As an increasing number 
of renters and homeowners are cost burdened and construction costs continue to rise, local governments and developers alike are looking for innovative and cost-effective ways to build more housing. Within this environment, modular housing is receiving renewed attention, with cities like Minneapolis using it to quickly erect affordable housing. However, despite its promise of efficiency, modular housing remains a relatively small share of the overall construction market – in 2024, it had a market share of $20.3 billion, representing just 5.1% of total construction activity across key markets. Looking abroad, other nations have embraced industrial housing to great effect; in Japan, 15% of homes are modular, as are a staggering 45% of homes in Finland, Norway, and Sweden. This post provides a brief overview of modular housing, explaining what it is and where it’s from, in the hopes of illuminating both its potential uses and the current barriers to large-scale implementation.
What is modular housing?
HUD defines modular housing as housing that is, “built offsite in sections, which are transported to a site, assembled by builders, and installed onto a foundation. [It is] built to meet building codes and specifications of the site on which they are placed.” Modular housing falls under the general umbrella of offsite construction, a term that also includes manufactured housing (formerly referred to as “mobile homes”). Despite the surface similarities, modular housing is distinct from manufactured housing, which is built to comply with the 1976 Manufactured Construction and Safety Standards (the “HUD Code”).
There are two main types of modular housing: volumetric and panelized. Volumetric refers to manufacturers fabricating entire sections of a building in a factory setting – it can be thought of as ‘three dimensional’ modular. These sections are then wrapped and transported to the site, where they are affixed to a foundation. Typically, volumetric components are built with traditional building materials such as wood and drywall. Panelized refers to a method in which manufacturers build prefabricated sections of walls, floors, and ceilings – it can therefore be thought of as ‘two dimensional’ modular. Panelized modular components are made from a wider range of materials than volumetric modular components, including innovative and energy-efficient materials like structural insulated panels (“SIPs”).
A (Very) Brief History of Modular Housing
Modular housing has a surprisingly long history. From the Manning Portable Cottage of the 1830s to visionary experiments in the early 20th Century, architects and builders have long sought ways to make scalable – and, sometimes, unusual – prefabricated housing. In fact, when the nation was facing a housing shortage in the late 1960s, HUD launched a program called Operation Breakthrough in an attempt to innovate a national approach to industrial housing. Although Operation Breakthrough was ultimately shuttered in the mid-1970s, it succeeded in producing 2,900 prototype units in 9 different locations and helped inspire federal regulation of manufactured housing.
Why build modular?
Even though it has yet to gain a large foothold in the United States, there are a few distinct benefits to modular construction. From an economic lens, much of the benefit comes from faster construction times. Compared to traditional site-builds, modular can reduce overall construction time by up to 50%. Moreover, since much of the construction process takes place in a factory, projects are protected from many of the variables inherent in on-site construction, such as weather, theft, and labor availability.
Modular buildings are often more energy-efficient than comparable site-built structures. Since modular construction is regulated at the state and local level, manufacturers serving multiple states will often adhere to the most stringent efficiency requirements among the states they serve. For example, a modular manufacturer servicing both Virginia and North Carolina may adhere to Virginia’s relatively stricter efficiency requirements even for their North Carolina projects. On top of this, volumetric modular components can be tested in the factory to ensure that they are sealed against air leaks, and panelized modular components can be made from energy efficient materials that would be challenging to use on a site-build. In addition to creating more energy-efficient buildings, modular can also reduce material waste during construction by over 80%.
Challenges of Modular
Despite the potential for fast construction, modular presents cash-flow conundrums for developers. Modular manufacturers frequently require deposits of 30% or more of the contract cost months in advance of the construction start date. However, lenders often will not finance these deposits, leaving developers with steeper equity requirements and lower loan-to-cost ratios. Compounding this (no pun intended), lenders frequently charge higher interest rates on modular projects. In fact, a 2024 literature review evaluating modular’s use in affordable housing found that economic factors were the most significant barrier to adoption.
Modular also faces other challenges, often tied to regulatory complexity and a general lack of knowledge. Over 60% of developers surveyed by the Modular Building Institute cite lack of client education as a hurdle to choosing modular, and almost half cite misconceptions that modular is a lower quality product. Similarly, transportation of components from the factory to the site can be complex and expensive, leading some to call for building modular factories near to areas with particularly acute housing issues.
Tying it All Together
Modular housing holds the promise of efficiency – both in terms of rapid construction times and environmental benefit. However, within the current regulatory and financial landscape, developers need to work creatively in order to overcome the hurdles to implementing this promising technology.
Ian Skahill is a Master’s in City and Regional Planning Student at UNC Chapel Hill and a former graduate student fellow with the UNC School of Government’s Development Finance Initiative.