Jun 9, 2021 - Economy

Why we can't have cheap houses

Nails against green background

Illustration: Shoshana Gordon/Axios

Home construction is a deeply inefficient business. But the implosion of Katerra, a startup into which investors plowed some $1.9 billion, proves that disrupting it won't be easy.

Why it matters: The high cost of housing is inextricably linked to the high cost of building new homes. If they could be designed and built using assembly-line technology, that would mean more, cheaper houses in a country that desperately needs them.

The big picture: Automated homebuilding is nothing new. Prefabricated construction dates back to at least 1624, and Sears kit homes remain desirable to this day — as do the mass-produced houses of Levittown.

  • Such businesses tend not to last, however. Pulte Homes, for instance, closed down its high-tech in-house prefabrication plant in early 2007, declaring it "economically unviable."

How it works: Houses are expensive because the incentive at every level, from developer to contractor to sub-contractor to sub-sub-contractor and so on, is to pad costs rather than cut them. Successful builders learn to expect unexpected costs — and to incorporate them into their quotes.

  • By vertically integrating everything from design and materials to building and construction into a single company, Katerra promised not only economies of scale but also an unprecedented degree of control over costs.

The catch: Large factories require substantial and predictable demand, while the construction industry is notoriously cyclical. And while some things can be automated, others, like navigating local permitting processes, cannot.

What they're saying: "Solo attempts by any organization to single-handedly disrupt residential real estate and construction will go the way of Katerra," writes John McManus of The Builder's Daily.

  • "The future of housing," if it's ever to arrive, necessarily requires close collaboration among multiple stakeholders.
  • The holy grail of affordable new housing will realistically always require government subsidy, too.

The bottom line: Obstacles to new construction are invariably deliberate, placed there by existing residents in an attempt to maximize their own property values. When all building codes are local, it's impossible to confront them in a formulaic and centralized manner.

Go deeper