Ed Glaeser is perhaps the pre-eminent urban economist working today, and I’ve cited his work repeatedly when looking at land-use restrictions and burdens on new development.
My mind is continuously blown by how huge the median new American home is: 2,500 sqft! I live in an 850sqft home in the UK with my wife, two kids, and a dog, which is pretty much bang on average.
You need to separate the fixed batch setup costs from variable cost.
In automotive manufacturing, you make one setup cost for thousands to hundreds of thousands of materials, parts, components, subassemblies, and final assembly. Examples like setting a tool in a press and making the next 10,000 to a million components. Stamping dies for connector brass for example. Steel and plastic dies.
In housing construction, there are more setups than continuous production steps. Every measure, cut, carry and place.Think about how many unique and non reproducible steps go into building a house.
The breakeven in variable cost analysis comes when enough units at say 30% contribution margin meet the fixed (setup cost) and then cash flow is positive.
You can back out the fixed setup cost. Get a price for 1, 10, 50, 100. Plot. The 0 unit slope is approximately the fixed setup cost. Thats why volume matters to get lower cost.
Construction hasn't figured it out. Albeit factory substructures and "manufactured homes" get into that direction.
Smaller construction firms may be more likely than large construction firms to build custom built houses, which confounds estimates of scale economies. They can't compete with large firms otherwise.
In the 1930s, auto makers didn't consider it mass production with less than 100,000 units. When they were asked to make a mere 50,000 planes a year, it was a challenge that required rethinking production methods.
Another excellent article. Certainly construction productivity is and has been 'flat' for decades. There are a number of companies (US, Canada, UK, Sweden, etc)exploring 'off-site' and modular approaches. These approaches - much like the manufacturing approach have merit. Technology investment, standardization of more that individual elements like 2x4/6/8 etc and plywood and drywall. SIPs are an advancement. Metal SIPs are also an advancement (although available as early as the 1980's). Panelized construction that also contains electrical conduit/cable; plumbing pipe runs etc. The possibilities are out there. Let's not forget Habitat '67 - a very successful modular multi-storey development still very popular today. Certainly, zoning and regulatory practices have a significant drag on productivity and cost.
I think you and the authors of the paper miss an important point, this is that builders do not want to build so many homes that they reduce the price they will sell at. In The UK, we call this building to the absorption rate. This also has the benefit of limiting the amount of working capital devoted to "work in progress" (WIP). And while there are kit home prefabricators, these are generally or luxury homes as they are expensive due to haulage costs.
Thus, irrespective of the regulatory landscape, while land is expensive as it is now due to the price of land and the cost of all the environmental reports needed to satisfy the authorities, it makes sense to limit WIP and save on working capital that way. That being the case, there is little incentive to invest in high productivity plant or materials. Add to this that house designs are relatively "one-off" by architects, and it is hard to see why anyone would invest in any form of tech to increase productivity.
There is another factor at play, and that is the conservatism of both home buyers and the building industry. We see it in the UK in the use of rough terrain fork lift trucks on sites where a small self-erecting tower crane would be more effective as half the building is inaccessible to the fork lift. Architect's drawings leave a lot for the builder to interpret rather than fully designing the home, e/g/ there are no wiring routes shown, merely switch positions and light / socket outlet positions. SO the builder cannot get a wiring loom made up externally (maybe be a firm that makes wiring looms for the sutomotive industry.
Single family housing is primarily built from basic parts such as 2x4 on site. No wonder there's no efficiency. You can buy some sort of semi pre-built house models in the US but they're luxury housing.
I come from Sweden and for the last 80 years you can buy house models from many different firms and price levels (and tailor them). Complete sections arrive on site and the house is basically assembled in a few days. Interior details does take some extra time of course but the basic house is there.
In the US not even companies building hundreds of houses in an area use this model. It's odd to say the least.
In the US there's a stigma against pre-fabricated housing. Luxury housing is almost always "stick built". Just say "double wide", and you knock a big chunk off the resale value and put down a down-class marker as well.
Regarding increasing square footage and increased amount spent on renovations, these intuitively sound like consequences of land use regulations to me, at least partially (the square footage more than the renovations).
Surely part of the square footage increase is driven by a growing appetite for larger homes, but if land use restrictions increase costs involved in building a new home, then the market might also be biased towards larger homes to profit from greater investment cost.
And if land use restrictions increase building costs and reduce overall supply, might this also incentivize people to stay in their homes longer and invest more in renovations? I mentioned I'm iffier on this second point because I could also see how a more dynamic real estate market might lead to people moving more frequently and thus renovating upon moving. I'd love to hear what you think about this, though.
---
And a slightly tangential point:
I repeatedly see writing throughout all sorts of media about housing affordability, and I understand the focus, but I also wonder about commercial real estate affordability.
If restrictive laws are significantly increasing residential real estate's price, aren't they also significantly increasing commercial real estate's price? And if commercial real estate supply is lacking (aside from giant office skyscrapers), doesn't this mean that businesses throughout the US are paying more for real estate and factoring this into higher prices for goods & services?
