Technology, Trade, and the U.S. Residential Construction Industry

September 1986

NTIS order #PB87-117594 Recommended Citation: U.S. Congress, Office of Technology Assessment, Technology, Trade, and the U.S. Residential Construction industry-Special Report, OTA-TET-315 (Washington, DC: U.S. Government Print- ing Office, September 1986).

Library of Congress Catalog Card Number 86-600575

For sale by the Superintendent of Documents U.S. Government Printing Office, Washington, DC 20402 Foreword

New technologies, and the expansion of international trade, have created a new framework for the U.S. economy. Within this broad setting, America’s residential construction industry is changing as well. Technology has affected both building techniques and the nature of the home itself. Specifically, factory-based production allows for greater use of advanced automation, and a wide range of technologies that improve comfort while reducing energy costs are now available. Recently, many U.S. home producers have become vulnerable to foreign competition, as factory-based construction techniques have improved rapidly in several other countries. The combination of an antiquated regulatory system and a lack of industry incentives for research has impeded America’s ability to upgrade housing quality, and to hold its own against aggressive and sophisticated overseas builders. This special report is part of a larger OTA project that analyzes the effects of technological change on the structure of the domestic economy, on international trade, and on options for public policy. Home construction’s importance to the study stems from the fact that although housing accounts for over 27 percent of personal spending, ownership of attractive residences remains beyond the reach of many American families. The quality and cost of the factory-built home, and the number of jobs generated by the industry, will be strongly influenced by whether the United States takes full advantage of developing technology. The House Banking Committee requested that OTA expand its analysis to include regulatory alternatives that might encourage the research and development of new technologies. Pressures to revise currently decentralized and fragmented U.S. housing policies have risen over the last several years. Coordination of State and local building codes, and Federal standards established by the Department of Housing and Urban Development, will change along with the changing structure of the industry. We trust that this special report will help Con- gress to recognize how existing statutes may operate in a new environment, and to update these guidelines if necessary.

Director — —

List of Reviewers

H.E. Blomgren Richard Hibbert President Technical Advisor, Code 08B National Manufactured Housing Federation Naval Facilities and Engineering Command Washington, DC Alexandria, VA Don O. Carlson Richard P. Kuchnicki Editor & Publisher President Automation in Housing and Manufactured Home Council of American Building Officials Dealer Falls Church, VA Carpinteria, CA James C. Nistler David Claridge Deputy Assistant for Single Family Housing Professor U.S. Department of Housing and Urban University of Colorado Development Boulder, CO Washington, DC Henry E. Collins Joseph F. O’Neill Vice President, Governmental Affairs Executive Director Underwriters Laboratories, Inc. American Council of Independent Laboratories, Northbrook, IL Inc. Washington, DC Eric Dluhosch Associate Professor Henry B. Schechter Massachusetts Institute of Technology Director, Office of Housing and Monetary Policy Cambridge, MA American Federation of Labor and Congress of Industrial Organizations Charles G. Field Washington, DC Staff Vice President, Construction and Development—Regulatory Counsel James W. Tucker National Association of Home Builders President and Chief Executive Officer Washington, DC ETL Testing Laboratories, Inc. Cortland, NY Earl Flanagan Chairman, Technology Management Board Frank Walter Washington, DC Vice President, Technical Activities Manufactured Housing Institute Danny D. Ghorbani Arlington, VA President Association for Regulatory Reform Robert C. Wible Washington, DC Executive Director National Conference of States on Building Codes Robert E. Heggestad and Standards, Inc. Casey, Scott & Cansfield, P.C. Herndon, VA Attorneys at Law Washington, DC

NOTE: OTA appreciates and is grateful for the valuable assistance and thoughtful critiques provided by the reviewers. The reviewers do not, however, necessarily approve, disapprove, or endorse this report. OTA assumes full responsibility for the report and the accuracy of its contents. iv Technology, Trade, and the U.S. Residential Construction Industry OTA Project Staff

Lionel S. Johns, Assistant Director, OTA Energy, Materials, and International Securities Division

Henry Kelly, Project Director, Technology and the American Economic Transition

Daniel Chenok, Research Assistant

Robert Gold, Senior Analyst*

Janet Lowenthal, Contractor

Administrative Staff Linda Long

Phyllis Brumfield

Contributors Vincent Brannigan

David Dowall

Edward Starostovic Steven Winter

*No longer at OTA Workshop on Uniform National System of Building Codes and Inspections for Manufactured Housing and Related Nonresidential Buildings, Apr. 9, 1985 Participants Stanley Warshaw Director, Office of Product Standards Policy Henry E. Collins National Bureau of Standards Vice President, Governmental Affairs Gaithersburg, MD Underwriters Laboratories, Inc. Northbrook, IL Robert C. Wible Executive Director William M. Connolly National Conference of States on Building Codes and President Standards, Inc. National Conference of States Herndon, VA Trenton, NJ Charles G. Field Observers Staff Vice President, Construction and T.R. Arnold Development–Regulatory Counsel President National Association of Home Builders T.R. Arnold & Associates, Inc. Washington, DC Elkhart, IN Ray J. Gans H.E. Blomgren Chairman, Technical Activities Committee President Member, Executive Committee National Manufactured Housing Federation Manufactured Housing Institute Washington, DC Syracuse, IN Vincent M. Brannigan David A. Harris Department of Textiles and Consumer Economic Vice President for Technology University of Maryland National Institute of Building Sciences Adelphi, MD Washington, DC Howard P. Gates, Jr. Rick A. Howell Consultant Director, Building Codes and Regulatory Services Lake of the Woods State of South Carolina Locust Grove, VA Columbia, SC James McCollom Gerald H. Jones Director Former President Manufactured Housing and Construction Standards Council of American Building Officials Division Kansas City, MO Washington, DC Richard P. Kuchnicki Ed Starostovic President President Council of American Building Officials PFS Corp. Falls Church, VA Madison, WI James Mitchell Steven Winter President President Mitchell Brothers Contractors Steven Winter Associates, Inc. Birmingham, AL New York, NY Frank Walter Vice President, Technical Activities Manufactured Housing Institute Arlington, VA

NOTE: OTA appreciates and is grateful for the valuable assistance and thoughtful critiques provided by the workshop participants. The workshop participants do not, however, necessarily approve, disapprove, or endorse this report. OTA assumes full responsibility for the report and the accuracy of its contents.

vi Contents

Chapter Page 1. Technology, Trade, and the Future of the U.S. Housing Construction Industry ...... 3 The Impact of Factory Construction...... 4 Barriers to the Adoption of New Housing Technology in the United States : : : : : : : : . . 4 International Competition ...... 5 Policy Alternatives ...... 6 Improving the Fragmented System of Housing Regulation and Its Enforcement in the United States ...... 6 Revising the Current Process of Inspection for “Manufactured” (Mobile) Homes . . . . 7 Labeling Building Quality ...... 7 Increasing Government Support of Research in Building Technology ...... 8 Reducing Excessive Changes in Housing Demand ...... 8

2. The Development of the U.S. Housing Construction Industry...... 11 The Various Kinds of Factory-Produced Homes ...... 13 “Manufactured” (Mobile) Homes ...... 13 Modular Homes ...... 16 Panelized Homes ...... 18 Precut Systems ...... 18 Component Systems...... 18 Industry Segments ...... 20 Production Builders ...... 20 Builder/Dealers ...... 21 Small Builders ...... 21 U.S. Home: A Case History ...... 21 Trends in Industrialized Housing ...... 23 The Early Years ...... 23 Operation Breakthrough ...... 24 After Operation Breakthrough ...... 25 The Future ...... 26 Market Concentration ...... 27 Implications for Small Builders ...... 27 “Manufactured” (Mobile) Homes ...... 27

3. Consequences of the Shift to Industrialized Housing ...... 31 Employment Impacts ...... 31 Productivity ...... 31 Employment Levels ...... 32 Skill Levels and Unionization ...... 33 Wage Levels ...... 35 Potential To Upgrade Job Quality ...... 35 Housing Costs ...... , ...... 35 Housing Quality ...... ,. 38

4. Industrialized Housing in Japan, Western Europe, and Canada...... 43 Japan ...... 44 Sweden ...... 45 Finland ...... 46 Denmark ...... 47 Canada ...... 47 Contents—continued

Chapter Page Great Britain ...... 47 France ...... 48 Norway ...... 48 West Germany ...... 48 Others ...... 48

5. International Competition in Industrialized Buildings, Components, and Appliances ...... 51 Trade Factors Affecting Exports to the United States ...... 52 Currency Exchange Rates ...... 52 Availability of New Markets ...... 52 Idle Plant Capacity and the Decline in Existing Markets ...... 52 Experience in International Trade ...... 52 Foreign Government Policies Affecting International Trade in Housing ...... 53 Overall Strategies and Planning ...... 53 Market information and Trade Representation ...... 53 Financial Assistance ...... 53 impediments to Market Penetration ...... 54 Changes in the International Market ...... 54 Lack of Understanding of American Markets ...... 54 Lack of Knowledge of Optimal Business Relationships ...... 54 Difficulties in Locating Interested U.S. Firms ...... 54 Materials Acceptance Problems ...... 55 Problems of Materials Testing and Acceptability of Foreign Standards ...... 55 Building Codes and Inspection Systems ...... 55 Trade Restrictions ...... 55 Lack of Understanding of Real Estate Markets ...... 55 Liability ...... 56 Shipping Costs ...... 56 import Possibilities for Various Building System Types...... 56 Precut Systems ...... 56 Panelized Systems ...... 56 Concrete Panels ...... 56 Steel-Framed Panels ...... 57 Wood-Framed Panels...... 57 Spandrel Panels ...... 57 European Penetration of U.S. Panelized Systems Markets ...... 58 Wet Core Modules/Control Centers ...... 58 Modular Systems ...... 59 “Manufactured’’( Mobile) Home Systems ...... 60 Manufacturing Equipment...... 60 Foreign Investment and Development ...... 60 Joint Ventures With U.S. Firms ...... 60 Mergers and Acquisitions ...... 61 Foreign Development and Construction ...... 61 Appliances ...... 61 Materials, Components, and Equipment ...... 63 Impediments to U.S. Penetration of Overseas Housing Markets ...... 63 Increased Competition...... 64 Lack of Understanding of Foreign Markets ...... 64 . . . Vlll Contents—continued

Materials Acceptance Problems...... 64 Building Codes and Inspection Systems ...... 64 Trade Restrictions ...... 64 Lack of Experience in International Trade ...... 65 International Volatility ...... 65 Corruption ...... 65 Distance ...... 65 Lack of U.S. Government Support ...... 65 Incentives and Opportunities for U.S. Penetration of Overseas Markets ...... 65 Exportation of Materials...... 65 Marketing Strategies ...... 66 Possible New Incentives for Trade by the U.S. Government ...... 66

6. Government’s Role in Facilitating New Technology ...... 69 Factors Impeding Innovation ...... 69 The Regulatory Environment ...... 69 Inadequate Study of Total Building Systems and Information Dissemination ...... 70 Fluctuations in the Building Cycle ...... 70 Housing Regulation ...... 70 The Current Regulatory Framework ...... 70 The HUD Code System ...... 71 Criteria for a New Regulatory System ...... 75 Alternative Regulatory Systems ...... 76 Fostering Technological Innovation ...... 85 Stabilizing the Building Cycle ...... 87

Appendix. Contributions ...... 91

Tables Table No. Page 1. Factory Construction as a Percent of All Residential Construction in the United States ...... 12 2. Comparison of Mobile Home Shipments and Sales of Single-Family Site-Built Homes for Under $50,000, 1977-83 ...... 15 3. Top 25 Homebuilders by Units Produced, 1983 ...... 26 4. The Nation’s Top Producers of Mobile Homes ...... 28 5. Percentage of Work Force in Various Skill Categories ...... 34 6. Approximate Cost Breakdown for New Single-Family Homes ...... 36 7. Construction Time Comparison ...... 36 8. Cost and Size Comparisons of "Manufactured” (Mobile) Homes and Site-Built Homes Sold ...... 37 9 Percent of ’’Manufactured” (Mobile) and Site-Built Homes With Various Problems . . . . 38 10 Comparison of the Top Five Factory Housing Companies in Japan, 1983 ...... 44 11 Factory Home Construction in Japan (as a percent of all home construction) ...... 45 12 Factory Construction of Single-Family Homes in Sweden (as a percent of all single-family home construction) ...... 45 13 Compliance With Acceptable Quality List ...... 74 Contents—continued

Figures Figure No. Page 1. Exploded View of a “Manufactured” (Mobile) Home Resting on a Chassis ...... 14 2. Home Ownership by Income Cohort for 1983 ...... 16 3. Double-Wide Modular Home ...... 17 4. Diversification Trends of Component Manufacturers ...... 19 5. Component Framing Assemblies ...... 20 6. A Model of the Industry ...... 22 7. Residential Building Contractors ...... 33 8. Total Number of Employees in the Mobile Home industry (SIC 2451) and the Prefabricated Wood Buildings Industry (SIC 2452)...... 33 9. Production Workers as a Percent of Total Employment in the Mobile Home Industry (SIC 2451) and the Prefabricated Wood Buildings Industry (SIC 2452) ...... 33 10. Average Hourly Earnings of Employees by Industry Sector ...... 35 Chapter 1 Technology, Trade, and the Future of the U.S. Housing Construction Industry Chapter 1 Technology, Trade, and the Future of the U.S. Housing Construction Industry

While technical change in the U.S. construction have a significant effect on the housing that reaches industry has proceeded more slowly than forecasters the American public. At present, however, housing once predicted, the past two decades have witnessed policy in the United States is fragmented and lacks significant progress in the technology of the house central coordination. It does not respond to the itself, and in that of the appliances installed. These changing needs of the housing construction industry. improvements have made structures easier and less expensive to build, and reduce energy and other Technical change in the U.S. housing industry has operating costs. New equipment and housing designs not taken the form of a revolutionary shift from craft- can make interior spaces more comfortable, can per- based field erection techniques to factory-based pro- mit greater control over the quality of indoor air, and duction. Change has instead followed a complex and can offer a variety of other amenities. New informa- diverse course that is virtually impossible to docu- tion technologies can integrate the network of di- ment with precision. Most new homes built in the verse firms involved in construction. Such innova- United States today use prehung windows and doors, tions can make it easier for prospective homeowners and factory-made roof trusses or floor joists Wall to find housing commensurate with their individual panels and large three-dimensional modules are tastes, and may even allow them to participate in shipped to construction sites and assembled rapidly. Traditional “manufactured” (mobile) homes are con- the design of the house to be purchased. structed in factories that operate with improved pro- Has the U.S. housing industry taken adequate duction equipment. While statistics are confusing and advantage of technologies that have improved qual- often contradictory, it appears 10 to 35 percent of ity and reduced costs in other industries? Might a all new single-family homes built in the United States shift to modern production technology reshape the were constructed in factories—25 to 50 percent, if domestic housing industry, change economies of “manufactured” (mobile) homes are included. In scale and scope for individual businesses, and af- many cases, however, the “factory” construction fect the number and nature of the jobs offered by techniques used in the United States do not take the industry? If the industry comes to resemble other advantage of the mass-production devices employed U.S. manufacturing industries, the potential for in- in the manufacture of products ranging from toasters ternational trade in construction increases; how will to automobiles. These housing factories typically em- the domestic industry fare against competition from ploy semiskilled workers in facilities where capital sophisticated foreign producers of housing compo- investments per worker fall below the standards of nents and production equipment? other production industries. This report explores these questions in order to A number of foreign firms have moved aggres- determine whether changes in public policy maybe sively into the business of producing housing com- needed to keep pace with technical change, particu- ponents. Imported homes and joint ventures with larly for smaller residential units. As home build- foreign housing producers already exist in Texas, ing comes to resemble other manufacturing indus- Florida, Massachusetts, Maine, New York, Rhode Is- tries, and as it grows from a local enterprise to one land, Michigan, Minnesota, and Wisconsin. The with regional, national, and international concerns, Scandinavian nations and Japan lead in this area. it is necessary to consider whether policies regulat- while most foreign techniques do exist in the United ing home production should be commensurate with States, many of these foreign producers have more regulations that guide other types of factory produc- experience in the use of modern production equip- tion. Programs to subsidize home purchases, to con- ment for housing. Several foreign firms are large and duct technical research, to establish fire and safety efficient by U.S. standards. Some are parts of man- regulations and government procurement, and more, ufacturing concerns with access to elaborate research

3 ——

facilities and huge engineering staffs, and with ex- soon penetrate U.S. markets with housing compo- perience in production engineering. In particular, nents, and may license technology to domestic pro- Japanese and Swedish firms benefit from both highly ducers, Foreign firms have already penetrated do- automated factories and substantial government- mestic markets for kitchen equipment, especially sponsored research programs. Swedish, Finnish, Brit- appliances. Japanese air-conditioners and refriger- ish, Norwegian, and other foreign firms also have ators, and components of these appliances, have extensive experience in exporting their products to moved rapidly into domestic markets, while U.S. ex- the Middle East and elsewhere. These firms may ports of appliances have stagnated.

THE IMPACT OF FACTORY CONSTRUCTION

Factory-based home construction technologies ● The overall labor productivity of construction could affect both housing production techniques and could be increased, thereby reducing net labor the nature of the homes produced. Specifically: requirements. ● The skill levels of workers could be upgraded ● Improvements could be made in both uniform in order to operate complex production equip- quality standards and energy efficiency for homes. Written guarantees of quality can be pro- ment. On the other hand, skill requirements vided more easily. might also be reduced if firms opt to design production around minimum wage workers. ● Computer-assisted design methods could give prospective purchasers greater control over the Changes in the construction industry are extremely products they buy, and a greater ability to un- difficult to document because of the way that statis- derstand the relationship between added ameni- tics are maintained. For example, some data on ties and added costs. factory construction of housing components are com- ● Overall construction times could be reduced. bined with information on several other manufac- Factory-made components place a finished turing industries, under the general area of “fabri- house on a foundation in 1 to 10 days. Among cated wood products.” While anecdotal evidence other things, this savings in construction time supports statements about changes in such areas as might reduce seasonal variations in construc- skill levels in construction and the quality of differ- tion rates. ent types of construction methods, reliable statistics ● The role of large firms could be increased. are almost nonexistent. Smaller firms can serve as independent site- assemblers of manufactured products, or as fran- chised agents of major producers.

BARRIERS TO THE ADOPTION OF NEW HOUSING TECHNOLOGY IN THE UNITED STATES U.S. firms have been slow to adopt innovations flexibility by laying off workers during slack in the production of housing for a variety of reasons: periods. ● The regulation of housing in the United States . Wide swings in the demand for housing, result- developed in an environment where most ing from the business cycle, changes in mort- builders were small firms operating in local mar- gage rates, and seasonal variations in home con- kets. Housing regulation remains a State and struction rates, make it difficult to justify large local prerogative. Thousands of local code var- capital investments. It is far easier to maintain iations make it difficult for a single firm to oper- —

ate in a market large enough to justify “econ- struction techniques. But competition with con- omy of scale” production facilities. Interestingly, ventional construction techniques has proven similar fragmentation in the appliance indus- difficult in regions where conventional costs try has led manufacturers to support strict Fed- have remained low because employees will eral preemptive standards, which would negate work for modest wages, with little job security. the effects of conflicting State and local codes Also, the U.S. housing market has not put a and would facilitate industry expansion. premium on the quality that can be offered by The industry is so fragmented and diverse that factory construction. little research is conducted to improve the tech- ● Housing markets in the United States have tradi- nology of either the structures produced or the tionally associated factory production with low- manufacturing process. Government support of cost, low-quality, “prefab” units. In Sweden and construction-related research is virtually non- Japan, however, factory construction has been existent. marketed successfully because of its association The economic advantages of factory construc- with high reliability and high quality, as well tion have not been clearly documented in the as with advanced production techniques. United States, although a number of anecdotes ● Most homebuilders in the United States are too suggest that significant savings in labor and ma- small to make the capital and engineering in- terials may be attained through improving con- vestments necessary to automate production.

INTERNATIONAL COMPETITION Foreign penetration of the U.S. housing and man- domestic markets for appliances more similar ufactured building industries is most likely occur in to those of the United States. At present many the following areas: imported appliances have qualitative advantages over competing U.S. products, particularly ● Panelized Building Systems.—Some foreign in the area of energy efficiency. companies, especially the Scandinavians, will The impact of these developments is already find profitable market niches, particularly in the being felt. Many appliances produced in the Northeast and in areas of the country where United States now contain high-value compo- high-quality material finishes, competitive nents, such as compressors, that are manufac- prices, high insulation levels, and the “Nordic” tured abroad. General Electric, the largest do- mystique will prove salable. Substantial over- mestic producer of room air-conditioners, has all market penetration in the next few years is announced that it will phase out operations at improbable. However, foreign technological its main Louisville factory, and Carrier has developments—especially in Japan and Sweden drastically curtailed production in New York. —should be monitored closely, as should Amer- ● Wet Cores.—While foreign wet core modules ican market attitudes and trends. that combine plumbing, wiring, bathroom and ● Appliances. —While the United States has en- kitchen fixtures, appliances, cabinets, electronic joyed a favorable trade balance in residential space conditioning, and communications con- appliances for many years, the terms of trade trols have not yet made a significant appearance may be reversing. In fact, between 1979 and here, they would be cost-effective products for 1984, U.S. real dollar exports of household ap- many foreign manufacturers. Custom cabine- pliances declined by approximately 30 percent, try, bathroom fixtures, and electronic gadgetry while real dollar imports increased by over 67 are some of the housing components that have percent. The Japanese are beginning to sell already proven attractive to U.S. homeowners. products ranging from room air-conditioners to It may make economic sense for foreign man- refrigerators to high-efficiency light bulbs. Com- ufacturers to combine these elements into petition is likely to increase as living standards “smart” modules with exotic designs and in Europe and Japan change in ways that make finishes. 6

● Materials, Components, and Equipment.—For- national construction industry has decreased in size eign building-related products, including win- over the past several years. Even within this re- dows, kitchen cabinets, mechanical equipment, stricted market, the relative share of U.S. firms has roof and floor tile finishes, and accessories, will fallen. Factors affecting this trend include: gain an increasing share of the U.S. market. Al- ● increased competition from foreign contractors, though it is not within the scope of this report ● to provide research in this particular area, the lack of knowledge and experience in international trade, potential impact on U.S. markets of foreign man- ● ufacturers may be significant. Several U.S. man- problems concerning building materials and ufacturers assert that little organized or indus- building codes, ● trade restrictions, trywide research has been conducted in this ● area. volatile political conditions in many foreign countries, ● Investors/Developers. –A significant amount of ● corruption of foreign officials, foreign money has come into the United States ● for real estate development, most recently for distance from the United States to potential markets, and the purchase of U.S. construction and design ● firms by foreign companies. In fact, heavy for- lack of U.S. Government support for trade ini- eign investment has contributed significantly to tiatives. the growth of the U.S. economy, despite the Raw materials, such as wood and lumber, repre- enormous balance of payments deficit. This sent the only significant building-related export op- trend will continue. portunity on the horizon for the United States. The In some cases the purchase of a U.S. company has only possibility for exporting U.S. manufactured facilitated the entry of foreign companies into Amer- buildings would be through assembling packages ican markets by providing valuable insight into busi- that combined buildings with project financing. ness trends. This purchase also allows the U.S. firm— Given appropriate investment in production and and as a result, the foreign owner—to compete for product design, U.S. firms could regain export mar- U.S. Government projects nominally set aside for kets for advanced appliances, controls, and other American companies. electronic equipment. Currently, few opportunities exist for U.S. firms to compete in overseas markets; the overall inter-

POLICY ALTERNATIVES This document examines several possible reme- while there had been significant improvement dies for the problems of the U.S. housing construc- over the years in administering and enforcing build- tion industry. ing codes, there were still disparities from one jurisdiction to the next in the way in which model building codes were adopted, interpreted, amended and Improving the Fragmented System enforced, which tends to defeat the primary pur- of Housing Regulation and Its pose of creating uniform model building codes in Enforcement in the United States the first place . . . the lack of reciprocity among regulatory jurisdictions and even the poor coordina- At a recent conference hosted by the National tion among enforcement authorities within the Association of Home Builders, the major U.S. same jurisdiction created unnecessary and costly codemaking organizational concluded that: delays in construction and thwarted the timely acceptance of new, cost-saving technologies.2 IThe National Conference of States on Building Codes and Standards, the Council of American Building Officials, the Building Officials and Code Administrators International and the lnte~national Conference of Building Officials, and the Southern Building Code Congress interna- Zcouncil of American Building Officials, News Release, March 1986, tional. Falls Church, VA. 7

Furthermore, some housing producers have com- more comprehensible, and thereby more attractive, plained about discrepancies between State transpor- to both foreign and domestic companies. However, tation codes concerning truck loads, which dis- a “least common denominator” code could result, courage industry expansion. which may reduce the quality of housing regulation, Regulation can be made more uniform in several or may create incentives to “build down” to mini- ways. First, the Federal Government could play a mum standards. more active role. This might be done through a modification or expansion of the existing national Revising the Current Process of HUD code system for regulating the production of Inspection for “Manufactured” “manufactured” (mobile) homes,3 although this sys- (Mobile) Homes tem should be examined carefully before it is applied to other categories of housing. Second, a new Serious questions have been raised about the ade- system of uniform national standards could be de- quacy of the HUD inspection system even in its vised, which could be either mandatory or con- present form. A recent HUD-sponsored survey of structed so that States would voluntarily elect to enter “manufactured” (mobile) homes covered by HUD the Federal framework. Third, a series of State com- regulations found: pacts and reciprocal agreements could be estab- ... an average of approximately 6.5 reported and/ lished, and encouraged by the Federal Government. or observed problems per house which were iden- Fourth, private systems could be implemented. tified in 78 or 96 percent of the houses inspected . . . Sixty-five (65) or approximately 80 percent of The meeting of home builders and code officials the houses had additional problems which were ob- cited above endorsed a plan that would be admin- served by the field inspectors and had not been, istered by the States. A single code would be adopted in most cases, reported in the earlier [telephone] by each State, and a uniform program of enforce- survey . . . The number of problems reported in the ment would be developed. ‘(The code would be man- survey raised questions regarding the integrity and datory for all factory produced housing and all site- quality of the houses which were produced during built housing constructed in jurisdictions currently the 1977-1981 time period covered by this sample. using building codes. "4 A key element would be The concern raised is validated by the number of affected houses and the number of problems ob- reciprocity, in which each State would accept the in- ; spections of housing components conducted by other served by the field inspectors. States. The report concluded that “HUD should consider Other options for action by regional groups or by revising the Federal Standards to address long term the Federal Government include: developing systems requirements for material performance . . . [Inspec- in which third-party inspectors, such as Underwriters tors] should increase the attention given to workmanship on the production line, and increase their Laboratories, could undertake a larger share of the 6 burden of inspection; providing support or guidance observations of in-plant testing.” If a national strat- in training local inspectors and regulatory officials; egy is developed to improve regulation and enforce- providing assistance in the creation of new stand- ment systems for factory-built housing, it may be nec- ards; and developing testing equipment to monitor essary to integrate regulation of “manufactured” these standards. (mobile) homes into the new system. Any action that reduces the fragmentation of U.S. Labeling Building Quality housing markets is likely to benefit large American construction firms, and may make domestic markets Labels that provide specialized information about the housing construction industry to potential buyers, 3The Housing and Community’ Development Act of 1980 (Public Law bankers, and insurance firms can lead to technical 96-399) required that the term “mobile home” used in the statute estatj- lishing HUD’s current mobile home inspection s~stem be changed to “manufactured “ This congressional intervention in semantics 15 ad- ‘Resources Applications, Designs & Controls, lnc (RADCO), “Final mittedly confusing See ch. 2 for a discussion of the nomenclature used Report for Durability’ in Manufactured Homes,” HUD Contract H-1 [)992, to de~cribe factory-built homes Dec. 27, 1985, p. 77 4CAB0, Op c]t , 1986 blb]d., p. 4. 8 improvements without mandating proscriptive reg- Several methods may accelerate technical progress ulation in areas not essential to health and safety. in housing. Research alone will not automatically Labels might indicate that structures or components lead to a more productive, competitive industry, but meet a fixed threshold of performance, much like it is an important ingredient for success. The National the home energy rating systems now in place in a Conference of States on Building Codes and Stand- number of States and cities, or like the Japanese “Bet- ards (NCSBCS) notes that: ter Living” label that qualifies building components Progress cannot be made in the use of new safe for group insurance. Energy efficiency labels could technologies in the building field without adequate help purchasers make choices about houses in much funding of generic research, such as that done by the same way that miles-per-gallon stickers on auto- the National Bureau of Standards.7 mobiles or energy efficiency labels on refrigerators assist consumer decisions. Reducing Excessive Changes in Housing Demand Increasing Government Support of Research in Building Technology Several techniques have been proposed for providing a “countercyclical” stimulus to the industry Despite the importance of research to the national through counter-cyclical incentives and other meth- economy, and its role as a major employer, neither ods. These include temporary interest reduction for the U.S. housing industry nor the U.S. Government housing loans and permanent interest reduction for have supported major research efforts to improve loans to low-income families; tax credits for buyers housing products or to upgrade the methods by of new or renovated homes, and for mortgage firms which houses are built. While many component that encourage housing development; and buyer sub- manufacturers have conducted significant studies, sidies via tax-exempt mortgage revenue bonds. there is little support for an examination of how the house operates as an integrated unit to enhance hu- While this issue will be addressed, a comprehen- man comfort. Misawa Homes of Japan spent 1.5 per- sive examination of counter-cyclical alternatives is cent of its 1984 sales on research. Sweden, with a beyond the scope of this report. population of 9 million, spends more on housing re- TComment of the Natjona] Conference of States on Building Codes search than the United States. and Standards, Inc., May 25, 1986, ..

