Last time in our series on the nature of the construction productivity problem, we looked at economies of scale, finding that capturing economies of scale in homebuilding is difficult.
Of all the levers we have to adjust housing cost, I’m convinced this is probably the least effective - because as you pointed out, we’ve already done a pretty good job with what we have. Short of some massive engineering or material breakthrough, any savings are likely to come from financing or permitting efficiency. Plus, if it costs 15% less to build, that doesn’t necessarily move the market, it just increases the developers margin.
It seems to be that with most innovations in construction the price is designed to match the alternative no matter the savings made by the manufacturer. Any savings are taken as extra margin and the product is sold for other reasons eg "these lighter elements will save you cost in the structure below ".
Is it that the construction market can never be as competitive since it's far less liquid than other markets? given the size of the stuff, the storage costs, the cap ex involved and given the relatively low cost to weight which makes transport significant.
Is it that construction is the biggest thing we make and therefore the hardest thing to benefit from standard economics?
I have no idea, but my guess is I think it's just because it's not really standard economics. You can't productize it because every site is different, it's heavily regulated, it's often but not always purchased with a 30-year-fixed-rate-loan(!) unique to this country, tons of subsidies on both sides of the transaction, long cycles. I would imagine this all trickles down to the components business. Like, what would happen if people just effectively stopped buying cars for 8 year periods and every county required a slightly different model?
I think w/r/t the risk averseness of building officials, ICC-ES's ESR program is supposed to bless these new construction products. However, I found that ICC-ES has about 80% market share in the construction space and outstanding high margins compared to the broader TIC (testing, inspection, and certification) industry. More here: https://moinmybackyard.substack.com/p/icc-es-the-financial-engine-of-the. In short, I think they are undersupplying the market for construction product certifications, thereby choking off innovation.
I hadn't looked at the margins of the construction product manufacturers like Simpson, and was surprised they are so large. Simpson is a major user of ICC-ES's ESRs. Part of their high margins, I think, come from the rarefied legitimacy that the ESR grants them.
Still, overall, I agree in the big picture, squeezing some margin out of one tiny little component of a building isn't going to move the needle on the overall problem. However, I do think ICC-ES and the broader TIC market does sit at a bottleneck above construction innovation in general. Unbottlenecking that may be a win.
As AI makes people more productive labor increases in price. So we might move towards automated systems but it won't reduce costs from existing methods, just to keep pace with where they are now. That might change material use patterns as automated systems will be better with some types of materials than others. Maybe even substituting more expensive materials if the total cost of installation is lower.
The thing I think might move the needle is much lower cost of transportation due to autonomy. Autonomous truck networks will want to have 100% utilization, and that will lower the price for loads that have fewer timing constraints, buffering the system keeping expensive capital in constant use. This might change some of the economics in this space, but it is very speculative.
I do wonder whether trucking automation/electrification will make moving manufactured components over longer distances more economic. Everything in this space is harder than you would expect, but it seems at least possible.
There is one, albeit somewhat marginal, strategy for reducing material costs: volume. Unit costs of commodities tend to go down as the volume of purchases goes up. This is true of almost every commodity, construction materials included. Even if it's only a few percentage points, in a market as tightly strung as housing construction, that's nothing to sneeze at.
This is likely why more and more construction starts involve contractors that are placing orders for dozens, even hundreds of houses at once.
This is also a way of reducing labor costs, as it turns out. It's just cheaper to put up fifty houses in the same development at more-or-less the same time than it is to build those same fifty houses scattered across the county. Again, not a huge difference, but it's a big enough deal that contractors and subcontractors that do new construction generally don't do renovations/repairs/additions, and vice versa. The business model is too different.
This storyline has, by process of elimination, brought us closer to what the real answer is for reducing construction costs (housing construction costs). There is no way to appreciably lower housing construction costs until we choose to build in other forms and design paradigms. Folks keep thinking there's some secret way to reduce the price of building center entry colonials on subdivision cul de sacs. Nope.
