Can modular homes help solve the affordability problem? 

Editor's note: The United States needs more housing. It's not a new problem, but new solutions are emerging — and some old ones are getting another look. How are they shaping the future of housing? What is showing the most promise?

This series explores a few different approaches and where they might lead.

What's old is new again in the real estate world as the demand for affordable homes continues to outpace construction. One of those old ideas is modular construction, which some experts say could be an important part of the solution to the nation's affordability challenges.

Modular construction dates back to the early 1900s when Sears sold prefabricated "kit homes." Today, developers are using modular construction to build a range of products from office towers to single-family homes and disaster relief housing. 

What is modular construction?

Modular construction is a process, not a product. Think of it like an assembly line for home building. Each room is completed individually in a warehouse, from the framing to the utility connections and design elements. Then, the rooms are delivered to a jobsite and installed in a range of configurations, including single-family homes, condos and multifamily living.

The development of modular homes involves the same permit review process and building code inspections as traditional developers — they aren't "manufactured homes," which are held to a different standard set by the Department of Housing and Urban Development, explains Jon Hannah-Spacagna, the government affairs director for the Modular Building Institute.

The public's confusion over modular versus manufactured housing has been a longstanding challenge for the industry, Hannah-Spacagna says, but the tides seem to be changing.

The modular building industry has been growing over the past decade, with the total value of permanent modular construction projects in the U.S. increasing from around $3.7 billion in 2015 to $14.6 billion 2023, according to the Modular Building Institute. Relocatable modular buildings — often used for schools and to support disaster relief — add another $5 billion in value.

"We're seeing a much greater acceptance [of modular housing], and it really comes down to understanding," Hannah-Spacagna said.

Addressing the housing shortage

Why does the modular home sector matter, anyway? Because, experts argue, this type of construction could be an important piece of the housing puzzle, increasing supply and lowering costs for buyers. 

Decades of underbuilding have led to a shortage of millions of homes — something that isn't likely to change soon, as traditional development activity has trickled back down to pre-pandemic levels, according to census and HUD data compiled by the St. Louis Fed.

"The affordability of our housing has actually reached some pretty concerning levels," Nathan Peterson, CEO of Vederra Modular in Evergreen, Colorado, told Real Estate News. "Modular could be the technology that will help lower that cost."

Modular construction and the affordability crisis

Peterson, whose company has built more than 200 modular projects in Colorado, says there are two key ways that modular housing can impact affordability: speed-to-market and carrying costs.

Modular developments can often be completed in 50% to 60% of the time it would take to finish a site-built project, Peterson said — which can make a big difference for a developer's bottom line, especially in a high interest rate environment.

"We're passing on a lot of those cost savings associated with the economies that we're dealing with."

And Vederra isn't the only one. For instance, Minnesota-based Rise Modular completed a 192-unit apartment building in St. Paul in 2021. The studio and one-bedroom apartments rented for between $940 and $1,375 per month, which was $200-$300 below the market average at the time, Business Insider reported.

Modular developments can also come with lower carrying costs for homeowners, Peterson said. In Colorado, modular homes are inspected by state regulators instead of county or local ones. That means these homes are required to meet a higher energy code, which can potentially help save homeowners money on their monthly utility bills.

Selling consumers on modular homes

Even though there is significant demand for affordable housing, modular construction remains a small part of the overall construction market — in 2023, the modular industry accounted for about 6.6% of new construction starts, and most of those were in the commercial and multifamily sectors. Still, that share is up from 2.14% in 2015.

The modular housing industry is known to live on a boom-or-bust cycle, largely due to a lack of dedicated funding, said Matt Lynn, a spokesperson for the Colorado Housing Finance Authority. To that end, Colorado awarded roughly $38 million in incentives for modular housing developments to eight manufacturers in February 2024. The state's investment is expected to generate about 4,755 housing units per year over the next three years, Lynn said.

So should states go all-out on modular? While the construction of modular homes can be less expensive, getting into the business involves high start-up costs — a new factory could run between $5 million and $50 million, according to estimates from Offsite Builder Magazine — so modular home builders need a significant demand pool if they are going to survive for more than a couple of years, Lynn noted. 

Both Hannah-Spacagna and Peterson agree that more public education about modular construction is key to growing that demand. 

"I feel like I am standing in the right place at the right time, but I haven't moved at all," Peterson said.