes called factory-built housing), they are regulated quite differently. Manufactured homes are the only type of housing built to a national building code, called the HUD Code. (Congress created the code in 1974 because manufactured homes were sold across state lines, making compliance with a patchwork of thousands of state and local building codes impractical for manufacturers.) All other homes, including modular, must comply with state and local building codes.
As of this writing, the HUD Code requires manufactured homes to include a permanent chassis to ensure permanent portability, although most never move after their initial installation. Removing the requirement for a permanent chassis from manufactured homes is one of the most promising provisions in the 21st Century ROAD to Housing Act given how expensive — and rarely used — a component the chassis is. But it doesn’t solve the fragmented and duplicative regulatory system of the modular housing industry, which remains subject to state- or local-specific approval, inspection, and compliance procedures.
Because of this, among the recommendations with the greatest potential impact on affordability is HUD’s guidance to “regulate modular homes using objective standards that focus on health, safety, and performance rather than the method by which a home is constructed.” This principle addresses one of the most persistent barriers to innovation and productivity growth in residential construction: prescriptive regulation.
The two approaches — prescriptive regulation and objective, performance-based regulation — encourage very different outcomes. The prevailing prescriptive approach to regulation is a micromanaging system that dictates how a home must be built, often specifying particular materials and construction and inspection methods. This approach tends to stifle innovation because using new materials or technology typically requires a regulatory waiver, which builders often avoid because of the added time and expense.
Objective, performance-based regulation defines a set of outcomes, requiring that a home meet standards for safety, durability, energy efficiency, and habitability. It encourages innovation and productivity because builders have flexibility in determining how to achieve these objectives and market-based incentives to achieve them as efficiently as possible.
The cost of regulatory mismatch
The transition from prescriptive to fully performance-based regulation will take time, but the destination is worth the journey. Offsite construction methods reduce costs by offering opportunities for improved efficiency, shorter timelines, automation, improved worker safety, and all-weather construction not available to homes built on site. Broader use of modular, panelized, and other factory-built housing types offers the most promising pathway for improving productivity growth for the residential construction industry, which has seen construction costs double in the last decade.
One reason that modular homes remain an underused housing type in the U.S., representing only about 3 percent of single-family homes built annually, is that regulatory systems are largely designed for site-built construction. In comparison, more than 28 percent of the housing built in Japan is modular, approved under a modernized, streamlined regulatory approach.
Modular homes frequently face duplicative inspection requirements (at the factory and on site), construction standards that assume on-site assembly rather than factory production, and zoning restrictions that exclude them from neighborhoods where comparable site-built homes are permitted. Demonstrating compliance with local building codes can itself be challenging. These barriers increase costs and limit innovation without necessarily improving health or safety outcomes.
Introducing a paradigm shift
Efforts to reduce regulatory fragmentation for modular construction are well underway. National standards such as ICC/MBI 1200 and 1205 are an important step in this direction. Together, the standards create a common regulatory framework that allows modular housing to fit more seamlessly into existing state and local building approval processes. They also establish a framework for factory certification, representing a paradigm shift in regulatory oversight from repeated inspection of individual homes to evaluation of the systems that produce them.
The standards were first adopted in Salt Lake City in 2021; among other things, they enabled code officials to complete inspections in factories located outside the city. Utah was among the first states to adopt ICC/MBI 1200 and 1205, in 2024. Other states have also adopted the standards, including Rhode Island, Virginia, Wyoming, and Colorado. In Utah, this was part of a broader effort to shift the industry from delegated approval of modular housing by 250 or so local jurisdictions, often lacking expertise or resources to inspect factory-built housing, to a single standard under the control of one state agency.
Housing system certification: A promising path to the ultimate goal
National standards are an important step, but a more radical shift is needed to fully realize the benefits of industrialized housing production. A promising concept described in HUD’s recent publication on offsite construction is housing system certification. Rather than requiring each project to demonstrate compliance through a traditional project-by-project permitting and inspection process, housing system certification evaluates and certifies an entire housing production system and its ability to meet safety and performance requirements.
Once certified, homes produced under that system are subject to a streamlined approval process. Local inspectors would retain jurisdiction over work performed on site, including utility connections, foundations, and compliance with applicable building, zoning, and site-development requirements.
The idea of a housing certification system is not new. HUD pioneered a version of the concept more than 50 years ago as part of Operation Breakthrough in collaboration with what is now the National Institute of Standards and Technology. Housing system certification has a long track record of success in Japan and other countries. Decades of stalled productivity growth in single-family residential construction in the U.S. indicate that it is past time to return to this vision of housing regulation that rewards innovation while maintaining rigorous standards.
HUD is uniquely positioned to reduce fragmentation in the regulation of housing production itself. Unlike zoning, construction standards are an area where national coordination can reduce costs while preserving local authority over land use and installation.
Best practices are a start … but it’s time for carrots and sticks
Although HUD’s recommendation to regulate modular housing based on objective standards is a welcome start, it is only a beginning. First, the recommendation should apply more broadly, beyond modular and manufactured housing to include panelized and other construction methods. Better yet, HUD should not limit its efforts to any particular construction method. While modular and manufactured housing often receive the most attention, the objective should be to encourage innovation across the housing sector. Picking one or two construction methods risks repeating the cycle of advantaging some approaches over others, whether or not they provide the best outcomes for consumers.
Second, the recommendation is just that — a recommendation. The crux of the U.S. housing crisis is that many of the nation’s roughly 20,000 local governments face strong political incentives to prioritize the interests of existing residents over future residents and have proceeded accordingly, contributing to a shortage of roughly 3 million to 5 million homes.
It is helpful to establish a benchmark, and given this guidance, some states and local governments may choose to adopt industry standards in response. But this still leaves a patchwork of regulation. As Congress recognized when it adopted a national code for manufactured housing, some aspects of modular housing regulation are most efficiently addressed on a national scale. If affordability is the goal, policymakers must not only create a regulatory system that rewards innovation, increases productivity, and expands housing production but also provide incentives for states and local governments to adopt it.