Chapter The Development of the U.S. Housing Construction Industry Chapter 2 The Development of the U.S. Housing Construction Industry

industrialized building techniques have grown in variety of factory construction techniques now be- importance throughout the postwar period, and fac- ing used in the United States are described in box A. tory-built housing has gained a significant market Confusion over terminology translates into a sta- share in many industrialized countries. However, in- tistical disparity, which raises questions about levels consistencies in available data make international of industrialization within the industry. This can be comparisons difficult to formulate. In the United seen by examining the two principal sources of in- States, 10 to 35 percent of all housing is now sup- formation about factory construction in the United plied from components produced largely in States (displayed in table 1). First, while the two esti- factories—25 to 50 percent, if “manufactured” (mo- mates of total unit sales and total “manufactured” bile) homes are included. Although “manufactured” (mobile) home sales are close, estimates of sales in (mobile) homes are virtually unknown outside the panelized housing differ by 350 percent. In modu- United States, several other countries produce a sig- lar/sectional housing, estimates differ by a factor of nificant fraction of all housing in factories. Approxi- 2. Undoubtedly, most of the differences derive from mately 90 percent of Swedish single-family housing conflicting definitions. Some of the “production and 15 percent of all Japanese housing is factory- builders” reported in Automation in Housing and built; in Japan, the factory share is growing rapidly. the “industrialized builders” reported in The Red Foreign developments will be discussed in more de- Book construct panels and subunits in their own fa- tail in chapter 4. cilities. Others build temporary “factories” near large- It is difficult to document the movement from “contract construction areas. Some simply use site-built ventional” to “factory” construction techniques, due construction techniques in warehouses, and then to the enormous variety of construction techniques transport partially completed wall sections to the now in use. Virtually all home construction employs building, The two surveys document these activities some kind of factory-built component, such as pre- in different ways. hung windows, doors, or roof trusses. On the other The statistics also differ in that the Automation in hand, even “modular” homes, which emerge from report presents a stratified sample of factories with bathroom fixtures in place and wall- Housing builders based on telephone surveys, while The Red paper on the walls, require some onsite work. The data is derived from a mailed questionnaire. confusion over definitions has been compounded by Book Using the Automation in Housing definitions and the fact that the term “manufactured housing” is de- methods, nearly half of all U.S. homes are now con- fined by statute to mean units more commonly called structed with factory-based techniques. Both data sets “mobile homes.’” In this text, the term “factory-built” show that the share of “manufactured housing” (mo- will be applied to complete units constructed in a bile homes) seems to be countercyclical, in that sales factory, to be erected as a package on a construc- increase when the overall housing market declines. tion site. The term will not cover components such There was a significant drop in “manufactured” (mo- as trusses or wall panels. At the turn of the century, bile) home sales between 1972 and 1976, and sales the term “industrialized housing” referred to use of also fell during the housing recovery of 1984 to 1985. framing lumber produced in a lumber mill, as op- The drop in sales during the early 1970s was due posed to the prevailing hand-crafted site assembly in part to the passage of statutes regulating “manu- of logs. We now call that “stick-building,” and refer factured” housing at a national level. Use of other to factory-prepared housing as “industrialized.” The factory construction techniques, however, increases steadily in the Automation in Housing statistics, while The Red Book data indicate a decline in pan- ‘ Put)]lc law 96-399, SW 308 elized housing. 11 12

Table 1.— Factory Construction as a Percent of All Residential Construction in the United States

SOURCE: Automat/on in Housing & Manufactured Home Dealer, January 1966, p, 14 & 16, 13

Table 1 .—Factory Construction as a Percent of All Residential Construction in the United States—Continued

1978 1979 1980 1981 1982 1983 1984 1985 Red Book Survey: One to four units: 1 Precut ...... 4.... 1 1 1 2 1 1 1 1 2 Panelized ...... 6 6 7 5 4 3 4 4 3 Modular/sectional ...... 2 2 2 3 3 2 3 3 4 Mobile homes ...... 12 14 14 18 18 15 15 14 5 Industrialized home builders ...... 10 10 10 10 13 13 14 13 6 Others ...... 48 45 43 42 36 38 36 37 Five or more units: 7 Factory made ...... 1 1 1 0 1 1 1 1 8 Other ...... 20 20 22 21 24 26 27 27 Factory (1+2+3+4+7) ...... 22 24 25 28 27 22 23 23 Industrialized...... 10 10 10 10 13 13 14 13 Others (6+9)...... —68 66 65 63 61 65 63 63 Total ...... 2,296 2,026 1,526 1,327 1,292 1,992 2,000 1,900 NOTES: Precut homes are definedas’’asales packageforwhich the many parts are pre-cut but not preassembled. Although roof trusses may be included preassembled wall panelsare not,” Modular/sectional homes are ’’three-dimensional housing unit(s) produced in aplant and designed forerectionon apermanent foundation with aminimumof on-site Iabor’’lndustrialized builders are ’’real estate developers and builders ,, using industrialized building techniques whenever they are cost effective “ SOURCE” ”The Red Book of Housing Manufacturers,” 1985

THE VARIOUS KINDS OF FACTORY-PRODUCED HOMES “Manufactured” (Mobile) Homes these units can be divided into three basic activities: assembly, or the actual construction of prod- The structural box beam serves as the basic de- uct units; material storage of supplies, components, sign principle of a “manufactured” (mobile) home. or product units until they are used in the produc- This integrated structural unit consists of four mation process or are shipped from the plant; and major subassemblies, into which are incorporated sev- terial handling, or the transportation of materials for eral mechanical service systems: the chassis, and the storage, shipping, or use in assembly activities.2 Each floor, wall, and roof systems. Nonstructural assem- phase must be carefully coordinated and integrated blies include such units as cabinets and windows. within the production system in order to complete Figure 1 provides an exploded view of a “manufac- the unit successfully. tured” (mobile) home, resting on a chassis. The typical “manufactured” (mobile) home plant Single-wide “manufactured” (mobile) homes are is housed within a single-story “manufactured” metal completed in the factory. However, multisection building with an average floor area of 64,000 square homes generally consist of three walls, a roof, and feet. Normally, plant layouts and assembly lines fall a floor, all of which are joined at the site. The ar- into three different types: straight, L-shaped, and U- rangement of sections at the building site allows for shaped. Subassembly and storage areas are located greater flexibility in floor plan designs. Both single in designated areas around the periphery of the as- and multisection homes conform to maximum high- sembly lines. Units move along the assembly lines way width loads—typically 14 feet. The Manufac- either end-to-end or side-by-side. The side-by-side tured Housing Institute’s 1985 publication Quick placement method has become prevalent, as it per- Facts reported that 29 percent of all “manufactured” mits more efficient factory space utilization. Further- (mobile) homes shipped in 1984 were multisection more, the side-by-side arrangement is desirable for homes. Due to their large size, these homes may producing multiunit “manufactured” (mobile) homes, overlap markets for other types of industrialized since two or more units can be mated onsite to be housing.

According to a recent study of the “manufactured” TAflhUr D, gernhardt, f?u;lding Tomorrow, The Mobile/Manufactured (mobile) home industry, construction processes for Housing lndust~ (Cambridge, MA: MIT Press, 1980). 14

Figure 1.- Exploded View of a “Manufactured” (Mobile) Home Resting on a Chassis

SOURCE” Arthur D. Bernhardt, Building Tomorrow’ The &40 bi/ehManufactured HOfJSin9 lndust~ (Cambridge, MA The MIT Press, 1980) assembled side-by-side, allowing for improved align- along the main assembly line, subassemblies are ad- ments and closer tolerances. ded at the appropriate points. Some manufacturers purchase subassemblies and components from other The Manufactured Housing Institute estimated that companies. The extent to which subassemblies and in 1983, approximately 185 firms shipped “manu- components are fabricated in the plant depends on factured” (mobile) homes from 410 factory sites. The such factors as the availability of labor and materi- average number of units shipped per plant was 582. als, local shipping costs, and the proximity of sup- With material costs accounting for 65 to 70 percent pliers. of the total cost per unit, more efficient material purchases can substantially improve the cost perform- Normally, 1 to 3 days are required to assemble ance of a given production facility. Firms with many a “manufactured” (mobile) home, depending on mar- plants can realize even greater economies of scale. ket demand, plant facilities, and unit specifications, with an average of 250 man-hours per unit. Most Most “manufactured” (mobile) home plants follow workers operate in crews, and are responsible for a sequence of basic assembly operations. Produc- a specific assembly or fabrication operation on a tion of the “manufactured” (mobile) home unit pro- ceeds from the bottom up and from the inside out, rotating basis. beginning with the chassis frame and moving to the Once assembly operations are completed in the floor, wall, and roof assemblies. As the unit moves factory, the units are transported to the homesite, 15 to a builder/dealer’s display lot, or to a storage fa- Housing Institute, indicates that in 1983, “manufac- cility. The units’ chassis are attached to trucks, and tured” (mobile) homes captured 82 percent of the can be transported within a radius of approximately market for single-family homes valued at less than 500 miles. From the manufacturer’s point of view, $50,000–an absolute increase of 44 percent from however, the “feasible” shipping radius depends on the market share of 38 percent in 1977. This signif- market demand, transportation costs, and the loca- icant increase did not result from a surge in “man- tion of competitors. The truck is the most economi- ufactured” (mobile) home production; rather, the to- cal means for transporting “manufactured” (mobile) tal number of site-built homes selling for under homes, although several manufacturers have used $50,000 declined from 433,000 units in 1977 to only rail and ship transport. The dealer installs approxi- 65,000 units in 1983. mately two-thirds of the units sold. Figure 2 compares the income characteristics of Upon reaching the site, the “manufactured” (mo- families living in “manufactured” (mobile) housing bile) home is positioned, unlatched from the trans- with that of all families living in purchased or rented port vehicle, and stripped of its wheels. For multi- housing. In 1983, nearly three-quarters of all “man- component “manufactured” (mobile) homes, sections ufactured” (mobile) homes were inhabited by fam- must be positioned and joined. Finally, the unit is ilies with incomes of less than $20,000, while three- connected to utility and sewer systems. Less than quarters of all housing was owned by families with 15 percent of the units installed between 1970 and incomes of less than $35,000. In fact, a recent study 1976 had been moved from their original location conducted for the U.S. Department of Energy indi- by 1983.3 Approximately 7 percent of the owner- cates that in 1980, the median income of “manu- occupied units and 4.5 percent of the renter-occupied factured” (mobile) home residents was $12,000, units are installed on permanent foundations, and while that of other single-family detached homeown- another 12 to 15 percent are installed on a concrete ers was $19,800.7 It is interesting to note, however, pad. The remainder rest directly on blocks, without that “manufactured” (mobile) housing does have a a concrete pad.4 Multisection units have declined in significant market share in the higher income cate- importance, after peaking at about 25 percent of all gories; in 1983, for example, 7,000 families with in- units sold in 1978. By 1983, they represented less comes over $100,000 per year reported that their than 15 percent of the units shipped.5 principle residence was a “manufactured” (mobile) 8 “Manufactured” (mobile) homes serve a relatively home. well-defined market niche. With an initial price per The real cost of a housing unit, of course, requires square foot of about 60 percent of a site-built house, deeper analysis than the initial unit cost. Such re- they are the principal choice of families looking for search could consider the quality of the housing housing with an initial cost of under $50,000.6 Ta- produced, the expected life of the unit, and the cost ble 2, based on data published by the Manufactured of operating and maintaining the unit. Some of these trade-offs will be discussed in chapter 3. %’estat, I nc , “,Analysi\ of the Ann IIal Fious]ng Data (AHS) Pert~]n- I ng tt~ f he Durahil itk of Nlanufac t[] red Housing’” (Rock\ Ille, LID 1986). .—. — p ~ $) ~Pacific Northwest Laboratory, “Impact of Alternatl\re Res]dentiA ‘ibid , p. 2.11 Energy Standards, ” November 1985. p. 33 ‘Iblcf., p. 2-1 (). ‘U.S. Department of Commerce, Bureal] of the Census “Ann (]A } {()([+ ‘)llan[lfactured F{oustng Inst]tutel ~ee table 8 ]n ch. 3. ing Survey: 1983, ” p A-1 1

Table 2.—Comparison of Mobile Home Shipments and Sales of Single-Family Site-Built Homes for Under $50,000, 1977-83 (in thousands)

1977 1978 1979 1980 1981 1982 1983 Percent Percent Percent Percent Percent Percent Percent Number of total Number of total Number of total Number of total Number of total Number of total Number of total Site-built homes sold 433 62 316 53 184 40 137 38 88 27 67 22 65 18 Mobile homes shipped 267 38 276 47 277 60 222 62 241 73 239 78 295 82 Total new 700 592 461 359 329 306 360 SOURCE Manufactured Hous(ng Inslltbte 16

Figure 2.–Home Ownership by Income Cohort for 1983 100

0 0 $20,000 $40,000 $60,000 $80,000 $100,000 Income — - — All units — Mobile homes

SOURCE: Manufacturing Housing Institute.

Most manufactured housing plants are located in Modular Homes small rural communities, particularly in the sunbelt region. The rural areas provide both the principal Modular systems resemble “manufactured” (mo- consumer markets and favorable labor markets, due bile) homes. The final building is composed of to the presence of low-skilled and non-unionized factory-assembled, three-dimensional “boxes” (see workers. Manufactured housing is concentrated in figure 3). However, modular units are transported the South, which held 46.2 percent of the market by external carriers, and modular buildings— in 1983; only 8.1 percent of all units are located in including small hotels/motels and commercial the Northeast.9 Approximately half of these units are buildings—may be constructed from any number of sited individually or in clusters of 5 or fewer, while boxes. These boxes can be stacked seven stories high about one-quarter are situated in clusters with 100 to form multistory residential and commercial struc- or more units. 10 tures. Unlike “manufactured” (mobile) housing, which is regulated by the national HUD code, modular homes must satisfy State and local building codes.

9westat, op. cit., P. 2.2 Modulars are among the strongest of all light-frame l“lbid., p. 2.6. residential structures. They are built with completed 17

roller systems or are placed on a temporary trailer assembly. Electronic airlifts place the finished sections onto shipping vehicles for transportation to the site. Generally, trucks transport modular sections to the site. Site cranes then remove and position the sections on a permanent foundation. Helicopters can be used for transporting the units when special problems arise, such as bridges or tunnels. Again, because modular units lack a structural frame chassis, they rest on permanent foundations. This necessitates significant site preparation work before the unit’s arrival. The recently developed “all weather wood foundation” (AWWF) systems, which cut costs and onsite assembly time when compared sheathing for roofs, sidewalls, and marriage walls with traditional concrete foundations, are now used with glue-nailed plywood, and employ heavier-than- throughout the industry. AWWFs are assemblies of normal construction techniques in wall and floor sec- frame walls built of low-grade, preservative-treated tion framings. Modular housing units come in a va- lumber and plywood to create basement and crawl- riety of styles and sizes. space foundations. In comparison with conventional cement foundations, the AWWF can be erected According to Automation in Housing magazine, quickly in extreme climates, which normally make 200 plants manufactured modular homes in 1983, concrete work difficult. As a result, they can extend with the typical plant building 350 homes per year construction seasons in many areas. This provides and employing 109 persons. Factory layouts, ma- greater continuity in employment, and lowers costs chinery, equipment, and assembly processes for pro- in areas sensitive to “land factors.” Furthermore, the ducing modular units resemble those described for development of prefabricated foundation systems has “manufactured” (mobile) homes. However, since eliminated the setup or drying time encountered with modular units are not built on a wheeled chassis, cement foundations, and skilled labor is not required they either move through the production line on for their assembly. 18

When the modular unit is secured on the founda- A major disadvantage of panelized structures is tion, sectional joint work commences using special- the onsite labor required to assemble such systems. ized connector plates as well as pneumatically driven Poorly trained installers can increase costs and re- fasteners. Joints are then sealed and the utility and duce quality. Although high-quality and tolerance sewer systems are connected to the main lines. The standards exist in the factory, the ultimate quality sections are sealed together with moisture-proof bar- of the structure depends on the skills and experi- riers, to ensure consistent moisture protection and ence of the contractor who assembles the system at energy efficiency. The Swedes make sure that this the building site. Currently, few U.S. panelized man- is done, and take great care to train installers. ufacturers provide their own building crews for onsite assembly operations. The Swedish discovered The market for modular homes has growth po- that quality assurance required them to have panels tential in the area of infill housing, or that which erected by either their own employees or teams is constructed between two existing structures. trained by the manufacturing firm (see ch. 3). Swed- Stacked modular units can satisfy the need for high- ish firms guarantee the installed product, density, smaller sized housing units in urban areas around the country. Precut Systems Precut systems, which include log homes, dome Panelized Homes houses, and precut frame houses, are produced in Like modular homes, panelized homes come in the factory and shipped to the site as packages. The an array of types, sizes, and interior/exterior finishes. builder receives a “kit of parts,” such as framing Panels may be produced in lengths of 2 by 8 feet envelope components, windows and doors. All ele- or 4 by 8 feet that are erected by one or two work- ments are designed to fit together and are cut to size. men, in lengths of 10 to 16 feet that can be erected These systems use certain individual components, by four workmen, or in sizes of over 16 feet which such as roof trusses. Generally, the leading U.S. require a crane for erection. precut systems manufacturers provide 2- to 3-year interim financing for their homes, using the owner/ Automation in Housing reports that approximately builder’s “sweat equity” as a partial downpayment. 600 companies produced panelized homes in 1983. Permanent financing is arranged upon completion The panels themselves fall into two classifications, of the house. There are approximately 250 log-home open and closed. Open panels refer to factory-assem- manufacturers and 60 dome-house producers in the bled wall, floor, or roof panels that are open on one United States today. or both sides so that construction and/or enclosed mechanical, electrical, or plumbing equipment can be inspected onsite. An exterior open panel wall may Component Systems have sheathing, doors, windows, and siding on the outside and insulation between the studs, but will Although not strictly a building system, manufac- lack finished materials such as drywall on the in- tured building components play an important role side surface. In contrast, closed panels are enclosed in conventional construction, The invention of the on both sides, severely limiting access to onsite in- metal truss connector plate was of enormous bene- spection. Panel factories typically contain linear profit to component manufacturers. This stamped metal duction lines with automated sawing machinery and plate that can join truss members, can splice chords pneumatic panel nailers and staplers. of trusses, can join members of rough openings for doors and windows, or can fabricate other compo- Panelized components can be loaded for shipping nents. In 1982, virtually all of the Nation’s 2,000 com- by truck or rail. Improved shipping techniques al- ponent manufacturers produced roof trusses, and low panelized home manufacturers to service greater nearly 80 percent produced floor trusses. Figure 4 market ranges than “manufactured” (mobile) or mod- provides a diversification trend chart depicting the ular home producers. component manufacturers’ tendency to expand prod- 19

Figure 4.— Diversification Trends of To move truss presses, the truss members and plate Component Manufacturers connectors sit on a conveyer, which moves the as- 100 sembly under a roller that squeezes several joints at a time. Roof trusses typically span a 32-foot wide house and are spaced up to 24 inches from the center. They can be set in place in minutes and, with the application of conventional 4 by 8 foot sheets of plywood as sheathing over the top chord, can close a house to the weather in less than a day. After roof trusses, the 1970 invention of the floor 50 truss represents the second major breakthrough for the American home building industry. These systems are made with 2-by-4 top and bottom chords placed flatwise with 2-by-4 webs, which are fastened with metal connector plates. Another advance came 230/o in 1976, with the invention of the metal web connected floor truss. This replaces all or portions of the 2-by-4 webs with a triangular metal web. Integral connector teeth protrude from each of the three 1% points of the web, which is then attached to the out- 0 — [ side edges of the chords. The floor truss assembly Roof Floor Wall Door Subcom- machinery operates on the same principle as roof trusses trusses panels units ponents truss assembly machines; the wood framing members are positioned on a truss machine, which 75 1982 presses the plate connectors onto the joints. SOURCE Automat(on In Housing 1983 Component manufacturers also make prehung doors and windows; prefabricated stairs; and sub- uct lines by including wall panels, door units, and components like corners, tees, and headers (see fig- other subcomponents. Recently, however, HUD an- ure 5). All segments of the housing industry use these nounced that a significant number of roof trusses wood components, largely because the light frame used in prefabricated industrialized housing had wood system that predominates in this country is failed.11 Careful regulation in this area could provide an “open system. ” These components can be used consumers with greater protection. by virtually all builders. Over 90 percent of America’s homes and apart- Some component manufacturers specialize in the ments are built with roof trusses that have been con- production of wet core modules. Although not an nected by metal plates. Advances in computer tech- actual building system, a wet core module is a nology have led to the widespread application of prefabricated element that can fit with a number of prefabricated truss assemblies in homebuilding oper- building types. In its most developed form, it con- ations. Roof trusses come in many configurations; sists of a module containing the bathroom, kitchen, computer software programs provide instantaneous and laundry facilities for a home, with plumbing, design information concerning loading and stress fac- stack, fixtures, and interior finishes built in. In a less tors, and indicate material and cost requirements developed form, it may incorporate fixtures into a associated with particular designs. Furthermore, roof plumbing wall, but not necessarily into the actual truss assembly has become increasingly automated. shells of the rooms. By industrializing a highly labor- intensive segment of the traditional housing con-

I I (’~rn ment [ )f [ ~1(, \ ,~t If}il{il (’( )n ft~rt~r] [ (’ ( )f Stdt(’S 011 B(1 I 1(1 III ~ (’~ J~l~’~ struction process, these components can produce sig- ~nd St~rldards, lr]~ hl,i~ 25, 1980 nificant cost savings for the builder. 20

Figure 5.—Component Framing Assemblies

Newer component framing house part assemblies: 1. Ladder rake overhang assembly 5. Gable end 9. Engineered floor trusses 2. Valley roof trusses 6. Wall panels 10. Wood foundation panels 3. Roof sheathing 7. Garage door header truss 11. Prehung doors 4. Engineered roof trusses 8. Pre-assembled stairs 12. Prehung windows

SOURCE: Autof7tt!tiOfl in ~OUSh~, 1983

INDUSTRY SEGMENTS The housing industry includes producers, distrib- Production Builders utors, sellers of the end product, and other segments. This segment consists of large and small volume The housing units that these segments produce— site builders, who use factory-made housing com- “manufactured” (mobile), modular, panelized, precut, ponents to construct large numbers of single-family and component systems—were presented in the houses or low-rise apartment buildings in subdivi- preceding section. sions, or “tracts,” near major metropolitan centers. Typically, their structures consist of prefabricated fac- Categories of housing producers are not entirely tory or onsite components. Often called “volume pro- distinct from one another. Some firms manufacture ducers of housing,” production builders do not use more than one type of housing; for instance, sev- networks of builder/dealers, but sell homes directly eral “manufactured” (mobile) housing producers to the consumer. make modulars as well. These producers try to maintain stability in an unstable market by retaining flex- Increases in site-labor and construction loan costs ibility in their plants. When demand for one type have made production builders the principal con- of product, like single-family homes, declines, they sumers of prefabricated housing components. While emphasize another, such as multifamily units, This some large production builders now operate their approach may become increasingly popular in the own component manufacturing systems, most still U.S. residential construction industry. secure components from independent companies. 21

Builder/Dealers Small producers often capitalize on short-term investments. They should be able to adjust finances “Manufactured” (mobile), modular, and panelized quickly, so as to reinvest in new efforts according home manufacturers usually sell their products to market trends. Such producers can operate more through networks of builder/dealers. These builder/ flexibly and more economically with unskilled or dealers often operate from display lots, located within semiskilled workers than with costly new machin- 700 miles of “manufactured” (mobile) and modular ery. Given these considerations, the large-scale, long- home manufacturing plants due to transportation term capital requirements associated with techno- constraints. Builder/dealers may sell for one or sev- logical innovation conflict with the needs and capa- eral manufacturers, and do most of their business bilities of most American builders. in well-defined market areas. In addition to acting as salespersons, builder/dealers prepare the land, U.S. Home: A Case History complete foundation and utility work, and supervise finishing work on the home after delivery. U.S. Home Corp., until recently the Nation’s largest homebuilding firm, serves as an example of a large Figure 6 illustrates the functional interrelationships company that has changed its market approach in among manufacturers, wholesalers, fabricators, order to satisfy housing demand—sometimes against builders, dealers, contractors, and consumers asso- its will. Started by New Jersey builder Robert Win- ciated with the manufactured housing industry. nerman, this company produced an estimated 2,400 houses in 1968, generating revenues of $58.3 million. U.S. Home became a national force the follow- Small Builders ing year, when Arthur and Charles Rutenberg incorporated their separate Florida firms with that of Small operators constitute the vast majority of 12 American homebuilders—far too small, in terms of Winnerman. During the next 3 years, Winnerman units produced per year, capital resources, and scope acquired 14 other firms. By 1973, U.S. Home oper- of operations, to handle the large capital expense ated in 11 national markets; production had in- of introducing new technologies. creased to 10,700 units, and revenues to $351 million. Production peaked in 1980, at 15,821 units. Concerning output, the 1977 Census of Govern- ments reported that 227,830 general building con- In 1982, US. Home delivered 12,599 units, down tractors, nearly 80 percent of all general contractor from its previous high, although it still enjoyed oper- establishments, had receipts of less than $250,000, ating revenues of $832 million. Over half of this pro- which translates into 5 to 10 units per year. Simi- duction was situated in Texas, where the success of larly, the National Association of Home Builders the oil industry had created an unusually high de- (NAHB) states that the vast majority of its member mand for housing. By 1983, U.S. Home had opened firms produce fewer than 25 houses per year. And 74 divisions and 13 manufacturing plants in 25 the 1977 Census of Construction concluded that one- States. They were building in 175 single-family de- fourth of all homebuilders operate in a single mar- tached communities, 109 condominium projects, and ket area, and that less than 5 percent of all builders 9 retirement communities. of single-family units worked outside their home U.S. Home’s 1983 annual report indicates several States. actions taken by the company to protect and expand These small firms do exhibit a strong entrepre- its market. It was the first major homebuilder to de- neurial nature. When market conditions change, velop and issue “collateralized mortgage obligations” they move out of homebuilding and into more prom- (CMO) funds. CMOS raise new mortgage credit by ising construction endeavors. In the so-called “bad selling securities that are “collateralized” by loan pay- years” of 1967, 1974, and 1975, nearly 20 percent ments made on previously sold homes; these funds of member firms surveyed by the NAHB in 1977 are then earmarked to make loans to purchasers of switched to other businesses. Members switched at IZNed Eichler, The Merchant EWder (Cambridge, MA: The MIT press, half this rate during periods of success. 1982), p, 187. 22 ~ stores homes clinics homes & family lstructures products apalrtmenl$ clasisrooms homes homes Com;umers Medical NurSing Farm MobtIE~ Reloc~ltable Motel!l Offices Churclhes Gardeln Single· Shops Speclnlty Vacation TowMlouses ~ ~ -.. ---tIo ~ ~ r---. ~ or & or home- carry home & yards dealers builderl dealers dealers builderl Package Retlii! builders contractors Mobile cash conventional Production Modular " " ,. r+ ~ .-f1.. ~~ 1980). Press, MIT Industry home The home precut) the (Pr~~fab Dealerl Builder! building Modular MA: fabricators fabricators MobilE~ of manufclcturers manufCllcturers manufaicturers ) ) ) ) .. i!' .. ~ b ... .. v ~ -J r--- ~ ,.... t L r- L Model (Cambridge, Industry 6.-A J I::: III & HOUSing Figure I J A jobber Building & specialty fabricators component fabricators materialS component Wholesaler wholesalers Independent , ') Ii'" .. .,...... --,. Mobile/Manufactured I...- c:::::::::: -)

,1- The lumber Tomorrow: Building materials Windows Roofing Tile Sheathing Stain Siding Paint Plumbing Paneling Pipe Lighting Millwork Nalls Heating Insulation Flooring Glass Doors Drywall Electrical Framing Carpet Concrete Countertqps Appliances Cabinets BriCk Beams Block manufacturers Building ~ ~ ~ ~ .... Bernhardt, .. D. sand, & etc zim:, tibelrs clay, steel, gypsum, Arthur products asphalt Wood plastics, coatings Iron, aluminum, nickel, adhesives, Chemicals" Stone, copper, mineral wood a.sbestos, c~~ment, SOURCE: 23 new homes. In 1983, U.S. Home learned of projec- When the oil market collapsed, U.S. Home was faced tions that the bulk of future demand for new hous- with a manufacturing capacity that outstripped de- ing would be in rural and small metropolitan areas. mand by a large margin. The firm has confronted In order to adapt to the changing nature of the mar- this problem by abandoning production of both ket, the company acquired Brigadier Industries Corp., “manufactured” (mobile) homes and modular units, one of the Nation’s largest producers of “manufac- and it is currently negotiating to sell off its Briga- tured” (mobile) housing. This move was intended dier subsidiary. to improve U.S. Home’s ability to operate efficiently in small markets, and to facilitate its pledge to offer Like many other producers of factory-built hous- housing at competitive prices. ing, U.S. Home has met with both success and failure in its attempts to operate within a volatile mar- However, U.S. Home did not anticipate the down- ket. Because it has continued to profit from certain slide of the oil industry and the resulting decrease segments even during periods of financial duress, in housing demand. The firm had entered the “man- it has been able to overcome setbacks in a particu- ufactured” (mobile) home market to capitalize on the lar housing category. Its case history demonstrates immediate need for low-cost housing; in much the the risks involved in adapting to industry develop- same way, it opened the largest industrialized hous- ments as they occur, and the manner in which a ing plant in Salt Lake City during the overthrust company may readjust to the effects of such changes. drilling boom of the late 1970s and early 1980s.

