Why It's Still So Expensive to Build Homes in America
Timestamps are as accurate as they can be but may be slightly off. We encourage you to listen to the full context.
Podcast Summary
This Odd Lots podcast episode explores why housing construction remains stubbornly expensive in America despite technological advances that have made other manufactured goods cheaper over time. (04:00) Construction labor productivity in housing has actually fallen by more than 30% from 1970 to 2020, according to a Richmond Fed paper discussed in the introduction. Host Tracy Allaway and Joe Wiesenthal speak with Brian Potter, author of "The Origins of Efficiency" and a former structural engineer who worked at the failed prefab housing startup Katerra. (07:28) The conversation examines why prefab housing has repeatedly failed to deliver on its promises, the fundamental constraints that make housing different from other manufactured goods, and whether there's any hope for reducing construction costs in the future.
- Main themes: The persistent inefficiency of housing construction, the repeated failures of prefab housing ventures, fundamental barriers to scaling housing production, and comparisons between housing and other manufacturing processes that have achieved dramatic cost reductions.
Speakers
Tracy Allaway
Co-host of Bloomberg's Odd Lots podcast, where she explores economic trends and market dynamics. She focuses on examining the intersection of finance, policy, and real-world economic phenomena affecting everyday Americans.
Joe Wiesenthal
Co-host of Bloomberg's Odd Lots podcast and a veteran financial journalist. He brings extensive experience analyzing markets and economic trends, with a particular interest in understanding why certain industries succeed or fail at achieving efficiency gains.
Brian Potter
Author of "The Origins of Efficiency" and senior infrastructure fellow at IFP, Potter is also the creator of the Construction Physics newsletter on Substack. He worked as a structural engineer for 15 years designing various buildings and later joined the well-funded but ultimately failed prefab housing startup Katerra, giving him unique insights into both traditional construction and attempts at industrial innovation in the sector.
Key Takeaways
Housing Construction Resists Standardization Due to Fragmented Regulations
Unlike other manufactured goods, housing faces approximately 20,000 different permitting jurisdictions across the US, each with slightly different building codes. (08:59) Additionally, different building sites have varying soil conditions, environmental factors like earthquake or hurricane requirements, and size constraints. This fragmentation makes it extremely difficult to achieve the economies of scale that drive efficiency gains in other industries, as builders cannot easily create truly standardized products that work across all markets.
Prefab Housing Fails Due to Hidden Transportation and Assembly Costs
While factory production promises efficiency gains, buildings are too large to transport whole, requiring modular construction that introduces significant hidden costs. (13:42) Potter explains that designing modules to survive transportation loads often becomes the controlling design factor, requiring extra structural elements that wouldn't be needed in traditional on-site construction. Additionally, connecting these modules on-site requires complex joining systems and extra components, often negating the supposed factory efficiencies.
Construction Projects Have Asymmetric Risk Profiles That Discourage Innovation
Construction costs follow an extremely fat-tailed distribution where successful projects might come in 10-15% under budget, but failed projects can exceed budgets by 100-300%. (18:23) This asymmetric risk structure rationally incentivizes builders to avoid new technologies or methods, as the potential for catastrophic overruns far outweighs the limited upside from modest cost savings. This creates a powerful structural barrier to innovation in the industry.
Geographic Constraints Limit Manufacturing Scale in Housing
Unlike semiconductors that can be manufactured in one location and shipped globally, housing modules become uneconomical to transport beyond about a day's drive from the factory. (20:00) This means even successful modular housing companies must operate multiple smaller factories across regions rather than achieving massive economies of scale in single locations. Each factory might produce only 500-1000 units rather than the tens of thousands that would enable dramatic cost reductions.
Talent Brain Drain May Be Undermining Traditional Industries
Potter suggests that highly capable individuals who might have previously worked in manufacturing or engineering roles at companies like Boeing are now drawn to higher-paying opportunities in Silicon Valley or finance. (33:24) This talent reallocation, while economically efficient in the short term, may be leaving traditional industries with less capable workforces, potentially contributing to stagnation or even regression in operational capabilities at established manufacturers.
Statistics & Facts
- Construction labor productivity in housing has fallen by more than 30% from 1970 to 2020, according to a Richmond Fed paper mentioned at the beginning of the episode. This stands in stark contrast to most other industries which have seen significant productivity improvements over the same period.
- The United States has approximately 20,000 different permitting jurisdictions, each with potentially different building codes and requirements. (08:59) This fragmentation makes standardization extremely difficult compared to other manufactured goods.
- Katerra, the prefab housing startup where Potter worked, raised approximately $2-3 billion in venture capital before declaring bankruptcy after just a few years of operation. (07:28) This represents one of the largest failures in the prefab housing space and demonstrates the scale of capital that has been unsuccessfully deployed in this sector.