I think we've hit the outer limits of what can be accomplished by building with dimensional lumber, and we need to think in new directions. This flies in the face of the fashion industry nature of American home building, i.e., every house being unique and expressing the inner dreams of its owner. Broad Corporation in Changsha has an interesting solution, although they've not been able to crack the American market due to all the usual regulatory and code restrictions.
The familiarity issue can in some cases be solved by international consolidation, allowing trusted brands and distributors to leverage lower production costs. This works best for relatively high value, compact products, e.g fasteners, paint or electrical or plumbing fixtures.
There's also ongoing work on establishing design rules for less well known materials such as steel fibre reinforced concrete, which can reduce the need for labour-intensive rebar work.
That Stack Modular example is brutal: modules built with Chinese labor, shipped across the Pacific, and the pitch still ends up "cost certainty" instead of "cheaper." When even that arbitrage can't beat an on-site framing crew, the cheap-labor lever is dead.
I thought cheap labor was solved with immigrants? 40-50 years ago there were virtually no Mexican or Central American immigrants working in home construction. Now there are few projects that do not rely on immigrant labor. I'd think the manufactured home industry is similar. Construction costs are driven by policy choices and excessive profits in the FIRE sector.
I actually think there could be more to reducing the cost of materials than can be deduced by looking at the profit margins of material suppliers. Similarly to how Elon Musk initially got into SpaceX (what are the underlying component costs compared to the current delivered market price.)
Many house components can be reduced to a much more basic level than what is currently being used in the current "systems" paradigm. For instance a traditional window made from a small amount of oak wood, glass, and putty, from a material perspective is considerably cheaper than a factory window. Even a plaster interior wall is made from sand, lime, and hair. These components are much cheaper than buying drywall.
The trick, of course, is getting these materials assembled into a house. But historically it seems very possible to utilize skilled labor to perform this function. Look at how fast Victorian era cities were built using these base components and transforming them on site utilizing highly skilled guild labor.
Very good realistic overview of possibilities to reduce build costs. If the scope to lower costs via off-site/pre-fab construction is limited in the US, with its huge internal market, it must be even more so in Europe.
Of all the levers we have to adjust housing cost, I’m convinced this is probably the least effective - because as you pointed out, we’ve already done a pretty good job with what we have. Short of some massive engineering or material breakthrough, any savings are likely to come from financing or permitting efficiency. Plus, if it costs 15% less to build, that doesn’t necessarily move the market, it just increases the developers margin.
It seems to be that with most innovations in construction the price is designed to match the alternative no matter the savings made by the manufacturer. Any savings are taken as extra margin and the product is sold for other reasons eg "these lighter elements will save you cost in the structure below ".
Is it that the construction market can never be as competitive since it's far less liquid than other markets? given the size of the stuff, the storage costs, the cap ex involved and given the relatively low cost to weight which makes transport significant.
Is it that construction is the biggest thing we make and therefore the hardest thing to benefit from standard economics?
I have no idea, but my guess is I think it's just because it's not really standard economics. You can't productize it because every site is different, it's heavily regulated, it's often but not always purchased with a 30-year-fixed-rate-loan(!) unique to this country, tons of subsidies on both sides of the transaction, long cycles. I would imagine this all trickles down to the components business. Like, what would happen if people just effectively stopped buying cars for 8 year periods and every county required a slightly different model?
I think w/r/t the risk averseness of building officials, ICC-ES's ESR program is supposed to bless these new construction products. However, I found that ICC-ES has about 80% market share in the construction space and outstanding high margins compared to the broader TIC (testing, inspection, and certification) industry. More here: https://moinmybackyard.substack.com/p/icc-es-the-financial-engine-of-the. In short, I think they are undersupplying the market for construction product certifications, thereby choking off innovation.
I hadn't looked at the margins of the construction product manufacturers like Simpson, and was surprised they are so large. Simpson is a major user of ICC-ES's ESRs. Part of their high margins, I think, come from the rarefied legitimacy that the ESR grants them.
Still, overall, I agree in the big picture, squeezing some margin out of one tiny little component of a building isn't going to move the needle on the overall problem. However, I do think ICC-ES and the broader TIC market does sit at a bottleneck above construction innovation in general. Unbottlenecking that may be a win.