TRENDS IN INDUSTRIALIZED HOUSING The Early Years three reasons: “the price of the prefabricated house was not competitive, public interest stopped short In the United States, prefabricated building tech- of purchase, and promised capital backing proved nologies received widespread attention as early as elusive.”14 Inconsistent local codes and management the 1930s. Having witnessed the technological suc- errors also contributed to the problem. cess of the automobile industry, the American public believed that mass production of houses would Few U.S. firms mass produced prefabricated hous- alleviate the Nation’s chronic shortage of affordable ing prior to World War II. As one study suggests: housing. In 1932, Fortune referred to General Up until the Second World War, prefabricated Homes, Inc., which had just unveiled its prefabri- housing accounted for only one half of one percent cated steel house, as “the General Motors of the new of total housing construction. The War radically industry of shelter, ” commenting on the construc- changed that figure. The need for large scale pro- tion of General Homes’ prefabricated steel house.13 duction at minimum cost and maximum speed gave By 1933, prefabricated housing companies were at- established prefabricators and would be prefabri- tempting to capture a share of the potentially vast cators a golden opportunity. The Federal Public market for mass-produced homes. Even industrial Housing Authority alone built some 116,000 pre- giants such as Armco Steel, American Rolling Mills, fab houses and about 80,000 more were built by other government agencies and by private opera- Wheeling Steel, Great Lakes Steel, and Goodyear–all 15 of whom envisioned that mass-produced housing tors. would generate profitable markets for their own This rapid expansion of prefabricated housing pro- building materials and components—began invest- duction during the war also stimulated new business ing in home manufacturing operations. ventures within the field. But early dreams of capitalizing on the prefabricated home faded quickly. One housing analyst cites

14W.D, Keating, Emerging Patterns of Corporate Entry Into l-lousing (Berkeley, CA: IURD Press, 1972). l~{4Housing: A Striking Answer,” Fortune, August 1932, p. 60. I Slbid. .—.—-

Following World War 11, the United States experi- five different technologies, to evaluate the technol- enced a housing crisis of unprecedented proportions. ogies, and to report the findings to Congress.”18 Ulti- In response to a critical shortage of homes, Presi- mately, Operation Breakthrough exposed builders dent Truman appointed Wilson Wyatt as Housing to the benefits of modern technology, and en- Expediter. Wyatt had full privileges to use the War couraged more uniformity within and between State Powers Act and the War Mobilization and Recon- building code systems; however, it failed to create version Act, and had direct control of the Federal widespread support for its programs in the Amer- Housing Authority and the Federal Home Loan Bank ican marketplace, where local factors tended to de- Board. He presented the Veteran’s Emergency Hous- lay implementation. ing Program on February 7, 1946, This program: Romney proposed a three-phase implementation . . . set a production target of 2.7 million units for of Operation Breakthrough: Phase 1, Design and De- the years 1946 and 1947. To reach this unprec- velopment; Phase II, Prototype Completion; and edented goal, Wyatt intended to rely heavily upon Phase 111, Volume Production. In June 1969, HUD prefabricated housing, 250,000 units in 1946 and requested proposals for the project. The department 600,000 in 1947. Achievement of this goal would stated that: have increased the value of prefab production from $100 million to $2.5 billion.16 Operation Breakthrough has as its primary objective the establishment of a self-sustaining mech- As it turned out, only 37,200 prefabricated units anism for rapid, volume production of market hous- were constructed in 1946, and 37,400 in 1947. The ing at progressively lower costs for people of all Wyatt program died out by 1948, and cost the Fed- income levels. 19 eral Government approximately $200 million, Many housing producers, including those with technically HUD received proposals from 236 firms. Com- sound products, went bankrupt upon the withdrawal menting on the unexpectedly high response rate, one of Federal funding. Among these were the futuristic study observed: Dymaxion House of Buckminster Fuller, and Carl On the heels of the urban riots, many of the Na- Strandlund’s porcelain enamel and steel Lustron tion’s big corporations wanted to devote some of Home. Other companies managed to profit from the their money and skills to solving social problems— very weakness of this Federal initiative; Fortune con- especially if money could be made at it. The list cluded, is long: American Cyanamid, General Electric, In- land Steel, CNA Insurance, Phillip Morris, Boise . . . the 1946 Wyatt program was almost entirely a Cascade, Warner Communications . . . From every private enterprise program, and a lot of private en- specialty, these wise kings came with their gifts to terprises made a lot of money under its shelter. 17 help the infant housing industry in its muddy man- ger.20 Operation Breakthrough In February 1970, HUD selected 22 Operation The next attempt by government and industry to Breakthrough finalists. Of the proposed housing sys- infuse modern technology into the homebuilding sec- tems, 10 were made of modular design, 9 were of tor came on May 9, 1969, when George Romney, panel design, and the remaining 3 used component Secretary of the U.S. Department of Housing and Ur- assemblies. Initially, HUD selected 11 demonstra- ban Development, presented Operation Break- tion sites. Budgetary constraints later reduced the through. This proposal grew out of Section 108 of number to nine. the Housing and Urban Development Act of 1968: Operation Breakthrough lost its early momentum “New Technologies in the Development of Housing when the participants encountered costly delays in for Low Income Families.” The Section “authorized securing financing during Phases II and III. These the (HUD) Secretary to select plans for the develop-

ment of housing using new technologies, to construct lsJohn M, Quig]ey, ‘(Res.i&nti~l Construction and Public policy: A at least 5,000 dwellings a year for five years using F’regress Report, ” IBER Working Paper, Berkeley, CA, 1983. ‘(]lbid, ‘blbid. ‘OMartin Mayer, The Builders (New York: W.W. Norton & Co., Inc., ‘T’’The Industry Capitalism Forgot,” Fortune, 1947, vol. 36, No 2, p. 67. 1980). 25 delays, which arose from having to satisfy a multi- homebuilding technologies have failed to material- tude of local codes before a given design could be ize. While the “Joint Venture on Affordable Hous- implemented, caused many financiers to lose inter- ing” initiated by HUD in several cities in 1982, has est in the program. In an effort to remedy the prob- had limited success, most Federal efforts have re- lem, HUD allowed Phase II and Phase 111 operations lated new technologies to energy consumption, not to proceed simultaneously, and “federal rent subsi- construction, The 1982 U.S. Comptroller General’s dies and section 236 subsidies were offered for Phase report to Congress, “Greater Use of Innovative Build- 111 units to speed production of Phase II prototypes.”21 ing Materials and Construction Techniques Could The final blow to Operation Breakthrough came Reduce Housing Costs,” cited a number of factors in government and industry that “impede the use on January 16, 1973, when President Nixon an- of available technological innovation and the devel- nounced an indefinite moratorium on new alloca- 24 opment and introduction of new ones.” These in- tions of Section 236 subsidy funds. In the end, only cluded: 14 of the original 22 Operation Breakthrough participants built Phase III projects. Some housing pro- ● a low level of effort by the Department of Hous- ducers did not participate due to the problem of code ing and Urban Development and the National compliance. Others cited “cost and other production Institute of Building Sciences to encourage the problems, corporate marketing policies, and bank- development and use of innovative technology, ruptcy” as reasons for avoiding the project.22 Sum- except for that related to reducing energy costs; ming up the results of Operation Breakthrough, ● builders’ reluctance to accept risks associated “about 25,000 Phase III units were completed in 150 with the use of technology whose long-term per- different developments using Section 236 set asides. formance is not proven; Only 1,500 units were completed for unsubsidized ● restrictive and inconsistently administered lo- occupancy at market interest rates . . . No factory cal building codes; and came close to completing a single volume run . . . ● builders’ lack of technical information on the The cost to the federal government was $72 million, results of using innovative technology.25 or $12 million more than had initially been bud- 23 The National Institute of Building Sciences had geted.” been created by Congress in 1974 under Public Law While Operation Breakthrough is now looked on 93-383, and was intended: as a mismanaged Federal housing program, the ef- . . . to encourage all sectors of the building indus- fort did expose builders to new housing construc- try to develop a more efficient way of introducing tion technologies. Furthermore, it led many States technology into housing by encouraging a more ra- to reevaluate their building code systems, en- tional building regulatory system through simplifi- couraged uniformity between State standards, cation and harmonization of building criteria, stand- fostered new methods for evaluating housing con- ards, and other technical provisions, and evaluating struction, tested new labor arrangements for struc- existing and new technology to facilitate its intro- ture assembly operations, and introduced American duction and acceptance at the Federal, State, and builders to innovative European practices. However, local levels.26 few HUD-sponsored building systems actually re- Due to internal organizational problems, the National duced the cost of housing as a result of the technol- Institute of Building Sciences did not become fully ogy that came out of Operation Breakthrough. operational until 1979. It has still not assumed the active role called for by the statute, primarily due After Operation Breakthrough to a shortage of financial resources. Since 1973, significant large-scale public, private, or joint venture projects encouraging the use of new

2’Quigley, op. cit. 24u.s. Genera] Accounting Office, Comptroller General, ‘

Summing up the scenario since Operation Break- pansion of the largest firms among them (see table through, the Comptroller General’s 1982 report 3), has brought about the combination of capital and stated that “the statutory authority given to HUD and concentrated land markets necessary to justify long- the National Institute of Building Sciences to en- term investments in plant and equipment. It is dif- courage the development and use of innovative tech- ficult to distinguish between cause and effect, be- nology in homebuilding has been receiving only cause factory-based mass production, especially of limited attention by HUD and the Institute.”27 Given the more profitable product lines, may also give firms the past performance records of both HUD and the a competitive edge to expand, In any case, some pro- Institute, it appears unlikely that either party will duction builders have already indicated their inten- vigorously promote the research, development, or tion to expand their production of housing, through use of innovative technologies or materials to reduce continued acquisition of construction facilities. housing costs, unless funds are earmarked specifically for this purpose. Fourth, Japanese and European technological innovations, coupled with the growing threat of competition from foreign concerns acting in joint ven- The Future tures with large domestic firms, has already inspired Industry analysts generally agree that the postwar a combination of interest, emulation, and even fear movement toward factory-built housing will con- within the industry. tinue, and may even expand. However, despite substantial interest on the part of leading industrial firms, as well as government backing for prefabricated housing under Presidents Truman and Nixon, large- scale mass production of homes in American facto- Table 3.—Top 25 Homebuilders by Units Produced, ries has not materialized. Why should today’s fore- 1983 casts be more reliable than previous ones? 1 Fleetwood Enterprises, Inc. (Ill) ...... 37,746 First, virtually all segments of the residential hous- 2 U.S. Home Corp. (I, II, IV) ...... 22,855 ing industry now depend on factory-based technol- 3 Champion Home Builders Co. (Ill)...... 21,715 ogies to a certain degree. Until the Second World 4 The Commodore Corp. (II, III, IV) ...... 16,274 5 Skyline Corp. (Ill) ...... 16,118 War, few firms were involved in mass producing 6 City Investing Co. (1,111) ...... 15,590 houses, and a mere 0.5 percent of total housing con- 7 Redman Homes, Inc. (Ill)...... 15,403 struction was factory-built. Clearly, factory construc- Lincoln Property Co. (1) ...... 12,734 Pulte Home Corp. (1) ...... 12,008 tion plays a more important role today. 10 The National Housing Partnership (1) ...... 11,701 11 Tidwell Industries, Inc. (Ill) ...... 11,010 Second, computer technologies are extending the 12 Liberty Homes, Inc. (Ill) ...... 10,565 inherent efficiency of factory-based production. Com- 13 Fairmont Homes, Inc. (Ill) ...... 9,779 14 Kaufman & Broad Home Systems, Inc. (1,111) ., 9,570 puters facilitate many individual operations involved 15 Jim Walter Homes, Inc. (1) ...... 8,706 in industrialized housing, from the initial design 16 Ryan Homes, Inc. (1) ... , ...... , . . . . 8,503 stage, to the building’s final assembly. This improves 17 Horton Homes, Inc. (Ill)...... 7,018 quality control, saves time and money, encourages 18 National Homes Corp. (II) ...... 6,842 19 Cardinal Industries (IV) ...... 6,754 uniformity of parts, and enhances design flexibility. 20 Zimmer Corp. (Ill) ...... , ...... 6,321 As new computer applications emerge and software 21 Canter Corp. (1) ...... 6,299 is developed to meet the specific needs of the resi- 22 Ocilla Industries, Inc. (Ill) ...... 6,000 23 The Ryland Group, Inc. (I, II, IV) ...... 5,491 dential construction industry, factory-based technol- 24 Weyerhaeuser Real Estate Co. (1) ., ...... 5,000 ogies should become more attractive to home- 25 Conner Homes Corp. (Ill) ...... 4,964 builders as well as homebuyers. Top 25 total ...... ~ . .’. .’...... 295,686 Top 100 total . . . . . , ...... ,377,983 Third, the big builders are growing. The emer- Top 25 as percent top 100 ...... 78 Legend: gence of “superbuilders,” and particularly the ex- (1) = production builder; (11) = panelized home manufacturer, (Ill) = mobile home manufacturer; (IV) = modular home manufacturer. Z71bid. SOURCE: “Automation in Housing, ” 1984 27

MARKET CONCENTRATION The 1978-83 market share percentages, numbers ogy has the potential to drive out small builders, or of units produced, and sales volumes of the top 100 at least to give them a different role. Use of factory- U.S. builders indicate the extent of market concen- produced structural elements has already made the tration within the residential construction industry. small builder more of an assembler than a crafts- These 100 home producers captured 24 percent of man. But it has also created many new opportuni- the industrialized housing market in 1983, a decline ties for specialized firms, in areas like site prepara- of 2.7 percent from the 26.7 percent figure of 1982;28 tion and crane operations. Will the small builder’s this can be attributed to the increasing presence of future role be limited to pouring a foundation and small builders in the revitalized housing market. Still, assembling a set of modules or panels? Will the small production levels and sales volumes for the top 100 builder become a captive of major production builders increased between 1982 and 1983. Auto- houses? Or will the small builder become an en- mation in Housing magazine’s 1984 annual report trepreneurial specialist supplier to larger home- indicated that “the largest U.S. firms accounted for builders? 377,983 units in 1983. Their sales volume soared 35.7 percent to 12.019 billion compared with the “Manufactured” (Mobile) Homes 8.859 billion they put on the books in recession- battered 1982.”29 The “manufactured” (mobile) home industry is the Table 3 presents the top 25 homebuilders, ranked most concentrated area of factory-based housing. Of by number of units produced. The table also de- the 169 firms engaged in the production of “manu- scribes the product-types manufactured by each com- factured” (mobile) home units in 1983, the top 25—as pany. These 25 companies produced 78 percent of shown in table 4—accounted for 74 percent of the all units built by the top 100 homebuilders, and total production volume of 295,000 units. The top almost 20 percent of all housing produced in 1983. 10 companies produced 54 percent of all "manufac- Ranking these companies according to their dollar tured” (mobile) homes, and the five leading manu- volume of sales, the top five—U.S. Home Corp., Pulte facturers reported sales volumes greater than $250 Home Corp., Ryan Homes, Inc., City Investing Co., million. and Centex Corp.—all boasted 1983 sales in excess This oligopolistic industry structure has resulted of $500 million; U.S. Home posted a sales volume from a series of mergers and acquisitions following of $932.7 million. Of these superbuilders, 29 had the enactment of the Manufactured Home Construc- sales in excess of $100 million. tion and Safety Standards Acts. Many firms that could not comply with HUD’s standards were acquired by Implications for Small Builders larger “manufactured” (mobile) home producers. Ta- ble 4 also indicates that only 4 of the top 25 are pri- As the industry becomes more concentrated, the vate firms, the remainder being publicly traded cor- role of the small builder may change. New technol- porations. Many of the public homebuilders have

~fi,~utornat;on In llousjrf~, Larious issues, established mortgage banking subsidiaries to origi- 2’]Automatlon in Housing, 1984 nate, underwrite, sell, and service home mortgages. 28

Table 4.—The Nation’s Top Producers of Mobile Homes

Headquarters 1984 Company name address housing units Champion Home Builders Co.a...... Dryden, Ml 22,795* Fleetwood Enterprises, Inc.b...... Riverside, CA 21,613* The Commodore Corp.c ...... Syracuse, IN 20,580” Skyline Corp.d ...... Elkhart, IN 16,892* Redman Homes, Inc.e ...... Dallas, TX 15,732 Guerdon Industries, Inc.f ...... Denver, CO 13,000 Liberty Homes, Inc...... Goshen, IN 12,075 Fairmont Homes, Inc.g...... Nappanee, IN 11 ,815* U.S. Home Manufactured Housing Corp.h ...... Houston, TX 10,179* Tidwell Industries, Inc ...... Haleyville, AL 9,636* Zimmer Corp...... Boca Raton, FL 8,500 Kaufman & Broad Home Systems, Inc.j ...... Los Angeles, CA 8,1 64*

Schulte Homes Corp. N 7,200 Horton Homes, Inc. . . .““o . . . “““. . . “““. . . “““. . . “““. . . “““. . . “““. . . “““. . . “““. . . “““Midd’ebuv’. Eadonton, GA ‘ 6,623 River Oaks Homes, Inc.’ ...... Boaz, AL 6,000 Palm Habor Homes, Inc...... Dallas, TX 5,554 Conner Homes Corp.m ...... Newport, NC 5,460 n Oakwood Homes Corp...... Greensboro, NC 4,800 ● Clayton Homes, Inc...... Knoxville, TN 4,489 DeRose Industries, Inc...... Indianapolis, IN 4,000 Wick Building Systems, Inco ...... Madison, WI 3,433 Winston Homes, Inc.p ...... Double Springs, AL 3,350 Golden West Homesq ...... Santa Ana, CA 3,250” Fuqua Homes, Inc.r ...... Arlington, TX 3,018 Destiny Industries, Inc...... Moultrie, GA 3,000 s Vintage Homes ...... Atlanta, GA 2,880 ● Home of Merit, Inc...... Bartow.,— FL 2,702 ● Figure estimated by RED BOOK editor. aFirm also produces motor homes. bFirm also produces travel trailers and mOtOr homes. cF1’m is a publicly held corporation (Am@. Firm also manufactures modular/sectional and panelized units as well as commercial mobile units.

dFirm also manufacturers travel trailers and mini-motor recreational vehicles. eF/rm is a subsldiq of Redman Industries, Inc.

fFirm is a subsldiaV of city Investing Co,, New York, Nyj as is Wood Brothers, Denver, CO, and General Development cOrp, of Miami, FL. gFirm also produces rnOdUlar/seCtional units.

hTwo major subsidiaries are B’ig~le’ Homes (mobile homes) and Interstate Homes (modular/sectional homes). centu’~on Homes is a subsidiary of Brigadier Homes. i Firm also produces modular/sectional homes, Shelter Resources.Winston Industries was purchased by Tidwell Industries, ]Firm is a whoily owned subsidiary of Kaufman & Broad, Inc., Los Angeles, CA,

kFirm also produces modularlsectional unit% lFirm is a subsldia~ of River Oaks Industries, Inc. IllrJonner Homes Corp, acquired BreCk Homes IrlC, and l+ave’lock Homes cOrp. “Manufacturing conducted through Homes by Oakwood, Inc., a wholly owned subsidia~.

oFirm also manufactures panelized homes. pFirm is a subsidiary of Tidwell Industries, Inc. qFirm also produces rnOdUlar/SeCIiO”al homes,

‘Firm is a subsidia~ of Fuqua Industriesl Inc., Atlanta, GA. sFirm }S a subsidia~ of Vintage Enterprises. SOURCE: Office of Technology Assessment. Chapter 3 Consequences of the Shift to Industrialized Housing —.

Chapter 3 Consequences of the Shift to Industrialized Housing

How will increased factory construction affect the tion signifies quality housing using skilled craft work- quality or cost of products for consumers, the struc- ers in highly automated factories, while in the United ture of the construction industry, and industry em- States it often relates to low-quality units made by ployment? No fixed answers exist for these questions, workers with few skills. The outcome hinges on the since factory-based construction takes on a variety manufacturer’s perception of market demand, and of forms. In Sweden, for example, factory produc- on the effects of public regulation.

EMPLOYMENT IMPACTS Productivity component suppliers. Finally, seasonal and annual fluctuations in consumer demand, material availabil- Above specific trends in the residential construc- ity, and environmental conditions also account for tion industry lies the question of overall productivity: discontinuity. is it going up or down, and how do we know? These characteristics reflect the housing industry’s Quantitative efforts to assess construction efficiency adaptation to the unpredictable social and economic and productivity in the homebuilding industry re- forces that affect demand. However, the fact remains semble the guidelines used to analyze more conven- that the measured productivity of the construction tional industries. This approach may be misleading, industry has fallen in recent years. The Productivity because conventional indices of economic perform- Index, which measures changes in output per man- ance, such as levels of “capitalization” and “value hour, rose from 70 in 1947 to 110 in the mid-1960s, added by manufacture, ” do not always apply to the but it now stands at about 80. While no single con- residential construction industry. As one economist sensus explains why new technologies have not in- explains, “the industry is diverse, dispersed, decreased productivity, several theories have been tached, and discontinuous—all characteristics which offered: are viewed with dismay by analysts of more stable, highly-capitalized, conventionally-deployed in- ● The deflators used to adjust the value of build- dustries.”1 ings may not properly adjust for improved quality. The diversity of the construction industry stems ● Repair and maintenance may be underreported. from the specialized nature of subcontracting units, Since the productivity of renovation work does which constitute over 70 percent of all construction not equal that of new construction, the overall establishments in the United States. This qualitative productivity of the industry should fall as the and geographic “unit spread” has resulted from an ratio of renovation work to new construction uneven distribution of consumer demand, labor mar- increases. However, it is difficult to obtain ac- kets, and availability of materials. Similarly, detach- curate data on renovation. Because of the un- ment of construction enterprises arises from diverse clear ratio between these two activities, changes work movement patterns, the predominance of in their combined productivity are not easily in- short-term subcontracting arrangements among terpreted, different specialty firms, and the builders’ continued ● Increased uncertainty resulting from fluctuations reliance on a shifting array of building material and in the demand for buildings has forced the in- ‘Francis T Ventre, “lnno~’ation in Residential Construct ion,” Tech- dustry to reduce the capital/labor ratio. Capi- nolo~ Re;fiew. vol. 11, 1979, pp. 51-59. tal/labor ratios increased 4.2 percent per year

31 32

from 1950 to 1968, but declined by 0.8 percent This set of considerations does not explain recent per year from 1968 to 1974.2 patterns in construction productivity. Answers will ● Large numbers of young, inexperienced work- arrive with better data. ers entered the work force as the baby-boom generation came of age. Between 1968 and Employment Levels 1978, the number of 16- to 24-year-old workers increased from 15.3 percent of the construc- Given the annual fluctuation in housing demand tion work force to 24.2 percent. There has also and residential construction activity, accurate em- been a significant rise in the number of new ployment trends are difficult to project. Neverthe- firms. The fraction of homebuilding firms less less, recent data on employment may help to ex- than 5 years old increased by a factor of 3 be- amine labor requirements. tween 1960 and 1976. The U.S. Department of Labor estimated that ● Levels of union participation and apprenticeship 483,100 persons worked as general building contrac- are falling. tors for residential buildings in 1983. Of this total, ● Offsite construction work, such as factory com- 346,100, or 72 percent, were classified as construc- ponent construction, is not counted properly. tion workers. The “manufactured” (mobile) home The ratio of value added by the construction industry, according to the most recent Annual Sur- industry-the value of industry sales minus pur- vey of Manufacturers report, employed 42,000 per- chases from other industries—to gross output sons in 1982, of which 34,600 were classified as pro- fell from 51.1 percent in 1958 to 44.6 percent duction workers. in 1979.3 In other words, a growing fraction of the value of homes sold was produced by sup- Detailed labor statistics on the panelized home, pliers to the industry, rather than by the indus- the modular home, and component manufacturers try itself. Also, between 1967 and 1973, 34 of do not exist. However, the Annual Survey of Manu- the 41 industries that produced materials for the facturers does compile labor statistics for the pre- construction industry grew faster than the in- fabricated wood building industry,5 which includes dustry itself, and 23 grew twice as fast. The panelized homes, modular homes, and building fastest growers made prefabricated wood com- components. While this industry classification also ponents and structural wood members for resi- encompasses prefabricated structures, panels, and dences, or items like wooden kitchen cabinets. components for nonresidential uses, products for Some of these firms outstripped the construc- residential use comprise approximately 75 percent tion industry by a factor of 8. This suggests that of all industry shipments, [n 1982, employees in the factory productivity is higher than site produc- prefabricated wood building industry numbered tivity for many activities. 16,800; 11,424 of these were classified as produc- ● There may be scale effects. Productivity was un- tion workers. doubtedly higher during the boom period of Figure 7 illustrates employment trends for the gen- tract home construction. eral building contractor sector, and figure 8 provides While the U.S. housing industry may appear un- time series employment data for the “manufactured” productive as a whole, it does employ a smaller frac- (mobile) home and prefabricated wood building in- tion of the total work force than any other OECD dustries. Both figures reveal that the last peak in em- nation, despite high U.S. construction rates. About ployment levels for these employment classifications 5.4 percent of American workers served the construc- occurred in the late 1970s. Referring to figure 8, the tion industry in 1980, compared with 11 percent in decline in total employment in both the “manufac- Japan, Italy, and The Netherlands, and 7 percent in tured” (mobile) home and the prefabricated wood France and the United Kingdom.4 buildings industries corresponds with an overall decrease in “manufactured” (mobile), modular, and ZH, Kernble stokes, Jr-., “An Examination of Pductivity Decline in panelized housing units produced between 1978 and the Construction Industry, ” The Review of Economics and Statistics, vol. 63, No. 4, November 1981, pp. 495-502. 1982. SJE, Cremeans, ‘{pr~uctivi~ in the Construction Industry, ” The corr- struction Review, May/June 1981, pp. 4-6. qstatistical yearbook, United Nations, 1981 and 1983. ‘SIC 2452. —

Figure 7.— Residential Building Contractors Figure 9.— Production Workers as a Percent of Total Employment in the Mobile Home Industry 700 (SIC 2451) and the Prefabricated Wood r Buildings Industry (SIC 2452) c “= 100

400 t 350 t 3001 1 1 1 1 I i 1 1 1974 1976 1978 1980 1982 Year SOURCE: U.S. Department of Labor, Bureau of Labor Statistics

Year Figure 8.—Total Number of Employees in the SOURCE: U.S. Bureau of the Census, Census of Manufacturers Mobile Home Industry (SIC 2451) and the Prefabricated Wood Buildings Industry (SIC 2452) contrast, an ample labor supply exists in the along 90 the Mexican border, where many manufacturers em- 80 r ploy alien workers; little skill is required, and the ability to read or write English is not of great importance. However, this creates problems of quality control, which, in turn, requires more super-visors.

