Using Economies of Scale to Produce Starter Homes

Too little entry-level housing is being produced in most markets across the country.

In many places, homeownership is all but out of reach for many working-class and even middle-income families. Large-lot zoning and other regulatory barriers, increases in land and construction costs that are outpacing inflation, and rising interest rates all create barriers to building starter homes. From 2019 to 2021 alone, the price of existing single-family homes rose 30%.

Many places around the country face the additional challenge of not being well-served by production builders, who rely on economies of scale to produce lower-cost homes. It is often difficult in these areas, which include rural communities and small towns and cities, to generate the economies of scale needed to produce entry-level homes. As a result, moderate-income households often lack quality housing options that fit their budget and needs.

Over the past several months, in partnership with BPC’s J. Ronald Terwilliger Center for Housing Policy, Abt Associates has worked to develop a concept for addressing the challenge of producing entry-level single-family homes in these markets.

The basic concept is to use off-site construction techniques, such as modular or panelized construction, to generate the economies of scale needed to produce lower-cost entry-level homes. The finished homes look (and indeed are) very similar to stick-built homes—they have just been developed in panels or modules in a factory before being assembled on the site. These homes cost more than manufactured housing but less than traditional stick-built housing, filling an important missing niche in the housing market.

The concept is designed to meet the housing needs of moderate-income households that are not currently being well-served by the private market. Although modular construction could also be useful for reducing the costs of producing subsidized affordable housing, this paper focuses on the use of public-private partnerships that harness modular housing technology to create affordable, unsubsidized homes.

This paper describes the proposed concept and outlines how state governments, philanthropic leaders, and others could work together to capitalize on off-site construction techniques to lower housing costs while generating steady well-paying jobs, reducing the carbon footprint of the homes produced, and increasing local resilience to climate-related disasters. It was developed based on a literature review and interviews with experts and stakeholders (listed in Appendix A). The concept was revised based on input solicited at a roundtable hosted by BPC.

The paper is divided into two sections. Part 1 describes challenges to housing production, particularly in rural communities and small cities and towns, identifies the market failures or challenges to be addressed through our concept, and discusses the potential for off-site construction to help solve these market failures and increase the supply of entry-level single-family housing. Part 2 proposes several approaches to piloting the use of off-site construction techniques as a solution. It lays out proposed tasks and a timetable for implementing a pilot project, involving a cross-section of stakeholders willing to take up the challenge presented.