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Housing’s Supply-Side Revolution

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IndieDwell converts shipping containers into affordable housing. The Idaho-based business has taken an idea championed locally by entrepreneurs Sheila and Sidney Gunst (see “Thinking Outside the Container“) and turned it into a growing business enterprise.

The company now sells 640-square-foot dwellings, including the cost of delivery and installation, for $78,000. Add $11,500 to build a foundation (IndieDwell’s estimate), plus utility hookups if applicable, plus, say, $10,000 for a tiny lot, and it should be possible to create a new unit of affordable housing in Virginia for less than $100,000 — roughly half the price of what it costs public housing authorities in Virginia today.

IndieDwell was just one of the businesses presenting fresh perspectives on affordable housing at a Virginia Housing and Development Authority (VDHA) event on May 22 organized to exploring new approaches to affordable housing. Other speakers addressed the phenomenal productivity gains in the manufactured housing industry and explored new concepts in modular housing. It was evident that a supply-side revolution in the housing industry is gathering momentum that holds out the potential to slash the construction cost of workforce and lower-income housing.

Traditional housing policy in Virginia, as in the rest of the United States, has focused on government-driven solutions. Government either builds public housing projects itself or subsidizes private developers to do so. What little innovation that occurs has focused on mobilizing resources from government, credit markets, or the nonprofit sector to bring down the cost. But compared to more dynamic sectors of the economy, the housing industry has seen few productivity gains. For the most part, housing is built the same way it was after World War II — on-site. Innovation has focused almost entirely on the introduction of new designs, appliances and features — not on the cost of construction. The biggest breakthrough in stick-built construction arguably was the invention of the nail gun!

Deb Sheehan, executive director of the Chicago-based CannonDesign firm, told the audience that the housing industry has seen less than a 5% gain in productivity over the past 20 years. The industry, which she variously described as archaic, outdated, low-tech and wasteful, is “grounded in old paradigms of delivery.” But the potential exists, she added, to embrace neural network thinking, Artifical Intelligence and big data to integrate project delivery, drive down costs and get product to market faster.

Standardization is another route for squeezing out costs, suggested Ted Benson, CEO of New Hampshire-based Bensonwood Homes, a manufactured housing company. Benson made an analogy between the bicycle industry and the housing industry. The bicycle industry has agreed upon certain standards for how the key elements of a bicycle — frame, wheels, pedals, gears, handlebars, etc. — should interconnect. That standardization allows bicycle makers to manufacture bicycles incredibly inexpensively or to create near-infinite customization at higher prices. While specific parts of the housing industry are standardized — interior doors, kitchen cabinets, plumbing fixtures, electric fixtures, appliances — the structure of the house is not. Benson argued that standardizing elements such as wall panels, floor panels, stair systems, roof panels, and decks could drive tremendous gains in productivity and cost.

Building housing in modular units is another productivity- and cost-enhancing strategy. Brian Gaudio, CEO of Pittsburgh-based Module, outlined his company’s vision for transforming how houses are designed and built in the U.S. The last disruptive innovation in housing, he said, was the invention of the autocentric suburban subdivision in Levittown right after World War II. Since then, consumer preferences have changed, the Internet has created a channel to connect consumers and home builders and bypass the middleman, and skilled labor shortages have created a housing construction bottleneck. Module’s model for a 21st century home builder contains three elements:

  • Design dwellings that can be constructed in modules and easily added onto as a family’s needs and income changes.
  • Create an online platform where customers can customize elements of their own modular house.
  • Outsource as much construction as possible to off-site manufactured housing companies. Much construction work can be performed in-factory at lower cost and with better quality control than on-site. Panels and modules can be delivered to the building site for finishing work.

Gaudio’s vision is for new families to build small starter homes that can readily accommodate new modules as new family members — whether children, elderly parents, or other — are added. The idea, he said, is to “grow into” a house rather than “move up and out.”

Module’s business model right now is geared to infill development — building on vacant urban lots. (Pittsburgh has 27,000 of them.) In time, he said, the company could expand into other market niches.

Bacon’s bottom line: The VDHA event also addressed innovations in housing finance, digital mortgages, and manufactured housing. Unfortunately, unable to attend the afternoon sessions, I missed much that is undoubtedly worthy of sharing with readers. But the big-picture takeaway is that Virginia policy makers should, in the words of VDHA director Susan Dewey, make an effort to identify new ideas. VHDA has formed an “emergent thinking group” to do precisely that.

As more than one speaker observed, the definition of insanity is doing the same thing over and over and expecting a different result. Well, Virginia has approached affordable housing the same way for decades now with the same dismal result — housing consumes an ever-increasing share of household income. Dwellings that lower-income households can afford are in desperately short supply. Evictions and homelessness are an increasing problem. The VHDA conference represents a huge step toward addressing these problems at the source — the cost of building a home.

Just one word of caution: There is a wide and increasing gap between the cost of fabricating new houses and the market price of housing. Because of the endemic shortage of new places to build, developers and and home-builders, not low-income households, are capturing the delta between cost and market price. Until Virginia localities adopt land use policies and build supporting infrastructure (primarily transportation) that allow the housing supply to increase, supply and demand will remain out of whack and costs will remain unaffordable.

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