Skill Levels and Unionization Dependence on unskilled and semiskilled labor has been a motivating force in the shift to industrialized housing. One of the principal causes of in- 1972 1974 1976 1978 1980 1982 dustrialization is to reduce the ratio of labor costs Year to total product costs. Systematic, factory-controlled SOURCE: U.S. Depatiment of Labor, Bureau of Labor Statistics production processes allow manufacturers to train the labor force: The proportion of production workers to all em- . . . to repeat only certain tasks, and to repeat them ployees in the prefabricated wood building indus- under factory-supervised conditions. This task sim- try declined from 75 percent in 1967 to 68 percent plification means that any given worker need not in 1982. Production workers in the “manufactured” be skilled in a trade, per se. Rather, the worker need only acquire skills necessary for the assigned task. (mobile) home industry fell from 84 to 81 percent When changes in unit design require a new set of of the total work force between 1972 and 1982 (see tasks, workers are trained for the new tasks; no nec- figure 9). While some analysts attribute the increases essary, a priori generic and transferable skills are in managerial positions to more government regu- presumed. 6 lation, this development remains difficult to explain. In other words, workers have neither need nor op- As for regional variation, when demand for new portunity to acquire new skills. housing expands, firms compete for each others workers. This causes problems in the Northeast, 6ThOmaS E, Nutt-powll, Manufactured Homes: Making sense Oi a where the number of potential employees is low. In Housing Opportuni~r (Boston, MA. Auburn House Publishing Co , 1982). 34

Little data exist on skill levels, both because there volvement. Production workers in the industrialized has been no serious effort to collect the statistics, housing industry have relatively low skill levels. In and as a result of the nature of labor requirements addition to factory employees, the majority of work- and the work force. To remedy the problem, in pre- ers who assemble panelized homes or work for large paring this study, OTA project staff contacted 50 com- production builders do not belong to unions. Union panies active in the industrialized housing and com- affiliation in the residential construction industry has ponent industry. The resulting survey reveals the fallen steadily since World War 11. widespread use of unskilled or semiskilled workers in the component and “manufactured” (mobile) Even less unionization occurs in the “manufactured” (mobile) home industry. Possible explanations categories—approximately 80 percent of the work 7 include: the small size of an average plant; the ru- force (table 5). Reliance on low-skilled workers stems from the fact that these products involve a great deal ral setting of most plants; the industry’s slow begin- nings; and the fact that the industry developed af- of simple assembly of cut-to-size parts. ter the era of large-scale union organizing. When The greater number of skilled workers in the mod- unionization does occur, it follows industry lines ular sector—32 percent as opposed to 21 percent— according to task-specific skill requirements and as- stems from the more specialized tasks associated sembly line production methods. with modular units, such as plumbing, electrical work, and cabinet work. The higher percentage of Contrastingly, workers in site-built housing construction and onsite assembly of factory-built homes college graduates in component and modular man- do tend to be affiliated with trade unions. One ana- ufacturing may be design engineers. Typically, lyst asserts, “the managements of some firms with skilled workers in a “manufactured” (mobile) home more than one manufacturing facility have made de- plant perform tasks associated with chassis welding, liberate efforts to ensure that their plants, if un- plumbing, and electrical wiring. An average plant ionized, are unionized by different unions.”8 This maintains a skilled worker in each trade area, who supervises the performance of unskilled, factory- union fragmentation strategy reflects management trained workers. When skilled or semiskilled labor efforts to control their bargaining position with the is required, some “manufactured” (mobile) and mod- unions, The same writer believes that the classification of union members in the “manufactured” (mo- ular home producers hire on a fixed-fee, subcontracting basis. Using a subcontracted labor force, manu- bile) home industry as assemblers, rather than on facturers do not pay overtime or provide worker a job or craft basis, has allowed the “mobile home benefit plans. plant management to rearrange tasks and manpower as necessary to increase productivity, a major rea- While the carpenter’s union has contracts with a son that labor in the mobile home industry shows number of “manufactured” (mobile) housing firms, higher productivity than conventional home build- the industry as a whole lacks substantial union in- ing labor.”9 —- —_ -—-— 7 Tw0 points about the data are worth noting. First, these numbers can shift as the market changes. Second, the firms that provided this data are a small fraction of the number of companies in the industry, but their average years in the business, 23 for component producers, sAflhur f), Bernhardt, Building Tomorrow. The Mobile/Manufactured 22 for “mobile” producers, and 19 for modular producers, would indi- Housing Industry (Cambridge, MA: The MIT Press, 1980), cate their success, and confirms the credibility of the survey results, 9] bid

Table 5.—Percentage of Work Force in Various Skill Categories

Skilled Unskilled Semiskilled Not licensed/ Licensed/ College Group (less than 1 month) (1-12 months) certified certified graduate Component. . . . . 38 41 12 1 8 “Mobile” ...... 41 38 15 1 5 Modular...... 33 35 22 3 7 SOURCE Office of Technology Assessment, 1986, 35

Wage Levels wage levels do not equal those of the construction industry. Past trends suggest that wage level gaps The housing construction industry’s use of un- between the various sectors will not close signifi- skilled, non-unionized laborers has enabled the aver- cantly in the near future. age “manufactured” (mobile), modular, and panelized home manufacturer to pay wage rates that fall Potential To Upgrade Job Quality below national construction industry averages. Fig- ure 10 presents average hourly earnings for the To date, the U.S. industrialized housing industry respective housing construction and manufacturing has promoted “a clear shift from traditional ‘craft’ establishments. Production workers in the “manu- skills to industrial-type ‘assembly’ skills, even on- factured” (mobile) home and prefabricated wood site. Some predict that craft skills will become part building sectors have earned significantly less per of a lucrative, but limited market for retrofit, con- hour than construction industry employees, and less version, rehabilitation, and historical preservation.”10 than employees in the housing sector as a whole. However, factory-based construction may not inevi- Although general contractors have offered higher tably lead to the unskilled, routinized assembly-line. wage levels than the manufacturing sector, these New technologies can create attractive, stable jobs for production workers. Employees in such facilities could be treated more like workers in automobile Figure 10. —Average Hourly Earnings— of Employees by Industry Sector factories than day laborers, enjoying continuity of employment, skill acquisition, and identification with 12 r the employer or firm. The Swedes employ factory-based construction to promote continuity in employment and to facilitate the development of an industry that provides greater returns to wages, Swedish factories resemble craft- based shops, where automated equipment amplifies individual skills. Rather than following an assembly line, Swedish factory workers craft individual structures using specially designed jigs and numerically controlled positioning, cutting, and milling systems. Whether U.S. industrialized housing producers will depart from current practice and opt for a Key: Swedish-style approach will depend on economic — Construction total and other factors that do not involve the technol- -“–- Residential building contractors ogy itself, such as the status and potential for suc------Manufacturing total cess of worker retraining programs. ‘-+----- Mobile home industry IOEric D]uhosch, “EXpert Panel on Technology Changes and [mPacts ~ Wood buildings industry on the Building Construction Industries,’” paper submitted to the Of- SOURCE” US Department of Labor, Bureau of Labor Statistics fice of Technology Assessment, 1984.

HOUSING COSTS Have new building technologies improved the in- new technology has not entered U.S. markets more dustry’s ability to lower housing costs? Unfortunately, rapidly. examination of the existing data leads to ambigu- ous and contradictory results. With the exception of Homebuilding technologies most directly affect la- component fabrication, it is difficult to document the bor and material costs, which account for approxi- net economic advantages of factory-based construc- mately 50 percent of total housing costs and which tion in the United States, which is one reason that have risen at less than half the rate of land costs and 36 financing 11 (see table 6). The extent to which cost Table 7.—Construction Time Comparison savings in home construction will aid the home- Structure type Total assembly time buyer, and whether this will appear as increased Double section mobile/ profit for builders, will depend on the nature of lo- modular home ...... 1 to 2 weeks cal housing markets. Panelized or precut home ...... 6 to 8 weeks Componentized home...... 4 to 12 weeks While precise cost comparisons are virtually im- Stick-built home. ., ...... 12 to 24 weeks possible to construct, factory-built housing may lower SOURCE: Automation in Housing. costs by:

● As expected, an inverse relationship exists between increasing the labor productivity of construction the use of industrialized building techniques and with advanced assembly equipment, components and the time required for construction. ● increasing the role of less-skilled employees willing to work for lower wages, To measure the extent that existing homebuild- ● decreasing construction time and construction ing technologies may reduce initial costs for the loan costs, homebuyer, the National Association of Home ● improving quality control with precision ma- Builders (NAHB) conducted a housing technology chinery and jigs, research project in 1979. The NAHB reported that ● decreasing defects and site visits needed to re- its “cost buster” house achieved a 25-percent sav- pair such problems, ings in construction material and labor, compared ● reducing the seasonal nature of homebuilding, to other homes of similar size and location, Possi- and ble savings in construction finance costs were not facilitating the purchase of large volumes of ma- considered. These cost savings will vary, depend- terials. ing on region; production levels; and the type, size, and quality of the housing. New technologies also affect the 17 percent of total costs taken up by construction finance. Sharp re- To translate this 25 percent labor and material sav- ductions in the amount of time required to build a ings into an “overall” scheme, a 1982 report from given unit—more so in the case of a multiunit project the U.S. Comptroller General based a cost savings like a stacked modular—can save the factory-based analysis on the National Association of Home builder substantial construction loan interest costs. Builders’ data. Since labor and material costs con- stituted approximately half of the initial cost, a 25- Construction time requirements for the various percent reduction in labor and construction mate- housing types depend on the building technologies rial expenditures decreases the sales price of a home employed, the skills of the workers involved, and by 11.75 percent, assuming that the cost savings are management effectiveness. Table 7 presents con- not retained as builder profits. Given the median struction time differentials for four types of housing. price of a house in April 1981 at $69,300, the initial savings would total $8,143, assuming a conventional I}’’ The Report of the President’s Commission on Housing,” 1982. 30-year mortgage at 15 percent interest and a 20 percent downpayment. This would create monthly savings in financing costs of $82.41, or $29,668 over the 30-year mortgage period. Because land and Table 6.—Approximate Cost Breakdown for New Single-Family Homes financing constitute a growing share of construction and consumer housing cost, this is a high estimate 1970 1980 Percent of the cost reductions that may be brought about by 0 cost ( /0) cost ( 0/0) increase existing technologies. Furthermore, the timelag be- Land...... $4,450 19% $15,500 24% 248% tween the introduction and use of new homebuild- Onsite labor . . . . 4,500 19 10,350 16 130 ing technologies suggests that new technologies will Materials ...... 8,650 37 22,000 34 154 Financing ...... 1,600 7 7,700 12 381 not reduce housing costs in the immediate future. Overhead/profit . 4,200 18 9,050 14 115 Total ...... $23,400 100% $64,600 100% 176% Of the various forms and types of industrialized SOURCE The Report of the President’s Commission on Housing, 1982. housing, “panelized and modular homes,” the Comp- 37 troller General’s report indicates, “are not a means however, sales figures for “manufactured” (mobile) of significant cost savings of new single-family de- homes do not include land costs and “setup” charges, tached housing. The industry markets the houses which increase costs by at least 15 percent. Sales on the basis of their high quality, stemming from prices do reflect differences in product characteris- quality-controlled factory12 methods, and their advan- tics; while the average size of site-built homes has tages to small builders. " Although the base prices decreased in recent years, the typical site-built home of panelized and modular homes do compare favora- remains larger than the “manufactured” (mobile) bly with conventional construction, additional costs home. incurred in site acquisition, site development, and utility installation may reduce their affordability. Also included in the table is a time series cost comparison between “manufactured” (mobile) homes However, panelized and modular homes can and site-built homes. Although the cost differential prove economical when site-building is simply not between “manufactured” (mobile) homes and site- feasible-on scattered sites, or in outlying rural areas built homes has increased over time, a cost calcula- that lack skilled tradespersons. In addition, pane- tion that included both the expected lifetime of each lized and modular homes can yield savings in “soft type of unit and the difference in maintenance costs costs” for builders. Since less site work is needed would raise the effective price of the “manufactured” for these houses than for conventional site-building (mobile) units. As a 1985 report for the Department methods, builders can sell more houses with the of Energy states: “Manufactured home occupants . . . same amount of finance money. Reduced work time consume more total energy per heated square foot at the site also negates losses from theft and van- than do occupants of other single-family detached dalism. homes’’ 13–48 percent more from April 1980 to The one type of factory-built house that does of- March 1981, and 31 percent more 2 years later. Fur- fer real savings in initial cost is the “manufactured” thermore, the Technical Advisor for Navy Housing (mobile) home. Table 8 states that the average sales recently concluded that when quality and upkeep costs are taken into account, “the mobile cannot price of a “manufactured” (mobile) home in 1983 1 was less than 25 percent of that for site-built homes; compete economically.” 4

IZU.S. Genera] Accounting Office, Comptroller General, “Greater Use Ispacjfjc Northwest Laboratof_y’, “Impact of Alternative Residential of Innovative Building Materials and Construction Techniques Could Energy Standards,” November 1985, p. 33. Reduce Housing Costs, ” Washington, DC, 1982. lqRichard Hibbert, LJ.S Nav)’, correspondence dated ~!ar. 6, 1986. 38

HOUSING QUALITY Objective measures of quality in housing are dif- Furthermore, field inspectors observed problems that ficult to construct. The “satisfaction” rating for both had not been reported by homeowners in approxi- site-built and “manufactured” (mobile) housing has mately 80 percent of the houses. Of the 520 prob- increased steadily during the past decade. In a 1983 lems identified in 81 homes, 30 percent were due Department of Census survey, 60 percent of the re- to material defects, 30 percent to poor workmanship, spondents living in site-built homes constructed in 14 percent to problems occurring during unit setup, 1976 rated their house as “excellent,” and 80 per- and the rest were the result of use or could not be cent of respondents living in a house built in 1983 determined .17 gave their homes the same rating. For “manufac- The relatively poor performance of the “manufactured” (mobile) homes, “excellent” ratings were given by 30 percent in 1976 and 54.6 percent in tured” (mobile) units just cited does not stem from 1983. 15 Table 9 compares site-built and “manufac- factory production technique. More likely, it reflects tured” (mobile) homes from two different periods. the U.S. market for low-cost/low-quality housing. While newer units fared better than older units in There is no direct equivalent to a “manufactured” most cases, the site-built units were less likely to suf- (mobile) home in Europe or Japan. fer from any of the defects surveyed. Also, other Factory-based technologies can enhance the phys- defects, including inoperative doors and windows, ical and esthetic quality of housing. In the United leaky pipes, and electrical wiring problems, have in- States, the term “prefab” still calls to mind inexpen- creased substantially in newer “manufactured” (mo- sive, monotonous, and drab housing. Consumers bile) homes.l6 tend to believe that American factories produce dreary, shoddy homes. However, the high-quality, In an effort to determine whether these reported high-status houses constructed in Swedish plants defects did exist, the RADCO company made sev- prove that factory construction can offer significant eral site inspections of units that had been the sub- advantages at various stages in the homebuilding ject of a previous survey. One or more major prob- process, from the initial design phase through the lems were discovered in three of every four units. production, assembly, and erection of the end ‘sWestat, Inc., “Analysis of Annual Housing (AHS) Data Pertaining product. to the Durability of Manufactured Housing,” February 1986, pp. 4-10. lb]bid,, pp. 3-17, 3-18, 3-23. Common stereotypes notwithstanding, the U.S. industrialized housing community has met consumer Table 9.—Percent of “Manufactured” (Mobile) demand with the development, through basic engi- and Site-Built Homes With Various Problems neering procedures, of various housing configurations. Units mimic the styling array of conventional Built before 1977 Built after 1977 “stick” builders: one-story, two-story, split-level, ex- Manufactured Site Manufactured Site posed ranch, contemporary, and traditional. They Holes in floora . . 5.2 1.8 1.8 0.5 feature varied foundation systems, roof configura- Peeling paint (currently) . 1,4 3.9 0.8 0.4 Broken plaster (currently). 1.5 3.4 0.9 0.5 tions, fenestration, and floor plans. Units with nonworking outlets (currently) 2.3 3.6 2.0 1.2 In certain cases, particular features are limited. For Fuses or switches blown example, while 24-inch stud spacing has proven (in last 90 days) .,, 15.8 17.3 16.4 18,1 sufficient for most homes, the interior sheathing used Exposed wires (currently) 1.9 2.8 1.1 1,9 Heating breakdown ... 6.8 4,4 5.1 2.2 in some industrialized housing is too thin to span Roof Ieaka ... 21.9 6.8 20,0 3.6 this distance and still remain flat. On the whole, how- Toilet breakdown ever, many options are available to the consumer (in last 90 days) ,, .,,,,., 4.4 4.1 7.0 5.1 Holes or cracks in interior of industrialized housing. Component and modular walls/ceilings (currently). 4.7 5.5 2,3 1.8 manufacturers produce up to 1,000 different models as@b@t home respondents were asked about “current’ problems manufactured home residents were asked about problems in the ‘‘past 12 months “ SOURCE Westat Inc ‘Analysls of Annual Housing (AHS) Data Pertalrung to the Durat)tl!ty of 17ResOurCes, App]i@Ons, Designs & Controls, Inc. (fUDCO), “Final Manufactured Housing “ February 1986, p 4-3 Report for Durability in Manufactured Homes, ” December 1985, 39 to choose from, and provide custom design options Factory construction means that homes can be for high-income buyers. built to more precise standards, and can benefit from more reliable assembly. Onsite construction and as- Improvements in computer-assisted design (CAD) sembly work is vulnerable to the vagaries of weather, should enhance design flexibility still further. Pro- and workers may cut corners—especially when a spective homebuyers may now design their own layer of drywall and paint will cover a multitude of floor plans, and compare different interior and ex- sins. The incentive and opportunity to do this is re- terior wall coverings in the unit spaces. The Japa- duced in the factory. In Sweden, the resulting qual- nese connect this process directly to production ity is such that most firms offer 10-year guarantees equipment, which then deliver pre-assembled units on their products. to a construction site within 3 weeks. U.S. manufacturers have only begun to implement Concerning the manufacture of component parts, technologies that are already realized in Swedish and the factory setting offers the efficiencies of mass pro- Japanese industrialized housing. Still, certain advan- duction so that structural components—such as tages of factory construction involve quality improve- floors, roofs, windows, and doors—can meet uniform ments that would not be readily accepted by con- tolerances. The high quality of prefabricated build- temporary American markets. Some industry ing components has contributed to their acceptance analysts believe that this problem may be solved by many State and local building codes. Component through a system of rating or labeling houses accord- manufacturers confront markets that can absorb high ing to graduations of quality (see ch. 6). Finally, re- volumes of production, which helps to offset the fixed cent improvements in the design and manufacture costs associated with automated manufacturing of commercial structures should affect residential equipment. construction, over time. Chapter Industrialized Housing in Japan, Western Europe, and Canada

a Chapter 4 Industrialized Housing in Japan, Western Europe, and Canadal

Despite the growth of factory-based housing in the Japan, Sweden, and other Western European na- United States and the American tradition as an in- tions now see the United States as a major market novator of mass-production technology, other indus- for manufactured housing. Foreign penetration, trialized nations top the United States in terms of which was unthinkable just a few years ago, has now homebuilding technologies. U.S. firms can learn raised considerable concern and debate within the much from foreign developments. industry. At the same time, some members of the U.S. industry believe that the existing domestic ap- The sophisticated manufacturing facilities of for- proach can satisfy American market demand, and eign housing industries constitute the major differ- negate the potential of foreign investment in research ence between U.S. and foreign firms. Most Amer- and development. One observer of the U.S. “man- ican plants lack modern equipment, relying on ufactured” (mobile) home industry contends that the unskilled laborers and worker-operated machines. Japanese and Europeans are “obsessed” with tech- Skilled operators and high-speed assembly lines nology.2 The vice-president of one of the largest firms make Scandinavian factories more capital-intensive, in the United States visited a construction research especially those in Sweden. Some Japanese compa- facility in Japan and asserted that “he could not be- nies have automated to the point where they em- lieve all these [research] employees just running ploy robotics and computer controls for production. wild” and that “if he were head of Taisei he would The Japanese are beginning to market homes fire every one of the R&D staff and save the com- through “showrooms” that provide customers with pany $25 million per year.”3 However, other ob- an enormous range of design options. servers argue that the U.S. industry has grown com- placent with the assumption that construction is a ] Unless otherwise noted, the material in this chapter is based on re- “nontraded” commodity. They fear that the lack of search conducted by the Stephen Winter Associates, New York, NY. U.S. research and development robs American homebuyers of both qualitative improvements and cost reductions, and increases the opportunity for foreign producers to penetrate markets.4 In order to assess the potential impact of foreign competition, as well as to provide some points of comparison with the U.S. housing industry, this chapter examines industrialized housing in nine selected countries. Also, it will address a range of domestic and international factors that affect foreign penetration of the U.S. housing market.

ZAflhur D, Bernharcft, BUj]djng Tomorrow: The Mobile/Manufactured Housing Industry (Cambridge, MA: The MIT Press, 1980). sA]bus Trip Report, July 7, 1985, cited in Daniel W. Halpin, Final

Photo credit: Don O. Carlson Report Task 3, “Technology in Architecture, Engineering, and Construc- tion,” contractor report for the Office of Technology Assessment, Mar, An American manufacturing facility. Workers glue 17, 1986, panels by hand, rather than with automated 4See for example the article by Don Carlson in Technology and the techniques. Future of the U.S. Construction Industry (AIA Press, 1986).

43 44

JAPAN Japan’s housing construction industry is based on Many of these houses are wood-framed modulars high-volume concentration in a small number of with walls constructed on a wooden lattice, rather firms, design flexibility, and capital-intensive, high- than with the stud wall construction employed in technology production. Table 10 summarizes the American modulars. Building elements, such as walls characteristics of Japan’s five largest business enter- and floors, are assembled into small modules in the prises, which as a group produced 56,000 units of factory and trucked to the site. These modules often industrialized housing in 1983. Several of these firms, lack the factory finish of an American modular. including Matsushita, Asahi, and Sekisui, own stock The one notable exception to the wooden lattice in housing companies. Misawa spent 1.5 percent, system is the precastle autoclave lightweight ce- or $7.5 million, of its 1984 sales on research. Sekisui 5 ramic (PALC) system, developed by Misawa Homes spent 0.2 percent, or $2.5 million. with extensive funding from the Japanese Govern- However, the 170,000 factory-built homes that are ment. Modulars of this material, which resembles sold each year represent 15 percent of the Japanese European lightweight concrete, contain a homogene- housing market (see table 11). Most houses are still ous envelope that functions as structure, insulation, produced by traditional “post-and-beam” frame meth- fireproofing, and interior/exterior finish. Currently, ods; a small number, about 7 percent, are multi- Misawa produces this type of house in only 1 of 23 family structures or are built with American 2 by plants, but claims that PALC units require just 170 4 inch wood stud techniques. man-hours to construct—as opposed to 3,300 man- hours for standard “post-in-beam” techniques, or Several large corporations control home manufac- 1,000 man-hours for pre-stressed wooden panel sys- turing: Misawa, Daiwa, National Homes, Sekisui tems. This represents an extraordinary gain in pro- Heim, and Sekisui Chemical. These five companies ductivity. 6 account for 86 percent of Japan’s total production. Their factories are highly automated, using such Misawa has developed elaborate equipment for modern equipment as robotic welders and main- fabricating these insulated wall panels with a vari- frame computers. Each plant can produce thousands ety of interior and exterior finishes, and has engi- of units per year. neered automated devices to fabricate panels con-

5James MCf@ller, “lndustria]ized Housing: The Japanese Experience, ” Alberta Department of Housing, December 1985, p. 95. ‘fbid.

Table 10.–Comparison of the Top Five Factory Housing Companies in Japan, 1983

Rank by production ., ., 1, Sekisui House 2. Misawa Homes 3. Daiwa House 4. National House 5. Sekisui Chemical Total production (83). ., ., ., .40,436 30,650 20,794 20,444 12,237 Year founded ...... , 1960 1962 1955 1963 1947 Factories producing housing ., ., ., 4 22 12 4 6 Total employees. ., ., 8,014 1,105 5,672 2,010 6,038 Total assets (million yen) . . . . . 597,497 138,208 289,198 69,346 290,937 Equity ratio ...... 26.7 20.0 34.0 25.2 18,0 Major shareholder (percent owned) Sekisui Chem (20.3) Misawa Co. (9,6) – Matsushita (58.6) Asahi Chem. (16.2) Ownership by Japanese banks (%) 13.4 10.4 14,9 6.7 8.6 Foreign ownership (%) ., ., 12.8 11.3 15.8 6.0 10.3 Sales breakdown (%) Building materials ... ., . . . — 69 87 63 — Housing construction : : : : : : 79 — — 27 38 Other construction ., . . – 13 — — — Housing lots, : : : : ... – — — 10 — Real estate ., ...... , 21 — 13 — — Other activities . . ., ... – 18 — — 68 Sales–March 1984 (million yen) ., 443,742 (Jan. 84) 126,216 285,689 97,924 324,018 SOURCE Japan Company Handbook, First SectIon Firms, First Hall 1984, The Oriental Econom!st, cited n James McKeller, “lndustnahzed Housing The Japanese Experience, ” Alberta Department of Housing, Oecember 1985, p 81 .

Table 11 .—Factory Home Construction in Japan After viewing these displays, the prospective (as a percent of all home construction) homebuyer can, with the help of an architect, custom design his house using a simple CAD (computer- 1971 ...... 8.5 assisted design) system. Upon completion of the de- 1975 ...... 10.9 sign, a materials list is generated instantaneously. 1979 ...... 10.8 1980 ...... 12.6 The buyer then receives a price, and the order goes 1981 ...... 13.6 to the factory. 1982 ...... 14.4 1983 ...... 15.3 Widespread export of Japanese industrialized SOURCE: Building Center ofJapan,1964. Cited in James McKelleL “industrial- housing or manufacturing technology has not ized Housing: The Japanese Experience:’ Alberta Department ofHous- ing, December 1965, p. 76 occurred. Misawa plans to construct a PALC plant in South Korea, and intends to arrive in the United structed from l-by 4-inch “studs’’ and thin plywood States within the next several years. All of the ma- sheets. jor manufacturers have expressed an interest in the U.S. market. They would welcome joint ventures, Most Japanese prefabricated homebuilders main- but do not wish to commit to large-scale investments. tain sales offices throughout the country. In 1980, Daiwa is employing conventional U.S. technology for example, Misawa sold 13,000 units through fran- in Houston and California, perhaps to learn the mar- chise dealers, employing 1,700 sales personnel in ket before making a significant capital expenditure. 163 branch offices. Manufacturers sell through Misawa has entered into an “agreement” with U.S. “home show parks," where model homes of many Home, but the details have not been revealed. different firms appear in the prime retail locations of major cities. Accordingly, land costs represent a Japan may need to modify its products in order major investment. The Sendai Park, located on the to penetrate foreign markets. Aside from differences site of Osaka World Fair, shows 48 homes and is in taste, Japanese domestic markets emphasize fire- the largest such facility. The Tokyo Housing Fair dis- resistance and the ability to withstand earthquake plays homes in Shinjuku. The Asahi Broadcasting tremors to a greater extent than U.S. markets. Energy Co. operates both of these home show parks, charg- efficiency receives little attention, due to the mild ing approximately $7,000 per month for each house; Japanese climate; few Japanese residences have cen- the fee covers land, management, and advertising. tral heating.

SWEDEN The Swedish industrialized housing industry may in factories. By 1983, that figure had risen to nearly be the most highly developed in the world. In the 90 percent (see table 12). The Swedes maintain ex- mid-1960s, Sweden set a national goal of building ceptionally high standards of quality, and offer 1 million new homes in a decade, This goal was multiyear guarantees for parts and workmanship.7 achieved by reorienting the nation’s homebuilding industry around factory production, and the trend IFOr a r~ent review of developments in Swedish manufactured housing see L. Schipper, S. Meyer, and H. Kelly, Coming/n From the Cold: continues today. Following the initial 10-year period, Energy-Wise Housing in Sweden (Cabin John, MD: Seven Locks Press, 40 percent of all single-family homes were produced 1985).

Table 12.—Factory Construction of Single-Family Homes in Sweden (as a percent of all single-family home construction) 1971 1972 1973 1974 1975 1976 1977 1978 1979 1980 1981 1982 1983

Factory built (o/o) . . . 60 55 55 43 42 48 44 49 49 58 65 82 89 Site built (o/o) ...... 40 45 45 57 58 52 56 51 51 42 35 18 11 Total units (thousands) ...... 35.7 42.8 43.2 53.3 36.1 42.7 40.2 40.6 38.2 32.6 26.8 23.4 19,3 NOTE: “Factory built” means produced substantially or entirely from factory elements, “Site built” means produced principally from loose wooden elements on site. The sharp increase in construction in 1974 resulted from a rush to take advantage of a tax rebate program before it expired. SOURCE: Central Bureau of Statistics, Construction and Housing Loan Statistics, Stockholm. 46

Of the approximately 55 Swedish industrialized in importing Swedish houses, with a combined pro- housing companies, 12 are considered to be “large.” jected 1986 sales volume of 1,500 units. Nearly all Building systems include small and large wood- plans to establish manufacturing facilities have framed, highly insulated panels, which may be han- grown out of joint ventures with Swedish factories. dled by either workmen or a small crane. Factory Currently, an overcapacity exists in Swedish techniques represent the state of the art. Typically, homebuilding factories, and production is at half its computer controls operate factory production lines, peak level. As a result, the Swedes may attempt to allowing for flexibility in the type of the units increase exports. The high-quality house represents produced. Swedish houses incorporate many inno- the most likely product for the United States, erected vative technologies not in use in the United States; with local custom builders in subdivisions of 10 or interestingly, some are produced by subsidiaries of more units. American firms. Sweden’s dramatic progress in the housing sec- Swedish manufacturers export homes to West Ger- tor has resulted from a broad national consensus and many, Austria, Switzerland, Holland, Norway, Den- direct government policies. The government subsi- mark, Finland, the Middle East, and North Africa. dizes mortgages, including costs related to energy The Swedes have begun shipping to the United and water conservation, and spends three times as States, on a limited scale. Swedish Wooden House much money on direct building research than the has erected high-quality, energy-efficient housing in United States.8 Including spending through univer- the United States for several years. Skanska, the ma- sities and industry research, Sweden’s total build- jor international construction and engineering firm, ing research budget approaches $200 million per has entered the U.S. market in both commercial and year. residential construction. Also, as of March 1986, no fewer than 20 American corporations were engaged 81bid.

FINLAND Industrialized housing in Fin and is widespread, orientation of Finland’s economy, and its global including 60 percent of single-family homes built per placement of trade-oriented consular officials all place year, although the Swedish industry is still greater. the country in a strong export position. Tradition- The predominant form employs the small panel, fol- ally, trade has been with Africa and the Middle East, lowed by units with large panels and modulars. Pan- specializing in camp buildings. More recently, pane- elized systems maybe closed in by the manufacturer, lized homes and precut log houses have been ex- or delivered as kits to the owner/builder. Modular ported to Great Britain, Sweden, South America, the construction is also gaining popularity. As a whole, United States, and—most of all—the Soviet Union. the residential construction industry enjoys an an- Finnish houses are found in 90 countries. Makroscan nual growth rate of 20 percent. USA, a subsidiary of Makrotalo Oy, one of the eight Finland’s industrialized housing industry and its large house manufacturers in Finland, and MakroEn- wood products industry are interrelated. Many firms gineering, a manufacturer of house-factory equipment, are currently finishing a project in Massachu- produce the lumber and materials that will be used setts. They now seek builders interested in using for individual home units. their system, as well as other joint manufacturing The Finnish experience in exporting building ma- ventures. Also, they sell factory equipment. terials like wood products and granite, the export .