As AI makes people more productive labor increases in price. So we might move towards automated systems but it won't reduce costs from existing methods, just to keep pace with where they are now. That might change material use patterns as automated systems will be better with some types of materials than others. Maybe even substituting more expensive materials if the total cost of installation is lower.
The thing I think might move the needle is much lower cost of transportation due to autonomy. Autonomous truck networks will want to have 100% utilization, and that will lower the price for loads that have fewer timing constraints, buffering the system keeping expensive capital in constant use. This might change some of the economics in this space, but it is very speculative.
I do wonder whether trucking automation/electrification will make moving manufactured components over longer distances more economic. Everything in this space is harder than you would expect, but it seems at least possible.
There is one, albeit somewhat marginal, strategy for reducing material costs: volume. Unit costs of commodities tend to go down as the volume of purchases goes up. This is true of almost every commodity, construction materials included. Even if it's only a few percentage points, in a market as tightly strung as housing construction, that's nothing to sneeze at.
This is likely why more and more construction starts involve contractors that are placing orders for dozens, even hundreds of houses at once.
This is also a way of reducing labor costs, as it turns out. It's just cheaper to put up fifty houses in the same development at more-or-less the same time than it is to build those same fifty houses scattered across the county. Again, not a huge difference, but it's a big enough deal that contractors and subcontractors that do new construction generally don't do renovations/repairs/additions, and vice versa. The business model is too different.
This storyline has, by process of elimination, brought us closer to what the real answer is for reducing construction costs (housing construction costs). There is no way to appreciably lower housing construction costs until we choose to build in other forms and design paradigms. Folks keep thinking there's some secret way to reduce the price of building center entry colonials on subdivision cul de sacs. Nope.
I think we've hit the outer limits of what can be accomplished by building with dimensional lumber, and we need to think in new directions. This flies in the face of the fashion industry nature of American home building, i.e., every house being unique and expressing the inner dreams of its owner. Broad Corporation in Changsha has an interesting solution, although they've not been able to crack the American market due to all the usual regulatory and code restrictions.
The familiarity issue can in some cases be solved by international consolidation, allowing trusted brands and distributors to leverage lower production costs. This works best for relatively high value, compact products, e.g fasteners, paint or electrical or plumbing fixtures.
There's also ongoing work on establishing design rules for less well known materials such as steel fibre reinforced concrete, which can reduce the need for labour-intensive rebar work.
Hilarious that your solution to reduce construction cost is lower labor cost and not once did you mention construction company profit margins.
That Stack Modular example is brutal: modules built with Chinese labor, shipped across the Pacific, and the pitch still ends up "cost certainty" instead of "cheaper." When even that arbitrage can't beat an on-site framing crew, the cheap-labor lever is dead.
Labor = robots. And deregulation.
Housing could be incredibly cheap to build.
Anyways this is not an engineering problem
I thought cheap labor was solved with immigrants? 40-50 years ago there were virtually no Mexican or Central American immigrants working in home construction. Now there are few projects that do not rely on immigrant labor. I'd think the manufactured home industry is similar. Construction costs are driven by policy choices and excessive profits in the FIRE sector.
I actually think there could be more to reducing the cost of materials than can be deduced by looking at the profit margins of material suppliers. Similarly to how Elon Musk initially got into SpaceX (what are the underlying component costs compared to the current delivered market price.)
Many house components can be reduced to a much more basic level than what is currently being used in the current "systems" paradigm. For instance a traditional window made from a small amount of oak wood, glass, and putty, from a material perspective is considerably cheaper than a factory window. Even a plaster interior wall is made from sand, lime, and hair. These components are much cheaper than buying drywall.
The trick, of course, is getting these materials assembled into a house. But historically it seems very possible to utilize skilled labor to perform this function. Look at how fast Victorian era cities were built using these base components and transforming them on site utilizing highly skilled guild labor.
Very good realistic overview of possibilities to reduce build costs. If the scope to lower costs via off-site/pre-fab construction is limited in the US, with its huge internal market, it must be even more so in Europe.