Furthermore – and I'm less certain about this part – if the supply of smaller-scale commercial real estate is restricted, this sounds like something like would favor large incumbent companies and disadvantage smaller companies, with a result of reduced competition across the entire economy.
If either of these are the case, this sounds like an issue of even greater significance than its already-massive significance. But again, I don't know what an expert would say about this and I don't know what relevant data would suggest.
Larger greenfield developers working inside zoned areas are frequently required to upgrade roads, bridges, and other infrastructure affected by their development. This adds to the development costs and follow through prices, directly.
Second, more expensive, more highly regulated/zoned areas tend to have higher costs of living and higher taxes, pushing up the local price of materials and labor.
The existence of large home builders doesn’t disprove land use as a barrier to productivity.
Large home builders face productivity drag by paying acquisition teams and purchasing entitlement land from external developers. The more onerous and irregular the land use across their regions the higher the acquisition cost.
If automakers had seek ongoing permission in 100s of different local auto codes their efficiency would be worse.
Excellent analysis! I'm sure you have a writeup previously on Katerra and their ability to panelize and save on costs with their model (that obviously failed) - is anything of a similar nature feasible in SFR construction? Multi I'm guessing yes, single seems harder.
Apologies if off topic but just got done binge reading your backlog. Saw one mention on monolithic domes but nothing on post-frame construction. Lots of 1 and 2-man teams building 2 story buildings with it. Seems like the best for extreme DIY.
My first thought on this was that your article on Levittown showed only limited benefits of mass production in home building. It's not like construction is all that more productive in places like Texas with laxer regulations.
Another thought is that modern homes have more stuff in them. In the 1800s, a home might have fir had wood stoves for heating and a pump in the sink. By the 1920s, central heating became more common along with hot and cold running water. In the 1960s, we started seeing more air conditioning often as a separate system in addition to a heating system. The energy crunch in the 1970s led to better insulation and more sophisticated windows. Newer homes also have more wall outlets and can handle more amperage. Modern homes are not just bigger, but they have more systems and features.
I don't think I've ever clicked faster on a blog post
My mind is continuously blown by how huge the median new American home is: 2,500 sqft! I live in an 850sqft home in the UK with my wife, two kids, and a dog, which is pretty much bang on average.
Here is a significant factor missed by all.
You need to separate the fixed batch setup costs from variable cost.
In automotive manufacturing, you make one setup cost for thousands to hundreds of thousands of materials, parts, components, subassemblies, and final assembly. Examples like setting a tool in a press and making the next 10,000 to a million components. Stamping dies for connector brass for example. Steel and plastic dies.
In housing construction, there are more setups than continuous production steps. Every measure, cut, carry and place.Think about how many unique and non reproducible steps go into building a house.
The breakeven in variable cost analysis comes when enough units at say 30% contribution margin meet the fixed (setup cost) and then cash flow is positive.
You can back out the fixed setup cost. Get a price for 1, 10, 50, 100. Plot. The 0 unit slope is approximately the fixed setup cost. Thats why volume matters to get lower cost.
Construction hasn't figured it out. Albeit factory substructures and "manufactured homes" get into that direction.
Smaller construction firms may be more likely than large construction firms to build custom built houses, which confounds estimates of scale economies. They can't compete with large firms otherwise.
In the 1930s, auto makers didn't consider it mass production with less than 100,000 units. When they were asked to make a mere 50,000 planes a year, it was a challenge that required rethinking production methods.
Another excellent article. Certainly construction productivity is and has been 'flat' for decades. There are a number of companies (US, Canada, UK, Sweden, etc)exploring 'off-site' and modular approaches. These approaches - much like the manufacturing approach have merit. Technology investment, standardization of more that individual elements like 2x4/6/8 etc and plywood and drywall. SIPs are an advancement. Metal SIPs are also an advancement (although available as early as the 1980's). Panelized construction that also contains electrical conduit/cable; plumbing pipe runs etc. The possibilities are out there. Let's not forget Habitat '67 - a very successful modular multi-storey development still very popular today. Certainly, zoning and regulatory practices have a significant drag on productivity and cost.
I don't see any improvement in construction productivity unless we get telerobotics or self driving cars.
I think you and the authors of the paper miss an important point, this is that builders do not want to build so many homes that they reduce the price they will sell at. In The UK, we call this building to the absorption rate. This also has the benefit of limiting the amount of working capital devoted to "work in progress" (WIP). And while there are kit home prefabricators, these are generally or luxury homes as they are expensive due to haulage costs.
Thus, irrespective of the regulatory landscape, while land is expensive as it is now due to the price of land and the cost of all the environmental reports needed to satisfy the authorities, it makes sense to limit WIP and save on working capital that way. That being the case, there is little incentive to invest in high productivity plant or materials. Add to this that house designs are relatively "one-off" by architects, and it is hard to see why anyone would invest in any form of tech to increase productivity.