DENMARK The Danish industrialized housing industry aims The small panel system, produced by such com- for both domestic and export markets. Nearly 80 per- panies as Hosby Huse, Hellebo, and Roslev-Huse, cent of the detached housing produced since the mid- represents the most likely export to the United States. 1960s has been factory-built, most of it panelized. Hosby Huse has already constructed a prototype unit At the same time, international contractors like A. at Brookhaven National Laboratory, the first in a clus- Jespersen & Son and Larsen & Nielsen have con- ter of energy-efficient houses from abroad. structed large projects throughout the world, primarily in the Middle East, using a prefabricated concrete system produced in local factories.

Canada’s housing construction industry does not struction shifts from large developments, where there compare to that of the United States, basically due is an economic advantage to site building, to dis- to the small Canadian housing market—150,000 persed rural housing. Factory-produced homes units per year. However, Canadian manufacturers should have a cost advantage over site-built houses have experience in exporting precut, panelized, and erected by small rural builders. modular building systems, especially Viceroy, Britco, Housing exports from Canada to the United States and Freure Homes. Viceroy sold 1,200 of its precut may increase rapidly in the near future. Most Cana- home packages in 1984, and topped that a year later. dian housing factories are situated near population The firm now plans to expand aggressively in North centers, within range of the United States. One Amer- American markets, and expects to establish manu- ican inspection and certification agency has already facturing facilities in Florida and Canada. Viceroy been contacted by five Canadian manufacturers credits its success to both outstanding design and about exporting homes to the Northeastern States. the high quality of their materials. The relative strength of the U.S. dollar has served Some industry members believe that despite as an economic advantage, generating low shipping shrinking demand, the market share for industrial- costs. ized housing will increase as Canadian housing con-

GREAT BRITAIN For over a century, the British have led in design panies have entered the U.S. housing market by and construction of industrialized buildings. They using traditional building techniques. Britain’s Bar- shipped prefabricated schools and commercial build- ratt Homes, which last year built approximately 11.5 ings to the Middle East, Africa, and Asia long be- percent of Britain’s private housing, has established fore many of today’s large firms entered these mar- an American subsidiary, and hopes to complete kets. Most British building systems rely on metal 4,000 to 5,000 homes annually during the next few framing, given the domestic shortage of construc- years. Another British firm, John Laing Homes, now tion lumber. operates in southern California. Laing plans to complete 200 units in 1986, and 1,000 units a year British real estate investors have been active in the major U.S. cities for some time, and British com- thereafter. 48

FRANCE Along with the British, French firms have been more sustainable economic base than other areas among the top five international contractor groups of the United States. for many years. Recently, several French companies In a joint venture with U.S. Home, Maison Phe- have entered U.S. markets as real estate investors nix has built a limited amount of steel and concrete and developers. For example, Les Nouveaux Con- housing in Florida. Also, Filled has attempted to sell structeurs produces conventionally built housing in French-designed metal-framed housing and commer- Los Angeles, and expects to complete 300 homes cial buildings. per year by 1988 and 500 by 1990. The firm’s management believed that California had a stronger and

NORWAY Traditionally, Norwegian contracting firms have ter, and also has plans for conventionally built con- been active in the Middle East, Africa, and Malay- dominiums and townhouses in the Orlando area. sia. Sandegruppen A/S, the largest group of contrac- At least one other Norwegian homebuilder, G. tors in Norway, now operates in the Orlando, Florida, area as the Selmar Corp. Selmar will construct the Black Watne A/S, currently operates in the United States, in the Austin, Texas, area. Norwegian Pavilion at Disney World’s EPCOT Cen-

WEST GERMANY West German firms, like Phillip Holzmann AG and Although internationally active in the production its subsidiary, the J.A. Jones Construction Co., have of factory-built housing, West German producers penetrated U.S. markets for nonresidential construc- have not yet entered U.S. housing markets. tion and development. The United States accounted for over $2 billion worth of contracts, or 41.7 percent of the foreign volume of West German firms in 1985, according to Engineering News Record.

OTHERS At the 1986 NAHB housebuilders show, firms ex- related products from foreign sources—appliances, hibiting either housing systems or components in- tiles, heating and cooling systems, and decorative eluded those mentioned above, as well as firms from items—were shown. Foreign exhibits accounted for Holland, Italy, and Belgium. Additionally, housing- approximately 15 percent of the total exhibit space. Chapter 5 International Competition in Industrialized Buildings, Components, and Appliances Chapter 5 International Competition in Industrialized Buildings, Components, and Appliances

Penetration of the U.S. housing market by foreign scribed in chapter 2, constitute either the whole or building producers is not widespread, but is greater the major elements of a building structure in prefabri- now than at any time in the past. A number of for- cated form, and include panelized, modular, “man- eign manufacturers have decided that the potential ufactured” (mobile), and wet core systems. Compo- gains outweigh the risks involved, and have entered nents, which do not fall within the scope of this the American market already; others plan to do so report, are minor assemblies, subsystems, or ele- in the immediate future. Conversely, opportunities ments like roof trusses, cabinets, appliances, equip- for U.S. penetration of overseas markets are, at best, ment, building materials, hardware, fixtures, and ac- limited. cessories. In the long run, however, foreign During the last several years, foreign building sys- producers will influence U.S. housing markets more tem producers have expressed an increasing inter- through technology transfer than with sales of en- est in the U.S. market. Evidence of this includes the tire structures. Joint ventures with U.S. firms repre- substantial foreign presence at expositions like the sent a probable vehicle for this transfer. National Association of Home Builders (NAHB) con- Currently, only a small number of foreign build- vention, the number of foreign housing manufac- ing systems exist in the American marketplace. How- turers seeking U.S. building code approvals, and the ever, component imports have increased substan- actual number of foreign building projects under de- tially over the last 5 years, including roofing, velopment in the United States. hardware, steel and steel products, wood and wood Primarily, four factors explain this international products, kitchen and bath fixtures, appliances, heat- competition: ing and ventilating equipment, and a variety of decorative finishes and materials. 1. a decreasing world building market, especially in the Middle East; Market penetration by foreign building manufac- 2. aggressive foreign pursuit of technological ad- turers could change rapidly in the near future. A vances within the housing construction in- number of manufacturers plan to export wood- dustry; framed panelized systems to the United States, upon 3. a greater interest in housing quality on the part completion of their market surveys and once build- of U.S. buyers; and ing codes are approved. A case study comparing two 4. a decline of traditional markets to which for- Swedish systems with the Council of American Build- eign housing manufacturers export, and a cor- ing Officials (CABO) Code for one- and two-family responding excess in production capacity. dwellings found that with minor changes, the two systems could satisfy U.S. statutes. Most of these Foreign building products that may be exported changes stem from the fact that while Swedish codes to the United States fall in two distinct categories, are performance-based, CABO’s—and most U.S. systems and components. Building systems, de- codes—are prescriptive. The arrival of other technologies, such as the Japanese ceramic house, does not seem imminent, but this may change with fur- ‘Unless otherwise noted, the material in this chapter is based on re- ther technological development or market fluctu- search conducted by the Steven Winter .Associates, Ne~’ York, NY. ations.

51 52

TRADE FACTORS AFFECTING EXPORTS TO THE UNITED STATES Foreign building exports to the United States de- tended with a shrinking market in recent years. Re- pend on the products’ qualification as an acceptable ductions in oil prices and oil production, as well as building type, and also on market conditions, gov- the increasing Third World debt, have limited large- ernment policies and assistance, and related busi- scale housing programs. ness strategies and decisions. These various condi- In addition, some foreign exporters project a de- tions will affect the relative success of foreign crease in domestic housing markets due to satisfac- products in the United States. Overseas manufac- tion of post-World War II demand. In the last sev- turers cite several incentives to risk penetrating U.S. eral years, Sweden’s domestic output has declined markets. from 100,000 units per year to 40,000. Japan has also reduced demand for housing, through various Currency Exchange Rates 5-year plans. One observer believes that the Japa- Fluctuations in the value of the dollar in relation nese will turn to renovation instead of construction, to other currencies have, over the past decade, ben- largely because of high land values and a shortage efited foreign housing products. However, because of building sites. component costs represent less than a third of the Against decreasing demand in many industrial- selling price of a house, changes in American tastes ized countries, companies that expanded production and expectations of quality may be just as impor- facilities now seek new markets. The United States tant as changes in exchange rates. may absorb much of this excess capacity. Third World markets are vast, but these nations cannot Availability of New Markets afford most available products. When compared to markets in most countries considering exports to the United States, the American Experience in International Trade housing market is enormous. Only Japan approaches Foreign building manufacturers have significant the U.S. level, producing approximately 1 million experience in international trade. The typical Finn- units per year. As a result, the potential for new busi- ish housing manufacturer exports 50 to 70 percent ness is greater in the United States than elsewhere. of its housing production. Other Scandinavian firms The United States also holds various sectors, with export housing to the Middle East, North and Cen- opportunities for exploitation of specialized niches tral Africa, the Soviet Union, South America, the Far like vacation housing and condominiums. East, and continental Europe.

Idle Plant Capacity and the Decline in Existing Markets Companies that produced housing for the Middle East, North Africa, and developing nations have con- 53

FOREIGN GOVERNMENT POLICIES AFFECTING INTERNATIONAL TRADE IN HOUSING Foreign government actions can have a large im- Swedish consulate in Chicago has familiarized Swed- pact on exports from their countries. Many nations ish firms with opportunities in the American mar- provide incentives and aids that are not available ket, The Danish consulate in New York has coordi- to American housing manufacturers. nated the export activities of manufacturers, and arranged for a multifirm booth at the 1985 NAHB Overall Strategies and Planning exposition. The Finns maintain commercial attachés in New York and Houston; the latter office assists In most industrialized countries, government and efforts to sell panelized housing to builders. The con- industry cooperate more than they do in the United sulates of France, West Germany, and Canada have States. The decision to export housing to the United acted as conduits to channel market information States may be more than that of a profit-oriented firm back to manufactured housing exporters in their seeking a new market; it may also reflect goals for home countries. U.S. consulates could be used in the national economy, and for long-range industrial similar ways. planning. The current success of the Japanese housing in- Financial Assistance dustry has resulted from successive 5-year plans to Foreign governments support domestic builders achieve national goals in domestic housing. Devel- in a manner unheard of in this country. This in- opment of such high-technology materials as ceramic eludes: wall panels was the direct result of the “House 55” research program, in which the Japanese Govern- ● low-interest loans to clients of domestic contrac- ment funded advanced materials and systems re- tors or materials suppliers, search by leading Japanese companies, Pressure to ● project risk/profitability insurance, increase domestic consumer spending may spur Jap- ● low-interest loans or tax benefits to contractors anese interest in supporting an innovative construc- to erect projects in politically important areas, tion industry. The average size of a Japanese home ● direct government-to-government loans that was approximately 800 square feet in 1968, and 860 help to purchase products from the lender square feet in 1978; this is still less than half the size country, of an American home. Clearly, the Japanese can- special tax incentives for export initiatives like not yet match Western standards of “adequate” market surveys, and housing.2 ● performance bonding of domestic contractors. Also, foreign governments channel aid so as to Market Information and benefit builders. Following the 1980 Italian earth- Trade Representation quake disaster, the United States sent relief money. European countries sent housing or supplies from Many countries open their consulates and com- their own markets, which both determined how aid mercial attachés to domestic firms that intend to ex- would be spent and gave business to their own com- pand business prospects, another example of coop- panies. In contrast, “Buy American” programs in the eration between the public and private sectors. The United States often fall short of their goals, as when the Army Corps of Engineers allows the use of non-

ZJarnes McKel]ar, “]ndustrializecf Housing: The Japanese Experience, ” U.S. materials for mechanical, electrical, and infra- Alberta Department of Housing, December 1985. structural subsystems. 54

IMPEDIMENTS TO MARKET PENETRATION Obvious risks stand in the way of foreign hous- Texas, have built housing by conventional U.S. tech- ing manufacturers’ attempts to export to the United niques, in order to become familiar with the U.S. States. Some are inherent in international trade, and housing industry before introducing their own tech- others are peculiar to the practices of the U.S. build- nologies. ing industry. Lack of Knowledge of Optimal Changes in the International Market Business Relationships Largely due to the currency exchange rate, for- Foreign producers are unfamiliar with the U.S. eign firms have had an advantage in the U.S. mar- business world. Firms risk a great deal by entering ket. However, recent international monetary devel- into joint ventures, acquisitions, and the direct im- opments may leave these firms overextended. Some port of components. Some companies are forced into foreign manufacturers hope that other factors, such certain practices. For instance, if no U.S. firm agrees as product quality, will allow them to remain com- to a joint venture, the foreign firm confronts the mar- petitive in the U.S. marketplace. Others plan to adapt ket alone. A number of firms leave their options to changing currency rates by deemphasizing ex- open, postponing major decisions and commitments ports, instead establishing operations in the United until they familiarize themselves with the market. States that resemble those of Japanese automobile Demonstration “model” houses and small projects and construction equipment manufacturers. test the waters, displaying the system’s feasibility and encouraging potential U.S. partners. Often, however, Lack of Understanding of these isolated test market attempts have little im- American Markets pact, and do not provide adequate marketing information. Another strategy is the purchase of U.S. com- Foreign manufacturers of building elements come panies in order to acquire “in-house” market from smaller countries with more homogeneous pop- expertise, but this leads to difficulties in holding on ulations, tastes, and climates than the Unites States. to key personnel. To understand the nature of a single market is a difficult task. The complexity increases when that market is composed of varying submarkets. Difficulties in Locating Interested U.S. Firms Producers may attack this problem by targeting specific market locations in the United States suit- As opposed to other industrialized countries, the able for their products, based on such factors as cli- American building industry is decentralized. Japan mate and physical characteristics. This may mean has 5 large house manufacturing concerns, Finland the Northeast for Scandinavian insulated wood has 8, and Sweden has 12. When these companies framed and finished panels, but southern California look for potential partners in the United States, they and Florida for Japanese ceramic panels, since these choose from hundreds of firms. The “right” partner southern markets accept concrete and stucco-like is not easily found. products similar to the Japanese ceramics. Also, the In addition, due to the decentralized building in- ceramic material differs from traditional materials dustry and to the small size of most firms, Amer- used in northern areas, and is unlikely to be accepted ican companies often lack the available capital to there. contribute to a joint venture, although the limited Regional tastes, building traditions, and demo- joint venture between Phenix International and U.S. graphic trends also enter into consideration. This Home to build housing in Florida represents a prom- process worries foreign producers, who see the inent exception. The larger firms are not easily con- American market both as a great opportunity and vinced that a joint venture is in their best interest; as a place where they could go astray. A number major U.S. manufacturers have not leaped at the op- of firms, including Norway’s G. Block Watne in portunity to join with Danish firms. Generally, Amer- 55 ican companies look for monetary gain, not tech- ing official who has jurisdiction over a given project. nological improvement. Also, there is a tendency in They can also obtain the National Evaluation Serv- the American building industry to continue in ac- ice inspection offered by the model code agencies cepted patterns, ignoring innovative procedures until and their umbrella organization, CABO. The latter they have been proven effective elsewhere. course of action works when the system is used widely and in different locations, but it requires a Materials Acceptance Problems significant time and money commitment, and does not guarantee acceptance of the ruling in all juris- Foreign housing manufacturers use materials and dictions. Furthermore, each factory must maintain techniques that may seem strange to Americans. Ex- its own quality control and inspection program. posed materials and structures, highly textured cementitious finishes, steel frames, concrete and Although European manufacturers view the mul- metal roofing tiles, and ceramic panels are not well tiplicity of U.S. codes as a major impediment, Euro- known, and may not be accepted in many parts of pean firms have begun to study code procedures in the United States. This problem stems from the va- the United States. Several Scandinavian panelized riety of American markets. Typically, U.S. building producers are now obtaining code approvals. The markets have resisted new materials technology; Japanese have also started to gain approvals for their many top U.S. firms that entered the housing mar- systems under the U.S. codes; recently, Misawa ket with innovative products, such as Boeing, U.S. Homes of Tokyo obtained approval for a wood lat- Steel, and Alcoa, have given up this practice. These tice panel system. However, no large-scale effort is firms discovered that marketing houses differed from underway. marketing other products, However, recent developments point to changing public tastes, primarily in urban areas where new architectural styles-’ ’post- Trade Restrictions modernism, ” for example—have led to distinctive zero lot line and multifamily housing projects. In Foreign manufacturers recognize that calls for pro- coming years, products now sought after as “high- tection from foreign penetration would rise with their tech” should become acceptable to the “trendy” mar- increased presence in the U.S. market. Eventually, ketplace. foreign manufacturers may submit to voluntary export limits, as has occurred within the Japanese automobile industry. Of course, foreign manufacturers Problems of Materials Testing and could instead establish production facilities in the Acceptability of Foreign Standards United States, either by buying U.S. firms or by cre- Building materials from abroad must comply with ating a U.S. subsidiary. This would allow them to U.S. standards of fire safety, strength of materials, circumvent import quotas while maintaining prof- and durability, which apply to steel and wood fram- its from the U.S. market. ing, interior and exterior finishes, electrical and plumbing system elements, insulation, and other factors. Few foreign standards and test procedures dem- Lack of Understanding of onstrate compliance with U.S. codes. Manufacturers Real Estate Markets will be forced to undertake extensive and costly materials testing in order to meet U.S. requirements. The housing market in the United States reflects This represents an added deterrent, as well as a time not only the complexities of the house and its asso- delay, for the producer considering exports to this ciated features, but also the intricacies of the real country. estate market. Foreign manufacturers could become involved in unprofitable projects, where failure Building Codes and Inspection Systems stemmed not from the quality and suitability of their building system but from a lack of understanding Factory-produced building systems used in the of the local real estate market. In this area, many United States must be approved by each local build- foreign firms seek American partners or consultants. 56

Liability States. The cost of shipping a modular home from Europe or Asia to America is approximately $25,000, Many Europeans fear the problems of confront- which precludes large-scale exportation of such prod- ing the complex issue of liability in the United States. ucts to this country. However, shipping costs are not The possibility of being saddled with lawsuits con- prohibitive for more compact housing forms. One cerning product liability, an area of U.S. law that is Scandinavian manufacturer estimates shipping costs presently in a state of flux, worries foreign manu- for a panelized home at 6 to 12 percent of home ma- facturers. terials costs, or 2 to 6 percent of total costs. Even after shipping costs, many products can be priced Shipping Costs competitively in the United States due to cost advantages in production. Shipping costs represent the principle economic impediment to exporting housing to the United

IMPORT POSSIBILITIES FOR VARIOUS BUILDING SYSTEM TYPES Opportunities for exports to the United States of Panelized Systems the generic types of building systems, described in chapter 2, will now be examined in detail. Panelized systems represent the most likely type of foreign building systems to enter the United States, now and in the immediate future. Unlike modular Precut Systems units, panelized systems can be packed compactly Precut housing systems, except for log homes and against each other. The manufacturer does not pay those from nearby Canadian manufacturers, are not to ship an excessive amount of empty space, because easily imported to the United States. Wood-framed this type of cargo is usually shipped at a rate propor- “stick” systems cannot compete, due to the high cost tional to its volume. of imports as compared with available domestic systems. “Stick” systems would require expensive U.S. labor to assemble the building, and would create the Concrete Panels logistical problem of shipping many small pieces. Shipping of heavy concrete panels would not be These systems perhaps best illustrate which ele- cost-effective. These units can be produced in the ments make a product suitable for import to the United States at a lower price and are not used to United States. Normally, the cost of the structural any great extent for residential projects. frame accounts for only 10 percent of the total house cost, and the house shell for only 30 percent. Build- Lightweight cellular concrete panels may play a ing systems that supply only the materials for these more important role in the future, due to their re- elements cannot realize substantial savings, even if duced weight and superior thermal performance. the cost of the materials falls below corresponding Again, however, domestic production would be less domestic levels. expensive. In order to penetrate the U.S. market, an imported Although no evidence exists regarding prior im- building system could focus on elements that require ports of concrete panels, a number of Scandinavian skilled workmanship, emphasize concentration of manufacturers, including Denmark’s A. Jespersen cost in the elements shipped, or bring out the visi- & Son, have expressed an interest in selling form- bility, styling, or refinement of the product. ing equipment and technology. 57

Steel-Framed Panels Japan’s manufactured housing industry contains a large wood-framed segment, but Japanese panels Currently, steel-framed composite panel systems employ a lattice of smaller framing members rather are produced in Great Britain, Australia, West Ger- than 2 by 4s, and are assembled into small mod- many, Finland, France, Belgium, and the United ules before transportation to the site. States. Intended for export—often for use in the construction of camp buildings, where large amounts Wood-framed panels are relatively small, 4 to 16 of worker housing must be built rapidly—this fram- feet by 8 feet, and can be handled and erected with- ing system has advanced primarily in nations that out equipment. Some manufacturers offer larger, lack either a large supply of lumber or a strong tra- custom-designed panels, which require a small crane dition of wood framing. A major French producer for erection. The framing protects the edges of the claims that steel-framed houses imported to the panels, and the voids between the framing contain United States could sell for 20 percent below the cost either foam plastic or fiberglass/mineral wool insu- of comparably sized, conventional American houses. lation. A continuous vapor barrier maybe installed Attempts are now being made to sell this system in in the panel. Also, various surface finishes can be the United States. applied, such as plywood, fiber board paneling, and The use of steel framing for single-family hous- gypsum board. ing has met with little success in this country, although lightweight steel studs have been used widely Panels are used in the high-end residential mar- for interior partitions in multifamily units. Conven- ket, where quality is a positive selling point, or in tional single-family housing can be erected in a cost- the low-end market of camp housing, since they can effective manner with light gauge steel, but wood be easily assembled into modules. Imported wood- remains the market preference. framed panel technology offers a number of advantages over conventional U.S. stick-built construction: Steel framing or steel panels do satisfy the require- ● high material quality and good craftsmanship; ments of noncombustible construction, generally in ● buildings over three stories and in the metal build- high levels of thermal insulation, up to R-37 in walls and R-47 in ceilings; ing industry. Steel-clad insulated spandrel and cur- ● tain wall panels shipped from foreign countries can adaptability to varying floor plans; ● higher degree of building tightness; and compete with equivalent U.S. products. Furthermore, ● increasing interest exists in steel-framed modulars availability of sophisticated finish materials. for urban housing programs and for low-rise commercial office space. Spandrel Panels Wood-Framed Panels Prefabricated metal spandrel panels, or curtain Wood-framed panels with integral foam plastic or wall systems, are components, not building systems. mineral wool insulation resemble their U.S. coun- As such, they are not part of this study’s direct fo- terparts, and are imported into the United States al- cus. However, they could become a significant im- ready. Given this market acceptance, expansion may port item. They contribute to facades of convention- soon occur. A common method for residential con- ally framed commercial buildings, and are currently struction in Scandinavia—up to 60 percent of the imported to the United States from Italy, France, and single-family detached housing and 30 percent of the Sweden. This foreign panel can fit easily into the townhouses are panelized in Finland, and over 80 U.S. market, since it does not involve changes in percent in Sweden—wood-framed panels have been basic construction practice, European panels might exported in large numbers to the U. S. S. R., the Mid- replace American panels, although cost remains a dle East, and North Africa. consideration. 58

European Penetration of Wet Core Modules/Control Centers U.S. Panelized Systems Markets While complete modules are too expensive to ship Several European firms have entered or have ex- internationally, the wet core module provides an expressed an interest in the U.S. market: ception. It can serve as the high-tech, high-cost center of the house, incorporating plumbing, service con- ● Hosby of Denmark and Makroscan of Finland trols, laundry equipment, bathroom and kitchen fix- both exhibited panel systems in the United tures, cabinets, appliances, and surface finishes. Such States, and desire to work with American a module would overcome the problem of shipping builders. Hosby has built a model house to be empty space, due to its higher proportion of expen- evaluated for energy efficiency and technical ad- sive materials and labor costs to space. To reduce vantages at Brookhaven National Laboratory in costs further, the module could be shipped in a New York; Makroscan has built housing on Mar- knocked-down state, with fixtures like bathtubs tha’s Vineyard. The Hosby house received 4,000 “nested” together during shipping and attached in visitors, including builders, architects, and po- their proper locations at the site. tential homeowners, in its first weekend, and has averaged 400 visitors each weekend since Presently, nothing points to the exportation of then. This indicates substantial interest in Dan- large wet core modules, which incorporate whole ish products. rooms, in the near future. However, certain advances ● Phenix International and Filled of France are in kitchen cabinet design, planning, and packaging active in this country already, Phenix has pur- facilitate the export of smaller modules that form part chased 16 percent of U.S. Home, and has joint of a room, incorporating a prefabricated plumbing ventured in Florida. Filled has built some steel- tree and its associated fixtures. Also, cabinets are framed demonstration units, and markets its being integrated with kitchen appliances at the lux- products through Modular Building Concepts, ury end of the market. Admiral displayed an im- a New Jersey manufacturer. ported line of appliances, with cabinets produced at ● Such Swedish firms as Swedish Wooden House its Italian subsidiary, at this year’s NAHB show. Other and Skanska, entered the U.S. market several European appliance manufacturers that market in years ago. At least six other Swedish firms have this country, including Maltritius and Gaggenau of expressed an interest in expanding to the United West Germany, also integrate cabinets and ap- States, and eight American importers of Swed- pliances. ish houses are now in operation, One hundred Japanese manufacturers are developing the Swedish houses have been built in the Eastern “smart” kitchen, with electronic integration and con- United States, with 500 more expected by the trol of the various kitchen appliances. A central proc- end of 1986. essor controls all appliances, rather than each ap- ● Puutalo Oy of Finland and Norgips of Norway pliance having its own timer, regulator, and controls. have also-eyed the U.S. market,-and Norgips Controls and monitors for other building systems, has applied for model code approval, G. Block such as heating, air-conditioning, intercom/con- Watne of Norway is building in Austin, Texas. trol/security, and lighting, may be centralized and incorporated into the wet core module as well. At least 20 other major European firms export wood-framed panel systems to other countries, and The development of this centralized, capital- may pursue the U.S. market. The most likely first intensive building service and control center may step for any foreign producer would be to work with overcome the prohibitive costs associated with ship- custom homebuilders and developers in this coun- ping modules. If the cost/bulk ratio rises above a try, marketing the appeal of high-tech craftsmanship. certain threshold, wet core/control modules may be Once the system is in limited use, expansion might cost-effective. Such a module would revolutionize then occur. Without joint ventures or direct sales, standard building practice, bringing plumbing, fix- foreign producers will have to become developers tures, electronics, cabinetry, and appliances into one in order to introduce their products. indivisible import package. .-

Modular Systems and small panels, the Japanese produce large, steel-reinforced, framed panels, which are in- Modular systems account for only a small share corporated into modular units. This system re- of world markets. Certain aspects of modular con- lies on a homogeneous material that requires struction make it unsuitable for export to the United no additional finishing or thermal insulation, States. Generally, prohibitive shipping costs prevent and provides structure, waterproofing, and fire- export, although Afford-A-Homes, a Canadian com- proofing. Its competitiveness in the Japanese pany, does export a modular that “unfolds” into a market derives from the supposedly low mate- 735-square-foot house, and can be shipped in an 8 rial and labor costs, although the role of gov- by 9½ by 20 foot container; several U.S. firms have ernment and corporate subsidy remains experimented with this concept. From Scandinavia, unclear. shipping can cost $80 per cubic meter, or roughly PALC is relatively new, and its full potential $18,000 for a 1,OOO-square-foot house. The high price has not been realized. Claims that it is the ma- pays primarily to ship empty space. terial of the future should be examined closely. European modular prototypes may also be unsuita- Less than 10,000 homes have been built with ble for U.S. markets. However, the experience of this technology in one Japanese plant, all in the European furniture exports indicates that foreign past 3 years. This accounts for less than 0.3 per- manufacturers will design products specifically for cent of the Japanese housing market. And be- America. cause it is an untested technology, no long-term studies exist on these houses or their perform- Modular systems can be broken down into a num- ance. The Japanese, who see ceramic modulars ber of different types: as another high-tech item at which they excel 1. Concrete Modulars.-Concrete modules are rare and which they can export, give these systems outside of the U.S.S.R. and Eastern Europe. widespread publicity. But the technology needs They best suit highrise, repetitive “boxlike” to gain greater recognition in Japan before it apartment-type buildings that have proven un- can enter the American marketplace. economical and unpopular in the United States Except in Florida and California, where stucco- and Western Europe. like materials dominate, U.S. market acceptance 2 Wood and Steel Modulars. —Generally assem- of single-family housing is problematic without bled from panels, wood- and steel-framed modu- dramatic cost savings. In the case of PALC, this lars are used primarily for camp construction. appears unlikely. Historically, materials that en- Certain Scandinavian firms, such as Huure ter the conservative U.S. housing market, such Ureeta Oy, have produced panel systems that as hardboard, aluminum, and vinyl siding, have can be assembled into modules in the plant or simulated familiar materials like horizontal sid- onsite. ing or tongue and groove vertical wood siding. 3 Ceramic Modulars.—Recently, much attention As a rule, other types of panels have not been has focused on “precastable autoclave light- accepted by the domestic housing industry, weight ceramics” (PALC). This material has re- which believes that prefabricated homes should sulted from extensive research by Misawa appear otherwise. This technology would suit Homes of Japan, and is now incorporated into multifamily housing or commercial building, but approximately 10 percent of Misawa’s modu- only if it represented a cost-effective solution. lar units. In essence, ceramics resemble the au- This material has received much publicity in toclaved, lightweight concrete that is manufac- the United States, and many U.S. delegations tured in Europe. It differs from normal concrete have been encouraged to visit the Misawa plant. by substituting air or gas bubbles for the ag- However, these plant visits appear to be more gregate in the mixture. of a “sales pitch” than a technical exchange. However, the Japanese have taken the use PALC represents an interesting alternative, but of this material to a higher level. Whereas the final judgment should await an analysis of its Europeans fabricate lightweight concrete blocks suitability for U.S. markets. 60

“Manufactured” (Mobile) Home bile) home market. In addition, the U.S. “manufac- Systems tured” (mobile) home is under a preemptive national code, which makes it more attractive to a foreign U.S.-type “manufactured” (mobile) homes are rare manufacturer who intends to build production fa- in other countries, except as temporary or camp cilities in this country. A problem exists, however: housing. However, the more advanced technologi- in order to make up for the cost of new, sophisti- cal manufacturing systems of the Japanese and Scan- cated equipment, minimum sales would have to dinavians may produce salable and innovative reach several thousands of units per year—not an models. Some observers believe that Japanese easy target to achieve. But Japanese firms are will- penetration of the U.S. market will occur in this un- ing to absorb initial losses in order to capture long- tested area. The Japanese industrialized housing in- term markets. A joint venture with a U.S. firm would dustry is geared towards high levels of production, reduce risks significantly. which can satisfy the American “manufactured” (mo-

MANUFACTURING EQUIPMENT Foreign building technologies may enter the U.S. ● Board fabrication equipment, such as cementi- market through a modification of standard Amer- tious fiber or particleboard, used in European ican manufacturing and construction techniques, construction but not commonly available in this rather than through direct importation of building country. -Among others, Siempelkamp of West elements. A producer may begin by shipping build- Germany exports complete fabrication facilities ing elements to this country. As demand for the prod- for such products. ucts increases, it may become more cost-effective to ● Particleboard, flakeboard and oriented strand- produce them in the United States. Possible open- board, originating in Canada, or made in the ings in this area include: United States with Canadian equipment.—This ● could replace American plywood. Panelization equipment, which foreign manu- ● facturers will sell to U.S. homebuilders and man- Admixtures, used by European companies to ufacturers.—These machines could vary from produce lightweight cellular concrete.—U.S. minor refinements of production line equipment firms could manufacture this material domes- tically, through the use of such additives. at “manufactured” (mobile) home factories to ● sophisticated automated plants. A number of Heavy equipment, produced by such companies Scandinavian manufacturers have begun to as Komatsu, the Tokyo-based construction market their equipment, but without a great deal equipment manufacturer ranked second next of success. to Caterpillar. Komatsu has announced plans ● Onsite forming equipment, produced by foreign to open its first U.S. assembly plant, which will companies such as Outinord of France, for use avoid protectionist legislation. Their goal is to in onsite casting techniques.—This equipment increase their U.S. market share from 7.5 to 20 has been in the United States for 20 years, and percent. would not require major outflows of capital.

