For affordable housing, construction needs modernization

President Joe Biden's idea to generate more affordable housing by tying federal infrastructure moneys to states' progress in reforming zoning and land use regulations is a good one. Elimination of certain types of exclusive zoning has the potential to significantly reduce housing prices.

Unfortunately, though, the president's exclusionary zoning reforms will not get the job done.

Nonetheless, there are other exclusionary zoning rules whose repeal would succeed in greatly reducing housing prices and lead to significant, lasting progress in making housing more affordable.

To explain this requires a little background.

1. The fundamental reason for the increasing cost of housing (relative to other goods) is that the construction sector employs an outdated and inefficient technology.

Rather than manufacturing homes in factories, they are constructed outside, with a centuries-old technology sometimes called the "stick-built" method. Whereas manufacturing industries that produce goods similar to houses (i.e., durable goods industries) enjoy average annual productivity growth of 3% and more over long periods, the stick-built construction sector has had no productivity growth over the last several decades.

Hence, the productivity of the manufacturing sector, and the rest of the economy for that matter, is regularly growing relative to that of stick-built construction. There can be no escaping the consequences of these diverging productivities — ever-increasing real prices of housing and worsening affordable housing problems.

2. An inefficient technology is used for housing because producers in the stick-built industry, whose existence would be threatened by production of homes in factories, have formed monopolies to sabotage factory-built homes. This organized opposition, which started more than 100 years ago, involves all manner of groups that have actively opposed factory-built homes: Local building contractors, local building inspectors, construction unions, local building-materials suppliers, architects, banks with mortgage portfolios in existing houses and more.

For the last 50 years, the monopolies inflicting the greatest damage to the factory-built housing industry are National Association of Home Builders and the federal Department of Housing and Urban Development.

3. Monopolies in stick-built construction have employed many weapons to sabotage factory-built homes and they have had to create a scapegoat to blame for increasing real housing prices: zoning and land-use regulations faced by stick-builders.

NAHB issues reports claiming such regulations add 30% and more to new home prices. Yet academic research shows these regulations add very little to new house prices. While stick-builders have not succeeded in improving productivity for decades, they have been wildly successful at selling the idea to the public that zoning and land use regulations greatly increase building costs.

And here we arrive at Biden's plans for zoning reform. The changes he proposes will not change the technology used in producing homes. Hence, they have no chance of breaking the monopoly-induced cycle of ever-increasing home prices.

A key Biden proposal is to eliminate exclusionary zoning practices in areas that permit only single-family homes. Plans call for allowing duplexes, triplexes, quads and multifamily housing more generally. But the new housing will still be built with centuries-old stick-built methods. Adding more residences by building duplexes and so on, will not lead to lower housing prices. Housing prices are determined by costs of production, which are primarily determined by technology. Despite oft-made claims that increasing supply will reduce price, house prices won't fall below the costs of producing the homes.

What could Biden do? He could focus on repealing zoning regulations that block certain types of factory-built homes from most localities in this country. These are small modular homes, sometimes called manufactured homes, which are typically restricted to undesirable locations like manufacturing districts if they are allowed at all. As the Census Bureau reports, these homes are produced at costs up to one-third less per square foot than stick-built homes.

Groups have been attempting to change these rules blocking manufactured homes for decades, with little success. Biden is on the right track by addressing exclusionary zoning laws, but he needs to go further to help these groups succeed.

James Schmitz Jr. is a senior economist at the Federal Reserve Bank of Minneapolis.