There is another factor at play, and that is the conservatism of both home buyers and the building industry. We see it in the UK in the use of rough terrain fork lift trucks on sites where a small self-erecting tower crane would be more effective as half the building is inaccessible to the fork lift. Architect's drawings leave a lot for the builder to interpret rather than fully designing the home, e/g/ there are no wiring routes shown, merely switch positions and light / socket outlet positions. SO the builder cannot get a wiring loom made up externally (maybe be a firm that makes wiring looms for the sutomotive industry.
One example:
Single family housing is primarily built from basic parts such as 2x4 on site. No wonder there's no efficiency. You can buy some sort of semi pre-built house models in the US but they're luxury housing.
I come from Sweden and for the last 80 years you can buy house models from many different firms and price levels (and tailor them). Complete sections arrive on site and the house is basically assembled in a few days. Interior details does take some extra time of course but the basic house is there.
In the US not even companies building hundreds of houses in an area use this model. It's odd to say the least.
Example of models here (you can tailor wildly).
https://www.myresjohus.se/husmodeller/
In the US there's a stigma against pre-fabricated housing. Luxury housing is almost always "stick built". Just say "double wide", and you knock a big chunk off the resale value and put down a down-class marker as well.
Really interesting article, thanks.
Regarding increasing square footage and increased amount spent on renovations, these intuitively sound like consequences of land use regulations to me, at least partially (the square footage more than the renovations).
Surely part of the square footage increase is driven by a growing appetite for larger homes, but if land use restrictions increase costs involved in building a new home, then the market might also be biased towards larger homes to profit from greater investment cost.
And if land use restrictions increase building costs and reduce overall supply, might this also incentivize people to stay in their homes longer and invest more in renovations? I mentioned I'm iffier on this second point because I could also see how a more dynamic real estate market might lead to people moving more frequently and thus renovating upon moving. I'd love to hear what you think about this, though.
---
And a slightly tangential point:
I repeatedly see writing throughout all sorts of media about housing affordability, and I understand the focus, but I also wonder about commercial real estate affordability.
If restrictive laws are significantly increasing residential real estate's price, aren't they also significantly increasing commercial real estate's price? And if commercial real estate supply is lacking (aside from giant office skyscrapers), doesn't this mean that businesses throughout the US are paying more for real estate and factoring this into higher prices for goods & services?
Furthermore – and I'm less certain about this part – if the supply of smaller-scale commercial real estate is restricted, this sounds like something like would favor large incumbent companies and disadvantage smaller companies, with a result of reduced competition across the entire economy.
If either of these are the case, this sounds like an issue of even greater significance than its already-massive significance. But again, I don't know what an expert would say about this and I don't know what relevant data would suggest.
Two thoughts -
Larger greenfield developers working inside zoned areas are frequently required to upgrade roads, bridges, and other infrastructure affected by their development. This adds to the development costs and follow through prices, directly.
Second, more expensive, more highly regulated/zoned areas tend to have higher costs of living and higher taxes, pushing up the local price of materials and labor.
The existence of large home builders doesn’t disprove land use as a barrier to productivity.
Large home builders face productivity drag by paying acquisition teams and purchasing entitlement land from external developers. The more onerous and irregular the land use across their regions the higher the acquisition cost.
If automakers had seek ongoing permission in 100s of different local auto codes their efficiency would be worse.
What is holding us back isn't regulation but Freemasons secrecy and sheer greed for profits.
Can there be any greater achievements for Humanity than to achieve faster than light travel with absolute Zero Emissions?
No!
I achieved that... theoretically for now... but I did it anyway.
https://fritzfreud.substack.com/p/around-the-world-in-4-hours
If we can solve this... the rest is a doddle.
What is the problem?
Freemasons secrecy and sheer greed for profits.
You sound sane.
And you sound like an Arsehole.
I hope you manage to find your way back to reality someday.
Go and Fuck your Mother... that is your reality!!!
Excellent analysis! I'm sure you have a writeup previously on Katerra and their ability to panelize and save on costs with their model (that obviously failed) - is anything of a similar nature feasible in SFR construction? Multi I'm guessing yes, single seems harder.
Apologies if off topic but just got done binge reading your backlog. Saw one mention on monolithic domes but nothing on post-frame construction. Lots of 1 and 2-man teams building 2 story buildings with it. Seems like the best for extreme DIY.
My first thought on this was that your article on Levittown showed only limited benefits of mass production in home building. It's not like construction is all that more productive in places like Texas with laxer regulations.
Another thought is that modern homes have more stuff in them. In the 1800s, a home might have fir had wood stoves for heating and a pump in the sink. By the 1920s, central heating became more common along with hot and cold running water. In the 1960s, we started seeing more air conditioning often as a separate system in addition to a heating system. The energy crunch in the 1970s led to better insulation and more sophisticated windows. Newer homes also have more wall outlets and can handle more amperage. Modern homes are not just bigger, but they have more systems and features.