FOREIGN INVESTMENT AND DEVELOPMENT

Foreign firms interested in penetrating the U.S. Joint Ventures With U.S. Firms construction market may pursue a variety of financial options, rather than market foreign-produced Some foreign manufacturers have joint ventured buildings or components. This would provide insight already. In particular, the Japanese prefer this into the complexities of the U.S. market, useful con- method, which combines Japanese production tech- tacts and knowledge, and a reduced risk for the for- nology with an in-place American marketing and dis- eign producer. tribution network. Misawa Homes is seeking to co- 61

venture with an east coast homebuilding firm, and ● Alganin Industries of Kuwait bought Kirby Sekisui Heim is reported to be working with Cardi- Building Systems in 1975; recently, the Amer- nal Industries, a modular manufacturer. Also, Mai- ican branch of the firm returned to U.S. owners; son Phenix International of France entered into a ● several American elevator companies are joint venture relationship with U.S. Home in Florida owned by foreign firms, including Haughton, several years ago, and Scandinavian firms have ex- by Schindler Holding of Switzerland, and Ar- pressed an interest in such an undertaking. mor, by Kone of Finland; and ● the Clark Equipment Co. of Michigan has Foreign panel manufacturers may begin their mar- merged heavy equipment production with ket penetration by exporting panels to this country, Volvo of Sweden, forming the third largest which would build market acceptance and create de- heavy equipment firm in the world. mand. Then, these manufacturers can joint venture or license with previously wary American firms, and Companies that acquire these firms may then com- produce their panels in U.S. factories. However, few pete for U.S. Army Corps of Engineers projects, un- of these products are so unique that the added over- der the “Buy American” program. head and labor cost of U.S. production would offset their current competitive advantage. Foreign Development and Construction Foreign developers, including Cadillac Fairview, Mergers and Acquisitions Olympian, and York, have been involved in major urban projects for a number of years. More recently, Foreign firms have pursued the increasingly popu- European builders have developed housing projects lar option of the merger or acquisition, in order to gain a foothold in the U.S. market and to pick up in less urban areas of southern Florida and Califor- useful experience: nia. The British firms of Barrat Homes, Taylor Woodrow, and John Laing Homes are all active in Holtzman AG of West Germany owns J.A. Jones this country, as well as the French firm of Premier of Charlotte, North Carolina, a contracting firm, Homes, a subsidiary of Les Nouveaux Constructeurs. and Lockwood Greene Engineers, a design firm; Some of these companies started by acquiring estab- Skanska, the largest builder in Sweden, bought lished U.S. building firms. Several South Korean the Koch Steel Erecting Co. of New Jersey; firms have expressed an interest in this area, but Archirodon of Greece purchased George Fuller their asset of low-paid labor cannot be utilized in of New York, a firm that builds highrises; the United States, reducing their leverage.

APPLIANCES While the United States enjoyed a favorable bal- U.S. exports of appliances have never been large; ance of trade in residential “appliances for many in 1983, U.S. firms exported about $990 million in years, foreign producers have begun to penetrate do- appliances, or 0.5 percent of total output.4 U.S. mestic markets with improved products and produc- citizens stationed abroad purchase a significant fraction technologies. Accounting for inflationary in- tion of these products. Japan, on the other hand, has creases, U.S. exports of household appliances fell by expanded household appliance exports from $1.4 approximately one-third between 1979 and 1984, billion in 1979 to over $2.25 billion in 1983. Japa- while imports increased by over two-thirds. 3 This nese appliances are widely available on the U.S. mar- trend will continue, assuming that foreign manufac- ket, and Japanese companies invest heavily in new turers expand production. technologies. Whereas US. appliance manufacturers

~The Stirling Hoke Corp., Building Equipment Ditrlsion “A Comparati~’e ~11 S Department of Commerce, BU reau of the Census, EA 275. EA .Analysis of US and Selected Foreign Household Appl]ance industries.” 67!5, SIC Code No. 363. Department of Energy contract, October 1984 62

spend 1 or 2 percent of their sales on research and Lighting and wiring equipment have become vul- development, Japanese firms spend 4 to 7 percent.5 nerable to foreign competition as well. Between 1979 Their efforts are beginning to pay off. and 1984, accounting for inflation, U.S. exports in Panasonic marketed a full line of products for this sector increased by $50 million, or 3.5 percent, while imports rose by approximately $500 million, 1985, some of which will be built in the Orient and 7 some in Canada. Panasonic, Sanyo, and Daikon have or 40 percent. Japanese and German firms have captured 5 percent of the U.S. market for room air- taken the early lead in the development of innova- conditioners by offering efficient, quiet units with tive lighting products. Compact fluorescent lamps, rotary compressors. The units use 13 percent less compatible with standard “screw in” sockets, use energy than comparable U.S. products. Sanyo now one-third the electricity of a standard lamp, last 10 imports small refrigerators—1 3 to 14 cubic feet—to times as long, dump less heat into a room, and pro- the west coast, with an average energy consump- vide a light color that most people find more attrac- tion of approximately half that of the best U.S. tive than standard incandescent. Neither General models. They are beginning to offer “full-size” Electric nor Sylvania, the largest U.S. lighting pro- refrigerators in test markets,6 and showed a full line ducers, manufacture these advanced products; of appliances at the NAHB exposition. The Japanese rather, they offer foreign products under their own have introduced a number of innovations in refriger- names. ators, including microprocessor temperature controls As concern about indoor air quality increases, that maintain three to five compartments at differ- Americans may pay increased attention to home ven- ent temperatures. tilation. The Swedes have invested heavily in equip- Some major U.S. appliance manufacturers have ment that ensures adequate air flow to each occupied moved manufacturing operations abroad. General room in a residence, while minimizing the heat or Electric, the largest domestic manufacturer of room cooling lost in the process. Primarily, American air-conditioners, announced that it will phase out houses rely on faulty workmanship to provide ade- production at its main factory in Louisville, Kentucky, quate ventilation, such as cracks around windows next year. Carrier has drastically curtailed produc- and doors and under sill plates. This guarantees that tion at its New York plants. The firms plan to pur- air enters the house, but rates of air exchange vary chase units assembled abroad, probably in Japan and widely from house to house and with local weather Brazil. conditions. At the high end of the market, European appli- Only an active forced air system can ensure ade- ances are available in this country-from Maltritius quate ventilation. Both the French and the Swedes and Gaggenau of West Germany, for example. These have developed inexpensive devices that control the same manufacturers are working to integrate cabi- amount of fresh air reaching each room in a home. nets and appliances. Electrolux of Sweden owns Tap- The Swedes offer a variety of interior ventilation de- pan in the United States and has acquired an Ital- signs, including one which ventilates a home over ian appliance subsidiary, making it one of the world’s the coils of a heat-pump water heater that extracts largest appliance manufacturers. They may attempt heat from the exhaust air. Their technical lead may to sell European designs to American builders. Ap- put them in a position to enter U.S. markets rap- pliances such as range hoods may also come from idly, if demand for equipment to improve indoor air Singapore and Korea. quality increases.

sHOWard @her, “Energy Conservation R&D, Innovation, and industrial Competitiveness: The Case of Household Technologies,” ACEEE Background Paper, January 1986; Sterling Hove Corp., op. cit. — %eller, op. cit. 7US. Department of Commerce, op. cit. 63

MATERIALS, COMPONENTS, AND EQUIPMENT Foreign fixtures, building materials, appliances, domestic producers imitate European styling. and accessories are now exported to the United Imported cabinets from West Germany, Eng- States, and may become more common. These items land, and Scandinavia are used by custom include: builders or are sold through kitchen dealerships, advanced through mass marketing or distribu- ● Metal Roof Systems.—A number of metal roofing producers have entered the U.S. market with tion systems. Soon, Korea may import inexpensive cabinets as well. These would enter the roofing systems that imitate conventional ma- manufactured housing industry, where direct terials like tile and slate, and suit both the single- sales to manufacturers eliminate the need for and multi-family housing markets. Primarily, an elaborate marketing and distribution network. these systems come from Finland, France, and ● Fixtures from Europe have Sweden. Plumbing Fixtures.— ● been sold in the United States for some time, Plywood.--Currently, high-grade Scandinavian primarily from Scandinavia, France, Italy, and plywood incorporates a number of plies and West Germany. Again, these custom items aim veneers not otherwise available in the United for the high end of the market. States. ● ● Finishes.--European plastic laminates are now Hardware.--Much building hardware is im- distributed in the United States. ported from Europe. Two European manufac- ● Tile.—Floor tiles from Mexico and Eur- turers have built U.S. factories to reduce costs. Floor ● ope have been available to custom markets for Door Frames. —A metal door frame producer many years. from Holland exhibited at the NAHB show, in- tending to export to the United States. Although building materials and fixtures lie be- ● Elevators.—In addition to purchases of Amer- yond the scope of this report, their presence cannot ican elevator companies by foreign firms, the be ignored when conducting research on building Japanese manufacturer Fujitec has built a fac- systems. The use of imported materials and fixtures tory in Ohio. is significant for several reasons: they can be incor- ● Heat Pumps and Heat Exchangers.—A number porated into American buildings without disrupting of Japanese manufacturers, including Mit- standard American construction practices; they are subishi, distribute residential heating and air subject to narrower testing requirements; they indi- handling equipment. cate foreign interest in penetrating the U.S. build- ● Cabinets.—European kitchen cabinets have ing market; and they provide an avenue for manu- gained widespread use at the high end of the facturers to establish recognition and acceptance, U.S. market. The European kitchen has become from which they may advance the exportation of a new standard of elegance in American homes; building systems or components.

IMPEDIMENTS TO U.S. PENETRATION OF OVERSEAS HOUSING MARKETS u. S. international contractors, and industrialized these same major contractors service a reduced work housing manufacturers in particular, have witnessed load and few international housing projects, except diminishing overseas markets since the euphoric for occasional “tag-along” housing components in 1960s and early 1970s, when they operated in Iran, a larger infrastructural or industrial project. The lead- Saudi Arabia, and the Persian Gulf States. Today, ing U.S. contractors, including Bechtel, Fluor, and 64

Blount, operate with as little as half the manpower termine realistic opportunities, and the high cost of several years ago. Few analysts predict that the of large-scale proposals; international building activity of the 1970s will resur- ● low profit margins that arise from the current face. Several reasons for the drop in international increase in competition; and building activity are discussed below. ● the belief that other U.S. firms have had trou- ble penetrating overseas markets, or sustaining Increased Competition profitable operations once the markets were established. Many new international contracting companies have assumed active, worldwide roles, especially in Most American manufacturers have had enough the Middle East, North Africa, Malaysia, and Indone- difficulty in coping with the changing nature of the sia. These include the aggressive European and Scan- U.S. construction market. Generally, they view the dinavian firms, and also firms from Greece, Turkey, uncertainties of offshore markets—with the possi- the Philippines, India, Taiwan, and South Korea. ble exceptions of Canada and the Caribbean–with strong misgivings. Initially, the Koreans were encouraged by the U.S. Government. They have now become a dominant force, due to their organizational and technological Materials Acceptance Problems sophistication. They also control the low-cost manpower that permits competitive bidding. However, Just as foreign materials have to meet U.S. stand- even the Koreans are having difficulty now, as ards, American materials must comply with foreign smaller projects allow for bidding by small local con- codes. This may require extensive testing. Not only tractors with a fraction of the overhead of the major is this a disincentive for direct export of U.S. products; it may put a U.S. firm at a disadvantage rela- international—especially American—contractors. tive to a foreign firm when both wish to export to Lack of Understanding of a third country. Many countries, particularly in Eur- ope, test their materials according to international Foreign Markets standards. A foreign firm may have conducted the With the exception of established U.S. interna- necessary international testing already. tional contractors and a handful of housing manufacturers, such as ATCO, Port-a-Kamp, and National Building Codes and Inspection Systems Homes, the obvious difficulties of working overseas appear to have discouraged U.S. firms. A number Each country maintains a different code and ap- of medium-sized panelized and modular manufac- proval process, which leads to varying approval turers have been approached regarding the export times. Export success could be facilitated by a bet- of building systems during the past 10 years, but they ter understanding of the complexities of each code, have declined to participate. Typical reasons given relative to the size of the potential market. include: The countries of the European Economic Commu- unfamiliarity with market requirements, inter- nity plan to adapt interchangeable codes, based on national business law, and payment conventions; West German building standards. Once this occurs, the uncertain political climate within many European firms will not have to understand or com- countries, and the difficulty in gaining code apply with a foreign code when they wish to export proval and binding commitments from appro- within Europe, placing the United States at a dis- priate government agencies; advantage. concerns over the reliability of payments, the frequent use of local currencies, and the diffi- Trade Restrictions culty of bringing money out of individual countries; The possibility of limitations or quotas on imports the high cost of project development, includ- to a given country always exists. These restrictions ing the need for overseas personnel who de- may be director indirect; Japanese practices in reg- 65 ulating and testing imports are an example of the U.S. builders with enough support to continue with latter. Such practices have eliminated potential profits a large-scale housing project. The involved firms lost on many products that would fare successfully in an a substantial amount of project development costs. open Japanese market. Corruption Lack of Experience in Payoffs and kickbacks are an accepted part of busi- International Trade ness in many parts of the world. U.S. companies have withdrawn from such practices, due to the 1971 Even firms experienced in foreign trade meet with Foreign Corrupt Trade Act. Although some U.S. firms unanticipated difficulties, due to the customs or laws may avoid these strictures by joint venturing, or by of particular countries; experience in one country using agents to distance themselves from such trans- may not help in another. For example, ‘one builder actions, much work has been taken by manufac- reported that six American trucks were left on a dock turers whose governments tolerate or condone in Trinidad when the government, citing the fact that bribery. the driver sat on the left side of these vehicles, re- fused entry. Also, documentation requirements and bureaucracy in a certain country may place an ex- Distance treme burden on a builder. Some U.S. firms will operate in North and Cen- tral America, but view the rest of the world as too International Volatility far away, Also, the traditional American disregard for foreign practices, customs, and ways of doing Much of the demand for housing is in politically business may make American firms less willing to and economically volatile parts of the world. Projects enter an alien culture. are at the mercy of economic disruptions, such as oil embargo and its resulting price increases, or po- Lack of U.S. Government Support litical disruptions, where the government instabil- ity endangers the completion of a project. Iran, Iraq, The U.S. Government provides less support for Libya, Lebanon, and certain South American coun- housing manufacturers than do other governments. tries are cases in point. In one instance, a drop in Few prospects exist for the development of imagina- oil prices led to problems in the Venezuelan Gov- tive financing programs, performance bonding sup- ernment, which in turn became unable to provide port, or profitability support.

INCENTIVES AND OPPORTUNITIES FOR U.S. PENETRATION OF OVERSEAS MARKETS Incentives for U.S. firms to penetrate foreign mar- for U.S. exporters, Japan is the largest importer of kets are limited. While large markets do provide wood from the United States and Canada, and ac- American companies with the opportunity to export counts for about 30 percent of American wood ex- industrialized housing, the cost-effectiveness of such ports. Primarily, this wood serves the traditional Jap- actions would be negative within current economic anese wood-framed building, which takes up most parameters. Given the incentives and disincentives of Japan’s housing construction. Industrialized hous- listed above, some conclusions may be drawn about ing constitutes only 15 percent of the market. It has increasing U.S. exports in the building industry. not yet displaced traditional building. The 2 by 4 frame method of construction, which Exportation of Materials accounts for less than 10 percent of the Japanese housing market, is a growing alternative to both con- The expanding Japanese market for 2 by 4 conventional and factory-built housing. This may in- struction represents an obvious area of opportunity crease demand for wood products from the United — —

66 — —

States, and for American machines that fabricate 2 velopment. In contrast, foreign export-import banks by 4 panels. Daiwa, one of the five largest Japanese sponsor housing projects from their own countries home manufacturers, has studied U.S. factory pro- with loans that are 2 to 3 percent lower than those duction techniques utilizing 2 by 4 construction. This of the Exim Bank, In light of the recent budget re- may indicate that 2 by 4 panels will replace the cur- ductions for the Exim Bank and of its decreasing role, rent Japanese wood panel, which employs a wooden assistance from this source may not arrive soon. Cur- lattice composed of smaller wood members. rently, opportunities exist for projects in Iran, Iraq, and the Soviet Union, but European and Japanese Marketing Strategies firms have significant leverage” due to government willingness to provide financing. The French are Package deals incorporating housing and financ- financing housing in Sudan at 4.5 percent, with a ing may stimulate exports of building systems. Given 5-year moratorium on payment. the current state of the international economy and the lack of funds available for building, many projects The U.S. Agency for International Development are assigned based on what company can obtain the may finance American construction overseas, most favorable financing arrangements. In this sit- through sending American building systems as aid uation, a strong dollar benefits U.S. firms. to Third World nations instead of direct financial aid. This would resemble the European practice of de- livering aid in the form of domestic goods. Possible New Incentives for Trade by the U.S. Government The U.S. Exim (Export-Import) Bank does not finance housing, except as part of larger overall de- Chapter 6 Government’s Role in Facilitating New Technology Chapter 6 Government’s Role in Facilitating New Technology

FACTORS IMPEDING INNOVATION U.S. homebuilders have been slow to incorporate members of the residential construction industry state-of-the-art technologies into their production blame the introduction of the national HUD code lines for a number of reasons, Without a policy aimed system for the sharp drop in “manufactured” (mo- at identifying and removing existing barriers to in- bile) home sales. novation, they may continue to retard growth in the productivity of this important industry. In addition to the problem of market fragmentation, industry spokespersons cite the time and money demands involved in complying with current codes. The Regulatory Environment As one housing producer asserts, in the absence of Inconsistent State and local building codes and a national—or sometimes even a State—code: differing inspection practices are frequently cited ob- . . . the factory is forced to deal with local building stacles to technological innovation in the U.S. hous- officials at a city, township or county level. The ing construction industry. This regulatory morass magnitude of effort needed to deal with so many prevents manufacturers from achieving the econ- different agencies and people takes company re- omies of scale needed to justify large investment in sources and engineering skills away from more sophisticated production facilities. Due to the absence productive activities. And most important, the un- ending local changes to the building codes create of Federal initiatives in the area, the major codemak- 3 ing organizations and the homebuilding industry unbelievable difficulty on the factory assembly line. have begun to develop a formal plan of action for This lack of uniformity adds to the expense of tech- an effective national inspection system; details of this nological innovation, making developers of new consensus State-based proposal will be addressed.1 products “unable to afford the enormous cost of sell- The States, of course, argue that control over housing the new technology to numerous regulatory offi- ing regulation should remain with State and local cials.”4 The closest thing to a national approval in government. the non-’ ’manufactured” (mobile) home industry is The General Accounting Office expressed a simi- the “NER” National Research Board approval. An lar view in its 1982 report, “Greater Use of Innova- NER can cost up to $10,000, and has significant limi- tive Building Materials and Construction Techniques tations. This detailed approval procedure itemizes every aspect of a given technology. Any change re- Could Reduce Housing Costs.” The report cited “re- 5 strictive and inconsistent local building codes” as quires reevaluation, and adds expense as a result. a major factor impeding “the use of available tech- A number of States refuse to accept NERs “because they do not include follow-up production line inspec- nological innovations and the development and in- 6 troduction of new ones.”2 On the other hand, some tions or inplant visits of any kind.” Eleven States have formed a special task force to certify product ‘Council of American Building Officials, News Release, May 1986; approval agencies. and National Association of Home Builders, International Conference of Building Officials, Building Officials and Code Administrators international, Southern Building Code Congress International, Council of American Building Officials, National Conference of States on Building 3Ed Starostovic, “Changes in Manufactured Housing and Construc- Codes and Standards, “Concept Paper Prepared by the Task Force on tion of Non-Residential Modular Buildings in the United States,” un- Housing,” Mar. 25, 1986. published paper prepared for the Office of Technology Assessment, 1985. ‘U.S. Congress, General Accounting Office, “Greater Use of innova- 41bid. tive Building Materials and Construction Techniques Could Reduce Hous- 51bid. ing Costs” (Washington, DC Comptroller General of the United States, ‘National Conference of States on Building Codes and Standards, Inc., 1982). May 25, 1986.

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America’s building codes and enforcement systems Fluctuations in the Building Cycle may not impede technological innovation directly. They seldom forbid the use of newer materials, com- Unpredictable demand for housing mitigates ponents, structural forms, designs or processes; when against capital investment in new technologies. Fluc- explicit prohibitions do exist, they are of secondary tuations in the building cycle discourage home pro- importance. The real point is that the present sys- ducers from investing in capital-intensive, highly tem detects technological innovation indirectly, by automated production technologies. In fact, one in- creating market fragmentation. dustry analyst notes that “manufacturers have re- lied on a highly elastic labor supply in lieu of automation. Large fixed investments in automated and Inadequate Study of Total Building mechanized processing equipment would eliminate Systems and Information Dissemination much of the flexibility that is so vital to success in a seasonal industry.”7 Unlike Japan and Sweden, the United States does not sponsor extensive research on new housing ma- On the other hand, other industries have begun terials, technologies, systems, or fundamental con- to employ systems that manufacture a variety of cepts. Generally, research efforts tend to be short products; this decreases their dependency on spe- term and related to a specific problem, rather than cialized markets. Such flexibility within a sophisti- large-scale, well-publicized projects designed to in- cated production system would be preferable, from crease overall productivity. Industry analysts agree the worker’s perspective, to the current cyclical pat- that this research gap impedes innovation, and that terns of layoff, bankruptcy, and startup. the lack of institutional and financial research support aggravates the problem.

HOUSING REGULATION The Current Regulatory Framework flicting requirements for the same condition. New editions of the code appear periodically, in 3-year Four model building codes form the basis for most cycles. The membership conducts annual code U.S. housing regulation, with the exception of HUD- change hearings, voting on amendments to the cur- regulated “manufactured” housing (mobile homes). rent edition of the code. The approved amendments The model codes are developed by the International enter the next edition of the code. Conference of Building Officials (ICBO), Building Offi- cials and Code Administrators International, Inc. Each model code tends to be regional. Although (BOCA), Southern Building Code Congress Interna- certain States have adopted one model code exclu- tional, Inc. (SBCCI), and the umbrella organization, sively, some overlap exists. The prevailing regional the Council of American Building Officials (CABO). patterns are: the Uniform Building Code (UBC), pro- These organizations enjoy a broad-based member- mulgated by ICBO and used west of the Mississippi; ship, including both regulatory officials and a vari- the BOCA Basic/National Building Code, promul- ety of private sector building and construction profes- gated by BOCA and used throughout the Northeast sionals. This membership plays a significant role in and Midwest; and the Standard Building Code, pro- maintaining responsive, consensus-oriented codes mulgated by SBCCI and used in the South. CABO that serve the public interest. oversees the three. Currently, local governments apply several thousand major and minor variations of Each model code group publishes a building code, these basic codes. There are at least as many inspec- a plumbing code, a mechanical code, a fire prevention systems, with differences in building code inter- tion code, and other such documents. These codes pretations and varying degrees of enforcement. The correspond to the model code package, to avoid con- various fire safety codes and inspection systems that 71 relate to buildings compound this regulatory com- other local codes. Zoning can be employed in ways plexity. that “exclude people from the community,”<) such Thirty-four States have adopted preemptive State as confining “manufactured” (mobile) homes to codes for modular housing. Those codes cover com- “trailer parks” in disadvantaged locations, or requir- ponent housing systems, including panelized homes ing significant lot or house sizes. in 28 States, large components such as “wet cores” As a result of this situation, U.S. housing producers in 31, and precut houses in 6. While these preemp- have been slow to introduce either innovative hous- tive codes reflect significant efforts by States to con- ing designs or advanced production technologies. solidate codes for industrialized housing, they have not eliminated the problems of diversity and com- The HUD Code System plexity. Twenty-five States prescribe mandatory minimum standards, 7 establish mandatory maximums, The HUD regulatory system for “manufactured” and 11 set both mandatory minimums and maxi- (mobile) homes represents the only uniform national mums—"mini-max, ” or single mandatory codes. building code and enforcement system for factory- Two of the preemptive State codes are mandatory produced housing. 10 Consequently, this 10-year-old unless specified otherwise. In one State, a local po- “HUD code,” which replaced and adopted large sec- litical jurisdiction may amend the mandatory State tions of an earlier voluntary code system developed code with State approval. by the industry, serves as a model against which others may be measured.]] Enforcement systems also vary, both among and within States. Inspections are conducted by State offi- Due to the establishment of this system, a uniform cials in 31 States, by county officials in 8, and by national building code for “manufactured” (mobile) municipal officials in 13. Twenty-three States allow homes now exists throughout the United States. Ap- inspections by third-party private firms. Omitted from proximately 400 manufacturing plants in 24 States these figures are the 16 States that do not have build- are currently inspected by a system that involves ing codes for any type of factory-built housing, State agencies, third-party private inspection firms, a national monitoring contractor, and HUD, HUD This complex regulatory system poses formidable administers the program with a small staff of Fed- problems for large U.S. homebuilders. The producer eral employees, at minimal cost to the Federal Gov- must satisfy hundreds, if not thousands, of building ernment. Covering the program’s cost are inspec- codes and inspection systems in order to serve the tion fees—up to $75 per transportable unit—paid for national market and still abide by the law. Dispari- by the manufacturers, and ultimately by customers. ties between State transportation codes governing large trucks add to the confusion. A spokesperson from the National Association of Home Builders estimates that a uniform code for modular and pane- 8 — ---- —— lized homes would reduce costs by 3 to 5 percent. 5tei]hen SeIdel, ‘ Flo(IsIng (’ost~ dnd Regl]ldtion\ (’t)ntr{)l]tir]q ttl(’ Regulator hlaze” (Ne;j Burnswlck. N.] Center for [ lrt)all I)CJIIC \ Rtw’,ir( II Producers of modular and panelized homes face 1978), p 174. other problems. Because the walls of some of these I{T[lC \Il rllrllull} propertj st~ndard~ for One dIl(l T\\ ( ) FdIIIIl\ [ )U (’11- building systems are closed at the factory, certain ings, uvxf to approt’e federallj’ guaranteed mortgaqes dI~d I n other F’tY- eral housins programs, IS another type of ndtlond] t)uildln~ c{)dt’ dIId features cannot be inspected at the final building site. enforcement s}stem, administered b} HLID This s~stem has c~x]ited Instead, they must be examined at the factory, which SI ncc the 193[ )s, much longer than the H ( I [) cwle s} stern for ‘‘111,1 n ~1- may be located far from the site. These factory in- facturecf ” (mot)i]e) homes. Howe\er, th]s s!rstt>m relles hed\Il\ 1)11 other codes and enforcement systems [t f~’as not designed to dddrei~ t I}t’ spections replace a significant part of the onsite work unique pr(hlems of factc)n’-[)ro(i~lcc’d housing, especicdl~ 011 t Ilt’ III\l KK that is traditionally done by government building in- t]oll side, nor did it replace other Ijull(llnq t II(le\ dn(i IIl\lxK 11(111 ~) + spectors. tem~ of the idme build]n$ L’nt]] recent]!’, it tncluded v)rn? fedt[]rc+ of bul]dlng codes. but dlso included site and bu]ldlng design~, ~nd [)t her A number of communities around the Nation cre- dc’cept cibl I It\’ crlterla n(’t usual 1} co~’ered I n building (’( de$ ,+41s( 1 t IIe F“ederdl dlrI;ensIoII of the Act h& I)eel] w cdk(i]ed t]~ r(~{ crlt l~gl~ldtl( III ate de facto building regulation through zoning and ttldt II]]OM’S for th(’ \(l])>tlt Ut 10[1 ( )f f(l 11(’tlolld] Stdt(’ dl](j ]()( cl] (’( Ki(’i f( Jr nd:Ic)nd standards ‘( ki)eriil A(I ( )11 nt I [ 1(+ f )fflc(!, (Jp ( I t Ekrnhdr(it. ()!) (It 72

