The U.S. Department of Housing and Urban Development has called for states and local governments to regulate modular housing using objective safety and performance standards rather than prescriptive construction methods, a shift that could unlock innovation in an industry where construction costs have doubled in the last decade. The recommendation appears in HUD's recent best practices guide aimed at improving housing affordability, according to a new analysis from the Niskanen Center. The report argues this regulatory change could fundamentally alter how much housing gets built across the country by removing barriers that have kept modular homes at just 3 percent of single-family homes built annually in the U.S.
Modular homes currently represent only about 3 percent of single-family homes built annually in the United States, compared to more than 28 percent of housing built in Japan, which uses a modernized, streamlined regulatory approach. The U.S. housing crisis involves roughly 20,000 local governments that face political incentives to prioritize existing residents over future residents, contributing to a shortage of roughly 3 million to 5 million homes. States including Utah, Rhode Island, Virginia, Wyoming, and Colorado have adopted national standards ICC/MBI 1200 and 1205, with Salt Lake City becoming the first city to adopt them in 2021. In Utah, the shift moved modular housing approval from about 250 local jurisdictions to a single state agency standard in 2024.
The report finds that "regulatory fragmentation and processes designed for site-built housing are important barriers to broader adoption of modular and other offsite construction methods." According to the analysis, prescriptive regulation "tends to stifle innovation because using new materials or technology typically requires a regulatory waiver, which builders often avoid because of the added time and expense." The authors write that decades of stalled productivity growth in single-family residential construction indicate "it is past time to return to this vision of housing regulation that rewards innovation while maintaining rigorous standards."
The cost difference stems from how homes are regulated today. Most U.S. homes are built on site, constructed at their final location largely by hand, one at a time. Modular homes, built in factories and transported to their destination, face a regulatory system designed for site-built construction. This mismatch creates duplicative inspection requirements at both the factory and on site, construction standards that assume on-site assembly rather than factory production, and zoning restrictions that exclude modular homes from neighborhoods where comparable site-built homes are allowed. Performance-based regulation would instead define outcomes for safety, durability, energy efficiency, and habitability, giving builders flexibility to determine how to meet those standards efficiently. The report points to offsite construction methods as offering the most promising pathway for improving productivity through automation, shorter timelines, improved worker safety, and all-weather construction not available to homes built on site.
The report identifies housing system certification as the next frontier beyond national standards. Rather than requiring each project to go through traditional project-by-project permitting and inspection, this approach would evaluate and certify an entire housing production system's ability to meet safety and performance requirements. Once certified, homes produced under that system would face streamlined approval, with local inspectors retaining jurisdiction only over on-site work like utility connections and foundations. HUD pioneered this concept more than 50 years ago as part of Operation Breakthrough, and it has a long track record of success in Japan and other countries. But the report warns that best practices alone won't be enough: "If affordability is the goal, policymakers must not only create a regulatory system that rewards innovation, increases productivity, and expands housing production but also provide incentives for states and local governments to adopt it."