Problems of the HUD Code System While there are similarities between the functions Congress will need to examine the HUD code sys- served by IPIAs and certified public accountants, tem if alternative regulatory schemes for factory-built IPIAs are not subject to many of the certification re- housing are to be considered. Various problems that quirements faced by CPAs. Both are charged with surround today’s HUD code homes may become more serving the public interest; however, CPAs—unlike pronounced if this regulatory scheme is “stretched” IPIAs—are subject to rigorous preliminary examina- to cover other categories of manufactured buildings, tions, as well as to professional and State regulation. or to serve higher income markets where owners The threat of removing a CPA’s certification provides may be more critical. the public with protection against default. The Potential for a Conflict of Interest.—The It is important to note that the concept “potential existing HUD code system creates the appearance for a conflict of interest” is used to avoid the need of a conflict of interest on the part of design and con- to prove impropriety. Certain public individuals must struction inspectors, since fees and services are ne- not only be above criminal behavior, but should gotiated directly between manufacturers and HUD- avoid situations where the public trust and confi- approved private firms. The housing manufacturers dence would be shaken by even the possibility of themselves hire both the third-party firms that as- illicit financial considerations. For example, judges sess home designs against HUD code standards— cannot vote on cases when they own stock in a cor- Design Approval Primary Inspection Agencies (DAPIAs) poration that is before the court, even if there is no —and those firms that conduct in-plant inspections suggestion of individual venality. The IPIA/DAPIA during the construction of approved designs—Pro- system, however, does not guarantee that a conflict duction Inspection Primary Inspection Agencies will not arise; for example, the system allows a reg- (IPIAs). The manufacturer pays these firms, and also ulated party to discharge an inspection agency. has sole discretion over future rehiring decisions. Various administrative remedies may reduce the Currently, 8 private firms do over 90 percent of the incentives for abuse. HUD, rather than the manu- design approval work, and about 35 percent of the facturer, could set and collect inspection fees. Man- in-plant inspections, for the Nation’s “manufactured” ufacturers and private inspection firms could be re- (mobile) homes. State government agencies, acting quired to sign 2- or 3-year contracts for services, as exclusive inspectors, conduct the remaining de- giving the firms more independence from their em- sign approvals and in-plant inspections, which has ployers. Firms might be permitted to do engineer- given rise to other problems.12 ing design and drawings, or design approvals, or in- PIAs must meet rigid HUD criteria to avoid con- plant inspections, but not all three. The Federal en- flicts of interest, but whether HUD can ensure that forcement agency could assign Federal inspectors, these criteria will continue to be met is uncertain. or select private inspection firms, in cases where Some members of the “manufactured” (mobile) monitoring indicated frequent violations of minimum home industry would like to modify the existing sys- standards. As matters now stand, only IPIA’s have tem by eliminating the exclusive right of States to the authority to pull Federal labels for noncompli- act as IPIAs. At the same time, they would like to ance with HUD standards; the government can act maintain Federal preemption of State and local codes only to counter an imminent safety hazard. Techni- that, in many cases, are more stringent than the Fed- cally, HUD can inform the IPIA or the manufacturer eral standards. If Congress wishes to ensure effective that a unit failed to conform with a code require- national regulation of the industry, HUD’s statutory ment, but whether steps have been taken to use this authority in these areas will need to be strengthened authority in a meaningful way has not been dem- and made more consistent. onstrated. ——. This is not to suggest that private firms cannot per- IzI-J.s, @partrnenl of Housing and Urban Development, ~jlth Report form responsible inspections; the advantages of non- to Congress on the Manufactured Housing Program (p. 51) illustrates governmental inspection systems will be discussed performance problems of State agencies and private firms through 1982. Although HUD has not yet published data for subsequent years, other later in this report. Nevertheless, the potential for information indicates continuing problems as well as improvements since a conflict of interest is built into the present system. that time. Existing monitoring and enforcement practices pro- 73

vide insufficient protections against the potential for bile home has actually been inspected by an em- abuse. The steps described above suggest some ways ployee of the Department. Even in those cases the in which enforcement might be improved. Department has not approved the home. 15 Responsibility for Compliance With Codes.-– The recent Varig Airline case confirms that under The HUD code system clouds responsibility for com- HUD regulations, the Department cannot be held pliance with national standards. The regulations do responsible for failure to ensure proper inspection. not require that the consumer be notified as to Failure To Require Full Compliance With All whether the “manufactured” (mobile) home com- Standards.--HUD regulations and enforcement plies with the standards. The manufacturer must cer- mechanisms also fail to assure that every home com- tify to the dealer or distributor that the structures 13 plies with all HUD code standards. The present HUD meet the code, but the approved label for retail code system requires inspections by State agencies units provides no such assurance. This consumer or third-party private firms of a sampling of homes label states: in a manufacturer’s production line. Each home is As evidenced by this label No. ABC 000001, the inspected in at least one stage of production, and manufacturer certifies to the best of the manufac- the number of production stages varies; the current turer’s knowledge and belief that this manufactured Acceptable Quality Level (AQL) list includes 174 in- home has been inspected in accordance with re- spection items. Furthermore, HUD has not pre- quirements of the Department of Housing and Ur- scribed uniform test procedures to assure compli- ban Development and is constructed in conformance ance with its performance standards. with the Federal Manufactured Home Construction and Safety Standards in effect on the date of manu- Complete data have not been compiled on non- facture. 14 compliances with HUD standards. However, HUD’s contractor, the National Conference of States on The label certifies inspection, but not compliance Building Codes and Standards (NCSBCS), conducts beyond a good-faith effort. monitoring inspections of each manufacturing plant Homebuyers have limited recourse without an ex- at least twice a year. These inspections aim at evalu- press guarantee. In fact, certain State laws may be ating the manufacturers’ internal quality control sys- of no help to the consumer, since the manufacturer tems, as well as the performance of State agencies may avoid State regulations in excess of Federal stat- and third-party private firms that do in-plant in- utory requirements. While consumers may pursue spections. , remedies involving repair of minor defects, the le- Although not intended for this purpose, the NCSBCS gal framework seems to prevent States from acting data developed from these semiannual inspections on their behalf, which would constitute an alterna- suggest the frequency of noncompliance of all units tive regulatory structure. produced in HUD-inspected factories. Manufacturers HUD does not permit “false” advertising, which often learn of NCSBCS visits in advance, and pre- would imply HUD endorsement of a “manufactured” pare accordingly; as a result, nonconformance iden- (mobile) home. Indeed, HUD has issued a categori- tified through such inspections may underestimate cal denial of responsibility: the actual figure. Data provided to OTA by HUD for December 1984 through May 1985 indicate that most Any assertion that the Department directly or indirectly approves the construction or sale of any mo- homes produced during that period failed to con- bile home or that the Department inspects mobile form to one or more AQL items, averaging 3.6 non- homes is false, except in the rare case where a mo- conformances per inspection (see table 13). Another breakdown of NCSBCS data, for November 1984 through March 1985, indicates that 8 percent of all IJsection 616 of the Natjonal Manufactured Housing Construction and nonconformances related to AQL items in planning Safety Standards Act states: and fire safety, 55.5 percent to construction, 16.9 to Every manufacturer of manufactured homes shall furnish to the distributor or dealer at the time of delivery of each such manufactured home electrical items, 11.3 percent to thermal items, and produced by such manufacturer certification that such manufactured 8.1 percent to plumbing items. home conforms to all applicable Federal Construction and Safety Standards. IWJ.S, f)epartment of Housing and Urban Development, ~ou~th An- 143282 .362( c)2(c), p. 253. nual Report to the Congress on Mobile Homes. 74

Table 13.—Compliance With Acceptable Quality List tory production involve inspection of production (December 1984-May 1985) lines rather than of individual units, as is done for site-built housing? Percent of AQL Percent of units in the items in compliance specified compliance range Weakness of Remedies and Penalties for Non= 95-1oo ...... 30.1 compliance.—HUD may lack the legal authority to 90-95 ...... 30.1 85-90 ...... 23.6 enforce full compliance with certain code standards. 80-85 ...... 9.8 Under HUD regulations: “A manufacturer. . . shall <60 ...... 6.5 correct, at its expense, any imminent safety hazard SOURCE: U.S. Department of Housing and Urban Development. or serious defect that can be related to an error in design or assembly of the manufactured home.”16 Although this record appears to be poor, the HUD has interpreted this congressional enabling leg- present HUD code system does protect the public islation to mean that it cannot require manufacturers from “imminent safety hazards” that present “im- to bring defective homes into code compliance, un- minent and unreasonable risk of death or serious less “unreasonable risk of injury or death” exists. injury”; it does guard against major defects which According to this interpretation, questions of dura- occur when a series of homes exits the production bility, quality, and amenity remain outside HUD’s line; and it does initiate a consumer complaint proc- jurisdiction. On the other hand, the HUD code’s ess, operated by HUD and by State administrative “Statement of Purpose” calls upon HUD to improve agencies who can respond without Federal enforce- the quality and durability of manufactured homes. ’7 ment authority. Federal legislation may be needed to resolve this However, the Federal system provides limited pro- double standard. tection for the individual purchaser whose home fails Formal rulemaking guidelines dictate attempts to to comply with the standards. HUD addresses con- increase inspections, and steps to disqualify Primary sumer complaints from States that have not estab- Inspection Agencies for improper or insufficient lished administrative agencies for the HUD “manu- inspections—or for improper awarding of Federal factured” (mobile) home program. Although the labels—are complex and protracted. Moreover, un- purchaser may go to the courts, he bears both the der the preemption section of the statute,18 States expenses of this action and the burden of proof. Ex- may not enforce the Federal construction and safety cept for health and safety problems, such as for- standards more stringently than the Federal Gov- maldehyde emissions from plywood and particle- ernment. Still, some States have used their business board materials, court action has little use or effect licensing or registration laws to enforce the HUD in the present HUD code system. Furthermore, most code standards when HUD has failed to require com- HUD code “manufactured” (mobile) homes are sold pliance. to lower income purchasers, who tend to avoid the costs of litigation. Inadequate Provisions for After-Factory In= spections.--The present HUD code system empha- The experience of the HUD code system raises sizes in-plant inspections, an important area of code questions that may affect the formulation of indus- enforcement for all types of industrialized housing. trywide regulations for all categories of residential However, the present HUD code system lacks an construction. Even the existing HUD regulations may efficient framework for after-factory inspections. need review, in light of newly available information; Through no fault of either the manufacturer or the although HUD’s data for estimating nonconformances manufacturing process, many “manufactured” (mo- in production, and for evaluating regulatory perform- bile) homes with Federal labels fail to meet HUD ance, need improvement, Department statistics do standards on arrival at their final destination. Units indicate a number of important issues. For exam- may be altered or damaged at dealerships, where ple, production defects can now be detected, counted, they are stored and shown to customers; or, the and reported. What levels of quality, what standards, and what degrees of conformance should be con- 1e3282.406. sidered acceptable? How should the regulatory sys- ITTitle V], Section 602. tem employ the data for enforcement? Should fac- 183282.11. 75 ——

rigors of transportation from factories to dealer lots foundation, would improve energy performance by and from dealer lots to final building sites may de- 4 to 23 percent.20 crease quality, especially when units are transported along uneven country roads. The problem of “torque,” A proposal to establish quality grades within cat- or the twisting of the entire unit, can arise if the home egories of industrialized housing offers a solution to this problem, and will be addressed in this report. does not rest on a level foundation at the final site. The marketplace, rather than market advantages cre- “Tie-downs” to foundations, connections between ated by government regulations, would then deter- double-wides or multiple units, and utility hook-ups mine the levels of quality that home producers could pose additional problems at the building site. offer to informed or affluent customers. The after-factory inspection process depends on The Role of Federal Oversight. -In general, the State and local regulatory systems. Under HUD reg- “manufactured” (mobile) housing industry supports ulations, dealers may not sell units that have failed the preemptive Federal standards that currently to meet HUD code standards. However, many State guide all U.S. “manufactured” (mobile) homes, while and local agencies do not conduct visual inspections HUD would like to grant more control to the mar- of units on dealer or buyer lots; when inspections ketplace, and to State and local standards. Also, HUD are made, reporting and followup are minimal. NCSBCS has developed a voluntary consensus stand- and the industry have differing views on enforcement procedures; many industry representatives ard for “siting” of units, but although CABO and would like to see less Federal oversight, as well as NCSBCS have developed code language for this purpose19 —which may or may not be used—a Fed- the elimination of the States’ right to act as exclu- eral onsite system of inspections or enforcement does sive inspection agencies. Many States, however, have not exist. expressed concern over proper levels of inspection, and worry that a weakening of the preemptive Fed- Lack of Incentives for Improving Durability eral system could aggravate problems.21 The States and Quality.--The HUD code program was de- have assumed some blame for the present situation; signed to improve durability and quality, along with they are now developing recommendations on how safety. While the safety record of “manufactured” to improve the State role in national housing regu- (mobile) homes has improved, it is still less than that lation reforms.22 of site-built housing; also, it is difficult to show that durability and quality have been addressed. Further- Criteria for a New Regulatory System more, while some manufacturers satisfy HUD code standards with ease, the regulatory system for “man- The following sections of this report suggest pos- ufactured” (mobile) homes does not recognize differ- sible alternatives to the present system of housing ences in quality. As a result, many producers build regulation in the United States. First, however, a set down to minimum safety, rather than up to mini- of criteria is presented, against which such proposals mum quality standards. could be judged. Throughout the discussion, the phrase “a national system of building codes and in- The implications of this extend to energy costs, spections” is used generically to imply a high de- which are higher in HUD code homes than in those gree of national consolidation and organization. A that satisfy the requirements of Title V of the Farmers national system may be legislated or operated by the Home Administration (FmHA). A recent study con- Federal Government, by State or local governments, ducted for the Department of Energy revealed that or with the regulatory participation of third-party pri- if FmHA energy standards were used instead of vate firms. It may be a single consolidated system HUD’s Title V standards, energy consumption of for the entire country, or a national organization most units would be reduced by 37 to 46 percent. HUD’s own Title II-E standards, which apply only to “manufactured” (mobile) homes on a permanent z~~pacific Northwest Laboratory, “Impacts of Alternative Residential Enerqy Standards,” November 1985, p. 9.2. ~lc~-mbined Meeting of the NCSBCS Regulatory Affairs Committee, State Manufactured Building Administrators, and State Building Offi- cials Subcommittees, Arlington, VA, Apr. 23, 1986. 19 NCSBCS, May 1986, op. cit. ZZNCSBCS, May 1986, op. cit. 76 comprised of subsystems for different types of man- Alternative Regulatory Systems ufactured buildings, for manufactured buildings that meet certain criteria, for different code-setting or in- Historically, the writing and enforcement of build- spection functions, or for different multi-State geo- ing codes in the United States have been performed graphic regions, by the same unit of government. In contrast, the very nature of industrialized housing invites a separation In order to remove regulatory impediments to resi- of these functions. How and by whom codes are writ- dential construction and its related industries, a mod- ten may differ from where and by whom codes are ified national code and inspection system might be enforced. Moreover, although the codes themselves evaluated against the following criteria: have received the most attention—resulting in four 1. Does the system apply to all categories of in- national model codes—the Nation’s fragmented code dustrialized housing and modular nonresiden- enforcement system poses a larger impediment to tial buildings? Those buildings that contain the development of the industry, Consequently, ini- closed components, factory-made to fit and func- tial alternatives for a national system relate to the tion together, could be emphasized. enforcement function. 2. Does the system facilitate market aggregation? Local factors also enter into play. Until the 20th Under a relatively uniform framework, firms century, most housing construction was a function may anticipate the codes and enforcement sys- of commerce within States. Traditionally, Congress tems that factory-built homes must satisfy within has deferred to State, county, and municipal desires a large geographic area. Uniformity would also in such matters. As a result of technological devel- enable manufacturers to achieve economies of opments in recent years, housing has entered the scale from factory production-line systems. realm of interstate commerce. Some industry experts Ideally, with appropriate adjustments for cli- believe that a Federal system would bring the regu- matic and other features, such as energy re- latory function in line with the current residential quirements, wind and snow loads, and seismic construction process. On the other hand, this would requirements, a unit produced anywhere in the tend to dilute local control, and might provoke op- United States could be used nationwide. position from State and local building officials and 3. Does the system include reliable and consist- their related constituencies. ent enforcement, to protect manufacturers, dealers, and contractors from subjective or arbi- The following discussion describes four categories trary interpretations of codes? This would proof alternatives: systems in which the Federal Gov- tect the public from the consequences of code ernment has lead role; in which the State Govern- violations. ment has lead role; in which private organizations 4. Does the system reduce costs and administra- have the lead role; or cross-cutting strategies, which tive burdens associated with regulation? may combine all or any of the three. These alterna- 5. Does the system leave as much control as pos- tives do not represent complete or detailed designs sible in the hands of local regulatory author- of regulatory systems. Rather, they should be viewed ities? Regional or national codes need not un- as generic possibilities, which hold the potential to dermine well-designed State or local codes. develop new systems. Instead, the new regulatory mechanism could be built on successful State and local expe- Systems Administered by riences. the Federal Government 6. Does the system constitute part of a coherent An Expanded HUD Code System.—The HUD housing policy that provides Americans with the code system might be expanded in its present form, highest quality at the lowest cost? This would making it a federally preemptive, national system require programs that protect consumers while that would cover other categories of industrialized encouraging industrial innovation and entrepre- housing and related nonresidential modular build- neurship. ings. This would require congressional legislation. 77

Under this alternative, the system could grow Or, such a system might include only integral stronger through legislative or administrative modifi- manufactured building systems with closed con- cations. Along these lines, the NCSBCS has devel- struction, such as HUD code “manufactured” oped an improved system of quality control and com- (mobile) homes; certain modular homes, compliance evaluation for HUD, in consultation with mercial modular buildings, or panel systems; industry representatives; the system is now in re- or large closed components such as “wet cores” view. These and other administrative steps may im- —all of these products must be inspected in the prove compliance with the HUD code for durability factory. State or local governments would still and quality features of “manufactured” (mobile) conduct onsite inspection of factory-made build- homes. ings when the site and the factory are in the Alternatives to HUD Code Regulation.—The same State, for “open” manufactured building present HUD code system could be enlarged to cover systems and for large “open” components. A recent proposal for Federal regulation of other categories of industrialized housing and related nonresidential modular buildings, but would be appliances, supported by both appliance man- altered in one or all of the following ways: ufacturers and environmental groups, illustrates this principle. The proposal calls for certain Fed- ● Congress might create an independent Federal eral standards to preempt several State and lo- commission, board, or administrative agency to cal guidelines, creating a more uniform code regulate manufactured buildings covered by the system that would benefit both producers and Federal system, replacing HUD’s responsibili- consumers. ties in this area. Or, HUD’s regulatory functions ● In order to ensure the successful implementa- might be assigned to another existing agency. tion of any alternative to HUD code regulation, In either case, HUD would retain the broader Congress might strengthen the language of the responsibilities for affordable housing and would statute that guides the present system. A feder- participate in code setting, but would not su- ally based system for all categories of industri- pervise code enforcement. alized housing could foster technological research It is difficult for any Federal agency to regu- and development by guaranteeing consistency late its own constituency. At present, HUD en- in Federal standards. courages construction of minimum purchase- For example, the statutes could specify HUD’s price housing, and regulates construction— role concerning energy standards. HUD is now which may mean increasing housing costs. This in the process of amending the code’s thermal alternative would separate the developmental energy requirements. These guidelines were in- and regulatory functions in residential construc- troduced by HUD, and may soon undergo HUD- tion, making it similar to the areas of nuclear initiated changes, even though the original stat- power, transportation, and environmental pro- ute did not give specific regulatory authority tection. 23 over energy to the Department. ● A Federal system might preempt State and local regulations for all industrialized housing and Incentive Systems.—The Federal Government related construction, but could be limited in sev- might adopt a “carrot and stick” approach to en- eral ways. The system could cover all factory- courage States to establish a uniform national code. built homes and related nonresidential modu- Such a nonregulatory incentive system for industri- lar units that are shipped across State lines, alized housing and related nonresidential construc- removing impediments to interstate commerce. tion could rely on Federal financing or mortgage guarantees, direct funding to State or local govern-

Zsf+sponsibilities for promoting and regulating nUClear pOWer’ are ments, government purchasing, or tax incentives. divided between the Department of Energy, and the independent Nu- The incentives need not be new or special subsidies, clear Regulatory Commission; responsibilities in the field of transpor- but could be based on contingent approvals that tation are divided between the Department of Transportation, and the independent National Transportation Safety Board; and environmental would allow participation in existing Federal pro- responsibilities are divided between the Departments of Energy and grams. The Federal Government already operates Commerce, and the Environmental Protection Agency. numerous programs that benefit homebuilding, espe- 78 cially those that guarantee or supply credit through connection.24 Also, many previous Federal programs the Federal Housing Administration, Veterans Ad- have transferred funds to State and local govern- ministration, Farmers Home Administration, Gov- ments, subject to specific requirements and con- ernment National Mortgage Association, and other ditions. such agencies. Voluntary Systems.—Under this alternative, The HUD-administered Community Development manufacturers could select between making their Block Grant program could serve as another non- housing subject to Federal approval under a Fed- regulatory incentive. Builders might qualify for grants eral preemptive system, to otherwise applicable State only if their homes satisfied quality standards estab- or local government regulations, or to a combina- lished by an organization like NCSBCS. This option tion of the two, depending on the type of housing would also encourage States to adopt standards that involved. resemble a national code, so that their home indus- The Nation’s banking system illustrates the prin- tries could qualify for Block Grant funds. ciple behind this alternative. The Federal Reserve Sweden maintains a particularly effective incen- System gives banks the choice of being either fed- tive system. Only those homes that meet stringent erally or State-chartered, subject to different require- performance standards are eligible for the Swedish ments and regulations. Savings and loan associations equivalent of FHA or VA housing subsidies. As a re- may also take advantage of this option. sult, the performance characteristics of most new The present HUD code system operates in a sim- homes exceed those prescribed by statute, especially ilar manner, although the advantages offered by Fed- with respect to energy. This system created such high eral approval make it impractical for manufacturers levels of thermal performance that energy standards to have the “manufactured” (mobile) homes in- could be increased without affecting most construc- spected at the State or local level. Producers of both tion methods. HUD code “manufactured” (mobile) homes and mod- These incentives, combined with reliable inspec- ular homes better illustrate the idea of choice. The tion systems, might persuade State and local gov- latter now fall under State or local regulations. With ernments to bring their codes for manufactured the “choice alternative” in force, a manufacturer buildings in line with a single, national model code, could select the code and enforcement system that and they might convince State and local govern- best corresponds to the structure being built. ments to accept industrialized housing and related Currently, the Federal Government confers com- nonresidential modular buildings produced and in- petitive economic advantages to building manufac- spected in other governmental jurisdictions. This turers by preempting State and local government would tend to encourage capital-intensive research, regulations—primarily because of benefits stemming since companies would not have to satisfy a myriad from market aggregation. Given these advantages, of local codes in order to introduce new technologies and the potential advantages of a Federal inspection to several parts of the country. label for factory-built homes, the Federal Govern- The underlying principle exists in two current Fed- ment might set and enforce high-quality standards. eral programs. The interstate highway program trans- This could encourage industry development under fers funds to the States, contingent on their compli- a manufacturers’ choice alternative. ance with federally accepted roadway standards, and conditions like the 55 miles-per-hour speed limit and the 21-year-old minimum drinking age. And the Min- imum Property Standards (MPS), administered by Zqln response to complaints of unfair competition from private sector HUD, constitute a powerful nonregulatory incentive certification groups, HUD has instituted a fee for certification of new system; mortgage approvals depend on conformance technology in its “Technical Suitability of Products Program.” Although with certain standards. This ties improvements in HUD’s charges remain lower than those of the private sector organizations, their presence has led to a decrease in the number of innovative technology to the financing process, although other construction programs available to the American marketplace, since HUD-approved regulation tends to negate such a developers have less incentive to introduce new technologies. 79

State Government-Based Systems plication of Federal regulatory authority. First, initial State participation is voluntary. Second, while Three State government-based systems, in which the States give up individual sovereignty for the State governments have the leading role, are dis- larger purposes or programs, the agencies that ad- cussed below. State regulators contacted by NCSBCS 25 minister such compacts are controlled by the mem- “showed fairly equal support for all three systems.” ber States. The Federal Government may play a role, Multistate Compacts.--Multi-State compacts, or but in a subordinate capacity. interstate compacts, are congressionally approved Multi-State compacts offer the following advantages agreements among or between States. Congress sets for the regulation of industrialized housing: the rules for any such multi-State arrangement, and State legislatures may vote to enter such compacts 1. Multi-State compacts would establish reciprocity only with congressional consent. Having joined, a among States, so that manufactured buildings State may withdraw only under rules established by produced and inspected in one State could be Congress. The regulatory or operating authority of accepted by another. the compact depends on the nature of the congres- 2. Multi-State compacts could serve as an inter- sional mandate. Over 200 multi-State compacts have mediate preemptive system, superseding the au- been enacted in the United States, for such diverse thority of individual States but under the aus- purposes as water allocation, transportation and port pices of a federally based preemptive system. development, corrections, education, forest fire pro- 3. Since State codes tend to follow regional group- tection, health, motor vehicles, radioactive waste dis- ings, compacts might be created for a limited posal, pest control, planning and development, pub- number of regions across the country. Contig- lic works, recreational parks, civil defense and uous or nearby States may reach agreements disaster, and welfare. with one another more easily; most manufac- Historically, compacts have been bilateral, re- tured buildings move regionally, not nationally, gional, and national in scope. Until the 1920s, most because of transportation costs. Also, multi-State were agreements between two States. The next gen- compacts might differ according to regional con- eration of compacts dealt with regional problems, siderations like climatic conditions or market such as the Colorado River Compact that embraced preferences. seven States. The first national agreement was the 4. Multi-State code enforcement for industrialized Interstate Compact for Supervision of Parolees and housing and manufactured commercial build- Probationers, established during the 1930s. Func- ings might rely on existing State agencies and tional compacts, or multilateral agreements that did systems, instead of spawning additional bu- not rely on regional identification, developed in the reaucracy. 1930s as well; the Interstate Compact to Conserve The Federal Government might provide incentives Oil and Gas was open to all oil-producing States. for States to join multi-State compacts. Federal financ- Compacts also began to serve regulatory purposes; ing or mortgage guarantees and other contingent ap- New Jersey and New York enacted the Tri-State Sani- provals have been described for a nonregulatory Fed- tation Compact in 1935 and 1936, respectively, eral incentive system in a previous section. Another joined by Connecticut in 1941. The Ohio Valley Sani- kind of incentive involves the Federal Government tation Compact represented an early regulatory as an equal partner in the compacts. An enlarged agreement for a river basin region. Since World War HUD code system, or a modified system of Federal 11, the proportion of regional and national compacts administrative agencies, could have preemptive reg- has increased relative to bi-State agreements. ulatory authority over manufactured buildings pro- Multi-State compacts create a legal regulatory duced in or shipped to States not belonging to multi- framework between or among States, and employ State regulatory compacts, encouraging States to join constitutional powers at both Federal and State such agreements. In this way, the Federal Govern- levels. They offer two direct advantages to the ap- ment’s activities would tend to diminish over time. The Abandoned Mine Reclamation Program illus- Z5NCSf3CS, May 1986, Op cit. trates this principle: once a State develops a feder- —. —

ally approved program for mine reclamation, it as- A broad spectrum of formal and informal agree- sumes full control of the program. ments are covered by this alternative. At one ex- Special Regional State Legislation Allowed by treme, construction that is not covered by HUD Congress.–The recent Supreme Court decision of codes—in particular, modular housing and modu- June 10, 1985, Northeast Bancorp, Inc., et al. v. lar nonresidential buildings–could be regulated by ad-hoc arrangements made at the discretion of public Board of Governors of the Federal Reserve System, officials. State or local governments could agree to et al., suggests an alternative that resembles the multi-State compact. The court held that since Con- accept units that have been produced and inspected gress had authorized States to determine what banks in a different jurisdiction. Such negotiated agree- could operate within their borders, States were not ments may employ third-party private inspectors, or obliged to accept all banks. The New England States State inspectors situated close to the factories. limited approval to regional banks, excluding New At the other extreme, reciprocal legal arrange- York. ments among States for the acceptance of manufac- The ruling in favor of this policy has important tured buildings other than HUD code “manufactured” implications for the housing industry. Citing this as (mobile) homes can and are now being developed precedent, Congress could pass a Federal statute al- without Federal assistance. Eleven States report some lowing for regional reciprocal cooperation by States type of agreement with one or more States. Florida, in the area of manufactured buildings. This differs Georgia, and South Carolina will soon conclude a from the concept of a multi-State compact, since no reciprocity agreement, and may be joined by Loui- regulatory authority would be established.26 Rather, siana, Mississippi, North Carolina, Tennessee, Texas, States would cooperate with one another based on and Virginia. their respective market needs. For example, a State Developments within States have facilitated State might declare that if other States accepted its own reciprocity. Many States have begun to confront the inspection and certification standards, it would re- problems of manufactured buildings other than HUD spond in kind. This would enable States to limit code homes, and have consolidated codes and en- agreements to nearby “acceptable” States, which forcement systems already. Although differences re- hold similar views on codes and code enforcement. main both between and within States, 34 different Essentially, such an agreement would represent statewide codes preempt local government standards a lesser form of the multi-State compact in manner, for modular buildings; 28 States have adopted such geographic extent, and strength of commitment. codes for packaged panelized buildings systems; 31 However, while this would improve geographic mar- preempt local standards for large closed components ket aggregation by regionalizing the manufactured like “wet cores”; and 5 cover precut homes. On the building industry, it would tend to impede the de- enforcement side, 31 States use State inspectors for manufactured buildings, 21 use county or munici- velopment of a national system. 27 pal inspectors, and 23 use third-party inspectors. Non-Federal Negotiated Agreements.—This alternative involves agreements negotiated between In the absence of more complete solutions, nego- State or local governments, or between a State or tiated agreements have allowed State and local gov- local government agency and a private third-party ernments to combat the regulatory problems pre- inspector or manufacturer. There is no Federal par- sented by industrialized housing, especially those ticipation, and agreements need not be accompanied relating to factory construction. However, this type by specific legislation. Such arrangements may be of governmental oversight presents problems of con- made on a case-by-case basis, and do not require sistency, and abuses have been reported. Assum- association with a statutory system. ing that the manufactured building industries will continue to enjoy sizable growth, negotiated agreements would be the weakest of all State-based alter- 26Although A~& 1, section 10.1 of the U.S. Constitution holds that “no state shall enter into any treaty, alliance, or confederation” with- natives. Such agreements may be easy to implement, out congressional approval, associations that do not legislate actual regulatory power—as was the case with Northeast llancorp-have been permitted. Z7NCSBCS, unpublished data. but uniformity over a large multi-State region is dif- develop consensus standards for their products that ficult to achieve and may not stand the test of time. are later incorporated in building codes. Private firms and industry representatives do much of this work Proposals of NAHB and the Building Code through organizations like the American National Associations. -As noted earlier, the National Asso- Standards Institute and the American Society for ciation of Home Builders, NCSBCS, CABO, BOCA, Testing and Materials. Industrial trade associations ICBO, and SBCCI have agreed on principles for a also implement consensus standards, and, as noted, State-based regulatory system that would affect codes the three major model building codes come from the and inspection systems throughout the country. They nongovernmental organizations and CABO. are now in the process of converting these proposals into a formal regulatory system with adequate fund- In addition, numerous profitmaking and nonprofit ing. The system would be based on the following laboratories test materials, products, and buildings. guidelines: Underwriters Laboratories, Inc., a private nonprofit firm, occupies a unique position in the industry. The ● One of the three major model building codes approval of electrical items by Underwriters, or by would be adopted by the States. Local jurisdic- a laboratory of equal stature, stands as a legal and tions could not make amendments. practical prerequisite for government approval. ● States would enforce the regulations that applied to factory-produced housing, and local jurisdic- Application of Private Regulation. -Private re- tions would oversee codes for site-built housing. sponsibility systems raise questions of accountabil- ● The selected model code would be mandatory ity: who is responsible, how, and to what extent? for all factory-built housing, and for all site-built Are there any models or examples of effective pri- housing constructed in jurisdictions that use vate responsibility systems that can apply to resi- building codes. dential construction, especially in matters of en- ● Amendments to the codes would be reviewed forcement? “through channels currently used for the model In response to these questions, European systems building codes” and “the States would establish a uniform procedure for evaluating and ap- of private assurance deserve analysis. Belgium has proving new products, design concepts, and a strong private liability law, under which architects and builders are held responsible for 10 years in mat- construction techniques. ” ● ters of building safety and durability. SECO—roughly States would agree to reciprocity agreements for translated as the “Bureau of Control and Proofing all industrialized buildings. of Building Safety and Construction’’—is a nongov- ● Education and training would be provided for builders, building trade workers, and regulatory ernmental engineering consulting organization that tests and inspects all types of structures. Government officials .28 approvals require SECO inspections; insurance companies also call for SECO inspections as a prerequi- Private Responsibility Systems site for issuing policies to builders and owners. SECO Private companies and associations play a substan- divides its attention between municipal authorities tial role in governmental processes for regulating the and the private sector—builders, manufacturers, in- U.S. housing industry. This participation takes vari- surance companies, and building owners. SECO’s ous forms, such as developing consensus standards, work includes laboratory testing, reviews of designs establishing model buildings codes, and testing ma- and plans, onsite and factory inspections of build- terials. ings and components, and plans and reviews of quality control systems. The firm handles approximately The American system resembles a gigantic volun- 90 percent of all such activities in Belgium, and Bel- tary regulatory scheme, considering the number of gian courts interpret “good practice” consensus private organizations that participate. An estimated standards developed by SECO. In turn, SECO is le- 1,800 private American companies manufacture gally liable for the advice and approvals that it gives. components for homes, and many of these help to Similar systems exist in other countries. In France, %4B0 News Release, Llav 1986 several nongovernmental organizations operate like ——. ——-——— .

SECO. Local governments or councils in Great Brit- panies that issue any form of fire insurance re- ain and Sweden are legally liable for the inspections quire annual inspections and maintenance of made under their auspices. A British law passed in heating systems. 1984 provides for home liability, and enables the 4. Private financing institutions, like private insur- government to accept inspections performed by ance companies, could take a more active role properly bonded private firms. in performing a private regulatory function. Compliance with code standards does affect loan More investigation of the effectiveness and prob- risks and marketability of buildings, of obvious lems of European systems is needed. However, these importance to private financing institutions. models do suggest possibilities for a “private respon- Consequently, in addition to requiring insur- sibility” approach i n this country, where most gov- ance, financing institutions may set specific ernment entities have not been legally liable for guidelines for those seeking credit for mortgage codes and inspections made under their auspices. financing, or construction loans for manufac- Congress might choose to make them liable, in or- tured buildings. HUD’s Minimum Property der to make codes and inspections more effective. Standards, used to approve federally guaranteed Under this approach, codes would continue to be mortgages, illustrates this principle. set through official government processes, but the enforcement system could be made private in cases Cross-Cutting Strategies of liability transfer Several ways to implement this approach are described below: A single code for all types of industrialized hous- ; 1;> ITI Y may not be tee] [ ~ .~gicail~ realistic or 1. Manufacturers’ and dealers’ warranties could be cj(J:;~;” < ,[, . I lrthe~”“ studj’ is I I \ ~: d, Alternatives to required on all industrialized housing and non- ! \j : I .: f’ c(]~e C(jl i. ] acc~l, . {l:~ic i he different cat- residential modular buildings. New Jersey main- } ~Jt housi T , and C( ~’ I I ~ S(JI grades of housing tains such a mandatory requirement, and sev- b $, ~ at ?gori (-4>. eral other States are considering the option. 2. Mandatory inspections could be conducted by Labeling.--In the United States, appliances are third-party law firms. The government could rated for energy efficiency, meats receive quality license the firms, but payment would come from grad{: r , ~ lgs, i; I f 1,!l]obiles ar-e given gasoline miie- the various involved parties, following the Euro- ~ C;C I ‘ <, ai’Ld truck and J !~.)mobi]e tires have pean model: manufacturers, dealers, contrac- ~J[~It~~ rati r’qs. Housing colll[: .-~pt a similar system, tors, government entities, homeowners, and ‘. ): “ 1’ :1:; !L alth a~d wret~, ‘S jr-ability, and quality. other building owners. The private inspection hli’1 sting building re~;l ! lations mandate “ac- firms would issue inspection certificates and af- cepta~le’i ,minimum health and safety standards. fix approval seals that certified full code com- Acceptable minimums indicate the absence of abso- pliance for manufactured units. Like certified lute levels, even in health and safety of buildings. public accountants, they would be bonded and For e~”ample, differences exist in fire protection— insured as a requirement for licensing, and wall ,+fi~” i.i Ials have distinct interior surface flame would be legally liable for their advice on code spread tij ,ies, and placement and enclosure of fur- compliance during inspection. naces, number of smoke detectors, number and dis- 3. Because they provide liability coverage and tance to exits, and exit capacities all differ accord- building insurance after construction, private insurance companies might become more in- ing to local conditions. volved in setting qualifications and require- Housing grades may be based on other factors: ments. In effect, they would perform a private durability, quality, amenity, and operating or life- regulatory function based on risk assessment. cycle costs. HUD has already demonstrated the fea- Insurance coverage could be required as a mat- sibility of establishing grades through the potential ter of law, and companies could set competi- for evaluation of quality, livability, and durability in tive premiums. Currently, U.S. insurance com- “manufactured” (mobile) homes.29 panies engage in loss prevention activities for “’l-l S Dep~rtment of Housing and (Irban Development, Sixth An- commercial buildings only; in Switzerland, com- J)II;II f

There are three approaches to grading homes door units, door locks, window sashes, handrails, within categories. First, each key attribute of a house interior doors, kitchen cabinets, “master television might be rated, with the cumulative result given to antennas,” and more. Products that carry the “Bet- the home purchaser. Second, minimum acceptable ter Living” label receive two types of insurance: prod- levels of each attribute might be established for each uct warranty insurance, which covers costs associ- grade of house. A “Grade A“ house would have cer- ated with replacement of a defective component; and tain features, a “Grade B“ house might be lower, and product liability insurance, which covers claims re- so on. Third, a house might be graded only for min- sulting from injury or property damage attributable imum standards of health and safety. Higher grades to a failed component.30 of homes would carry stickers, demonstrating com- The French “Agreement” system, where a single pliance with selected standards of durability, qual- national private corporation makes comprehensive ity, amenity, and operating or lifecycle costs. technical investigations and certifies building inno- Such improved information about building qual- vations, has been adopted with variations in over ity would allow banks to estimate the market value 10 countries. The “Agreement” organization assesses of the structure more accurately. Also, it would per- likely performance of factors not covered by exist- mit banks to project potential operating costs, such ing building codes. Its recommendations encompass as energy, for use in qualifying individuals for hous- the design, manufacture, assembly, and installation ing loans. Both features would facilitate the opera- of products. It also conducts research on testing tion of housing markets, and would encourage methods and quality control for manufacturing and greater construction quality without prescription. building erection procedures. The establishment of categories of factory-built Dozens of energy rating systems have been de- homes, together with grades within such a system, veloped in the United States. For example, Califor- would yield two important benefits. This market- nia Utilities began rating new homes in the late based solution would allow market forces, and not 1970s, providing builders with discounts on utility statutory regulation, to govern supply and demand. connection charges if their structures met minimum Also, it would create incentives for producers to standards of electric energy efficiency. The program “build up” in order to satisfy better-informed con- succeeded in attracting consumer interest in energy sumers. efficiency, but some building officials found the Cali- fornia rating systems “difficult to enforce”31 due to Other Models.—Japan maintains national stand- their relative complexity. ards for certifying building components. The Japa- nese Ministry of Construction provides group insur- Several other types of systems exist. Austin, Texas, ance and a “Better Living” label for housing has a “five-star” rating system for new houses. The components that meet specified standards. The Min- Western Resources Institute has organized builders, istry publishes the standards in the Japanese equiva- bankers, insurance companies, and realtors into a lent of the Federal Register, and invites firms to ap- coalition that provides an “Energy Rated Homes” ply for certification. Applications must include label for units sold in western Washington; this detailed design drawings and test results, and are project is designed to operate by industry consensus, reviewed by a 25-member certification commission not government intervention.32 Appraisals leading composed of consumers, members of “local public to a rating are conducted much like standard ap- organizations, ” and technical experts in housing praisals. components. Certification must be renewed every The State of Florida has combined energy rating 3 years. with a “minimum standards” approach. New homes, By June 1985, 541 companies had received cer- residential additions, or significant renovation must tification for 1,417 products in 31 categories. These satisfy a minimum standard for energy efficiency, categories include hot water systems, ventilation units, gas appliances for kitchens, gas leakage alarm ~ocovernment of Japan, Ministry of Construction, Housing Produc- tion Division, Quality Housing Co&onenK CerMication $\rs/ern, 1985, systems, solar energy systems, bathtubs, “housing ~INCSBCS, May 1986, op. cit. information systems, ” and even mailboxes, front sZJav Luboff, private communication, February 1986. ———

which varies between three “climatic zones”; beyond eral Government has been slow to use its power as this threshold, houses receive grades that indicate a secondary lender to encourage similar considera- future performance. However, as with the Califor- tions. The Federal Home Loan Mortgage Corpora- nia Utilities model, effective enforcement has been tion (“Freddie Mac”) does account for energy effi- difficult to achieve, especially in rural areas with low ciency when a borrower is on the borderline of the levels of construction. PITI equation; the Federal National Mortgage Asso- Presently, California is considering a statewide ciation (“Fannie Mae”) allows for an increase of two percentage points—28 to 30, for example—in the energy rating system. The California State Building Code mandates stringent energy-efficiency require- mortgage payment-to-debt ratio, if the home satisfies ments for new homes, which made obsolete the State certain energy requirements; other agencies have not yet followed suit. Freddie Mac has indicated that standards set by the electric utilities and which led if projected energy costs could be specified with to the abandonment of utility-based labeling pro- greater accuracy, then the agency would consider grams. The California code requires builders to sub- including them as a loan determinant. mit certification plans prior to approval. A computer- based analysis then determines whether the proposed structure meets minimum levels of energy per- Other Measures formance. Since the computer-based analysis applies Four additional options were identified as poten- to all structures receiving code approval in Califor- tially important, but were not investigated in detail: nia, labels with the number of “points” scored can 1. Mandatory training and examinations for cer- be supplied at no additional cost to the builder. In two demonstration municipalities, the State Energy tification of inspectors might be required for all building inspectors. Enhancing the skills and Commission has established a rating scale for existing residential structures of 1 to 6, where 1 indicates professional qualifications of inspectors will the highest level of energy efficiency. Were this improve code enforcement. The model code system applied on a statewide level, most existing agencies and NCSBCS already offer training and homes would receive relatively poor scores, illus- examination systems, and 10 States require in- trating the benefits of purchasing a new home and spectors of manufactured buildings to take ex- aiding builders as a result. aminations for certification. In fact, most States “strongly endorsed the need for mandatory Also, banks have been encouraged to consider training and certification examinations for in- energy costs when reviewing a borrower’s ability to spector and third-party personnel.”33 pay. Standard rules call for an owner to pay no more 2. Design approvals for manufactured buildings than 28 percent of his or her annual income for prin- might require reviews and signatures from reg- cipal, interest, taxes, and insurance (PITI), but many istered engineers. lenders have abandoned this standard in the face 3. Improved quality control of factory production- of skyrocketing housing costs. California loan offices, lines for manufactured buildings could be for example, now allow PITI to reach 32 percent of achieved, perhaps borrowing and adapting tech- a buyer’s income. If a label allowed lenders to project niques from other industries. the energy bills associated with a home purchase, 4. Consumer participation in code-setting for man- the rules could be extended to include PITI + E, or ufactured buildings could be improved, and con- expected annual energy bills. This would permit sumer complaint and appeal processes short of lenders and borrowers to integrate operating costs lawsuits could be facilitated. into purchasing decisions with greater accuracy. However, few lenders have moved to consider such quality features as energy efficiency, and the Fed- qJCSBCS, May 1986, op. cit. 85

FOSTERING TECHNOLOGICAL INNOVATION Many housing experts urge the U.S. Government As for public funding, historically small agency to play a more active role in promoting fundamen- budgets have decreased even further. Still, several tal building research. They claim that without such agencies do sponsor relevant research, including the study, the U.S. residential construction industry will Department of Agriculture through its Forest Prod- become increasingly vulnerable to foreign compe- ucts Laboratory, the Commerce Department through tition, and American homebuyers will continue to the Centers for Building Technology and Fire Re- receive less than their money’s worth. The argument search at the National Bureau of Standards, the De- concludes that because even the largest housing partment of Housing and Urban Development, the firms cannot or will not conduct basic research, the Department of Energy, the National Science Foun- Federal Government must make the kind of long- dation, and the National Institute of Building Sci- term commitment that has succeeded elsewhere. ences. However, due to poor coordination of these Sweden’s Council for Building Research, for exam- activities, research efforts have remained fragmented ple, spent $39 million on research in 1983, more and have fallen short of their potential. than three times as much as HUD, despite the fact that Sweden’s residential construction industry is ap- HUD has not promoted aggressive policies for proximately one-twentieth the size of its American basic housing research. A 1982 GAO report states counterpart. The U.S. Government does support such that since 1974, “HUD has funded only one project research in health and agriculture, both of which which demonstrated (in one geographical area) the cumulative cost saving potential of a wide combi- are based on small establishments that lack the re- 34 sources to conduct independent research. However, nation of innovative technologies.’’ Some indus- even the 100 large companies that produced 25 per- try representatives assert that HUD’s research serves cent of all housing units in 1985 did not make sig- to back up or justify a proposed building regulation, nificant investments in research. It may be time to and is seldom made public in any case, although reevaluate the historical “laissez-faire” approach to HUD’s “Joint Venture on Affordable Housing”-- housing research. initiated in several cities in 1982—has achieved limited success. Research funds from the private sector, including both individual firms and trade and professional Recognizing the need “to encourage all sectors of associations, have been inadequate in the past, and the building industry to devise voluntarily a more efficient way of introducing technology into hous- a change in this trend seems unlikely. Most large 35 U.S. homebuilding firms do not maintain a research ing and building,” Congress established the Na- budget, which implies a lack of industry confidence tional Institute of Building Sciences (NIBS) in 1974. in the cost-effectiveness of technological innovation, NIBS was designed to spearhead new housing-related at least in the short run. Professional associations research for the industry, a goal that has not yet been of architects and builders, like the American Insti- achieved. This stems from the specific mandates that tute of Architects, conduct some research, but their accompany NIBS funding, as opposed to funding for budgets are minute in relation to the size of the in- the kind of long-term, basic research that enabled dustry as a whole. Japan to develop its ceramic building material. In 1979, NIBS issued a report that identified “the reg- Trade associations do sponsor useful research. For ulatory environment” as the major constraint on re- example, the NAHB Foundation, Inc., has developed search, development, and demonstration projects. a research house to demonstrate advances in con- The Institute attributed its own sluggishness to en- ventional construction techniques, has instituted cer- courage new technologies to a shortage of financial tification programs for manufacturers of building resources.36 products, and conducts economic and regulatory analysis for public and private groups. Nevertheless, ~qceneral Accounting office. Op. ~lt compared with the resources available to other U.S. ‘5 Public Law 93-383 ‘6”A Study of Existing Processes for the introduction of New Prod- industries of a similar size, this construction research ucts and Technolog~ into the Bu]lding I ndusto, ” prepared by’ The program is, at best, limited. Ehrenkrantz Group for the National Institute of BuildlI~g Sclen~es, 1979 86

Summarizing its review of HUD and NIBS as of not project the effect of different design alter- 1982, the GAO observed that “the statutory author- natives on peak electric loads of residences, ity given to HUD and the National Institute of Build- and energy costs in many southern areas de- ing Sciences to encourage the development and use pend more on peak electric loads than on to- of innovative technology in homebuilding has been tal energy consumption. Also, more efficient receiving only limited attention by HUD and the In- analysis of the implications of different win- stitute. "37 Neither agency appears ready to promote dow locations, shadings and glazings, patterns research and development of new homebuilding of moisture penetration, noise propagation, technologies or materials unless funds are earmarked and heat exchange could be developed. specifically for this purpose. 4. Simplified and accurate methods of energy Preparation of a comprehensive list of priorities labeling, and improved techniques for project- ing energy costs. Financial institutions could would help to increase Federal support for housing- employ this data in order to gain a better de- related research. Previous sections of this report have termination of a borrower’s ability to repay a discussed the need to integrate such research into mortgage loan. The present system estimates a program that considers the performance of an en- the principal, interest, taxes, and insurance on tire residential structure, in the areas of construc- a home, and measures this against a bor- tion, energy efficiency, safety, and comfort. In light rower’s expected annual income; adding proof this situation, a list of research priorities might 38 jected energy costs would provide for a more include the following: accurate equation. 1. Analytical tools that could facilitate the design improved data on the actual performance of of low-cost structures. For example, most ex- different energy efficiency strategies and con- isting computer models for evaluating heating struction techniques. Current information on and cooling costs are difficult to use, and are lifetime operating experiences for different sys- not tied to advanced building design systems. tems, especially for residential construction, As a result, few architects or builders employ is poor; maintenance costs of industrialized such techniques. housing cannot be compared with conventional 2. Advanced manufacturing technologies, includ- construction techniques. For example, per- ing a variety of numerically controlled produc- formance of insulation, sealants, and other tion systems, which have been developed for materials is not well documented, and the other manufacturing industries and could be durability of residential retrofits is poorly adapted for use in factory and field housing understood, Differences between the predicted construction. New standards and communica- performance of structures and the actual field tion protocols have accompanied the introduc- experience need to be clarified. tion of these innovations into other sectors, Improved techniques for characterizing the and the residential construction industry may performance of residential appliances, making need to repeat this process. the estimates of performance for these items 3. Analytical tools for determining the effect of match actual field experience with greater ac- building design decisions on energy consump- curacy. tion; present techniques for this purpose are 7. Techniques for integrating residential electric inadequate. Improved estimates for building systems with utility dispatch systems. Controls performance in all types of warm-weather cli- on individual appliances could also be im- mates are needed. Most existing methods can- proved. 8. Technologies of a variety of building compo-

SIGeneral Accounting Office, Op. cit. nents. Examples include glazing materials, jg.$ee National Institute of Building Sciences, “Building Technologies high-efficiency lighting, water heaters with flue- Research Agenda: A Technical Report,” May 1985; a report entitled gas condensation, heat-fired–or gas-powered “Third Edition of a National Program Plan for the Thermal Perform- —heat pumps, integrated appliances, and com- ance of Building Envelope Systems and Insulating Materials, ” Building Thermal Envelope Coordinating Council, is in preparation. See also E. ponents like compressors and refrigerants. Hirst, et al., Energy Efficiency in Buildings: Progress& Promise (Wash- 9. Controlled interior air quality, which may be- ington, DC: American Council for an Energy Efficient Economy, 1986), come a critical public health issue, particularly 87

where significant amounts of radon from soil discourage long-term technological research. Two or groundwater have been introduced. Also, million housing units were started in 1978, as op- more study of interior air pollution is needed posed to under a million in 1982.39 Large invest- —especially of the sources of this factor, and ments in production equipment can prove financially of possible techniques for mitigating its effects. ruinous during periods of low housing demand, as 10. Industry standards and tests, which could per- in the case of U.S. Home (see ch. 2). A strategy for mit rapid, inexpensive analysis of the perform- evening the fluctuations in the housing cycle may ance and safety of new components and encourage greater capital investment on the part of systems. the building industry. This discussion does not intend to provide a comprehensive review of this com- Some industry analysts advocate the creation of plex but important subject, but several options have a quasi-governmental corporation to test and certify been suggested for stimulating short-term housing new building technologies for construction. A sin- demand (see box B).40 gle approval source for innovations in building technologies could marshal public and private support Concerning the potential result of such policies, for innovative development, especially to confront GAO observed that: problems of technology transfer. Consensus stand- Past housing stimulus proposals have generally ards and model code organizations represent exist- been thought to be inefficient because of a variety ing industries, known product-lines, and current of leakages arising from: (1) credit diverted to pur- technologies, and tend to resist technological change. poses other than housing; (2) windfalls to sellers; Also, because new technologies do not assure cer- (3) purchases by buyers who receive the subsidy tainty in performance characteristics, there is justifi- but who would have bought without it at roughly able market resistance to unproven innovations. the same time; (4) purchases by buyers who would Homeowners prefer not to gamble with an enormous have bought later but move up their purchases. lifetime investment. However, the last group, those who move up their purchase decision, are really doing what a stimu- Consequently, one approach calls for existing in- lus proposal attempts to do—moving forward con- stitutions to continue code setting for older, proven sumer decisions to buy at a time when housing is technologies, while a new, quasi-public corporation in a slump and reducing demand during the next would test, approve, and promote newer building upswing in the economy. These consumers may technologies. Such an institution would serve as a also buy more expensive housing than they other- prestigious, unbiased source of information, whose wise would have, which would tend to create more recommendations would be accepted by other in- jobs and help the homebuilding industry. Whether or not a stimulus program which would result in stitutions. moving consumer decisions is desirable depends The Center for Building Technology at the National heavily on the economic outlook. If strong recov- Bureau of Standards performs a similar function, con- ery is anticipated it may prove helpful to shift starts ducting research for the development of testing forward. If only a weak recovery is anticipated, shifting starts may yield an even weaker recovery. The standards. The Center acted much like the proposed extent of these leakages have been heavily de- “quasi-public corporation” in its involvement with bated. 41 Operation Breakthrough. Another example is the relationship between the Federal Food and Drug Administration (FDA) and the National Research Council (NRC) of the National Academy of Sciences. The NRC’s independent scientific reviews of phar- maceuticals provide the basis for actions by the FDA.

Stabilizing the Building Cycle WU,S, Department of Commerce, Bureau of the Census, Sttitktkd Ab- Variable housing construction rates in the United stract of the L’nited States, 1984, p. 743, WU, S, Congress, General Accounting Office, “Countercyclical Stlrn U- States impede long-term planning and heavy invest- Ius Proposals for Single-Family Housing,” Washington, DC, 1982, pp 7-8.

~]lbid., P. 6. ment in capital1 equipment,, and worker training,“, and 88

.--Ho.yers, re- made eligible fot In aewly built or sqb credit would equal but would not ex- a 1,,1118100 would resemble the eeetiOlt';Ad Appendix Appendix Contributions

This OTA special report was prepared from a variety ● Steven Winter Associates, Inc.’s files, of sources. Steven Winter of the Steven Winter Associ- . publications-both of the housing industry and more ates, Inc., New York, prepared most of the material deal- general publications, ing with international trade. David Dowall of the Univer- ● foreign housing manufacturers’ literature, sity of California, Berkeley, and Edward Starostovic, PSF ● foreign product manufacturers’ literature, Corp., Wisconsin, contributed to the sections concerning • reports by others, and domestic housing production. Robert Gold, OTA, and Vin- . foreign Consulates and Trade Associations. cent Brannigan of the University of Maryland were pri- “In addition, individuals whose knowledge and opin- marily responsible for the sections addressing policy alter- ions of the field would be worthwhile were contacted. Due natives; many of these concepts were proposed in a to their positions, many of these individuals requested workshop held by OTA (see inside front cover for par- that their names be kept confidential. Altogether, over ticipants). Janet Lowenthal, OTA contractor, helped to 50 persons were contacted, from various fields: combine the material into an integrated text. Daniel ● experts within the manufactured housing industry, Chenok, OTA, conducted final research, revision, and ● domestic builders with experience in international editing. markets, Because the information collected by the Steven Win- ● foreign manufacturers of building systems and their ter Associates, Inc., constitutes the basis of chapters 4 and sales representatives, 5 of this special report, it is appropriate to include their ● building products manufacturers, and statement of methodology: ● trade representatives from other countries. “In order to present an accurate picture of the state of “The information gathered has been compared and ana- manufactured housing internationally, and the most im- lyzed in order to arrive at an understanding of the cur- portant factors affecting it, Steven Winter Associates, Inc., rent state of manufactured housing and its trends. It was has drawn upon its knowledge of the manufactured hous- beyond the scope of this study to present an exhaustive ing industry, as well as upon its extensive contacts within report on each country considered, although such infor- the industry. mation will be presented where it is considered impor- “Preliminary analysis of the important questions con- tant for a basic understanding on the issues. Rather, we cerning manufactured building internationally determined have tried to focus on the most important facts and to the most important areas for concentration. Information raise the most important issues, especially concerning on these areas was then gathered from a number of those countries that will probably have the greatest role sources: in the international manufactured building market.”