Chapter 6

Government’s Role inFacilitating New Technology

Chapter 6

Government’s Role inFacilitating New Technology

FACTORS IMPEDING INNOVATION

U.S. homebuilders have been slow to incorporatestate-of-the-art technologies into their productionlines for a number of reasons, Without a policy aimedat identifying and removing existing barriers to in-novation, they may continue to retard growth in theproductivity of this important industry.

The Regulatory Environment

Inconsistent State and local building codes anddiffering inspection practices are frequently cited ob-stacles to technological innovation in the U.S. hous-ing construction industry. This regulatory morassprevents manufacturers from achieving the econ-omies of scale needed to justify large investment insophisticated production facilities. Due to the absenceof Federal initiatives in the area, the major codemak-ing organizations and the homebuilding industryhave begun to develop a formal plan of action foran effective national inspection system; details of thisconsensus State-based proposal will be addressed.1

The States, of course, argue that control over hous-ing regulation should remain with State and localgovernment.

The General Accounting Office expressed a simi-lar view in its 1982 report, “Greater Use of Innova-tive Building Materials and Construction TechniquesCould Reduce Housing Costs.” The report cited “re-strictive and inconsistent local building codes” asa major factor impeding “the use of available tech-nological innovations and the development and in-troduction of new ones.”2 On the other hand, some

‘Council of American Building Officials, News Release, May 1986;and National Association of Home Builders, International Conferenceof Building Officials, Building Officials and Code Administrators inter-national, Southern Building Code Congress International, Council ofAmerican Building Officials, National Conference of States on BuildingCodes and Standards, “Concept Paper Prepared by the Task Force onHousing,” Mar. 25, 1986.

‘U.S. Congress, General Accounting Office, “Greater Use of innova-tive Building Materials and Construction Techniques Could Reduce Hous-ing Costs” (Washington, DC Comptroller General of the United States,1982).

members of the residential construction industryblame the introduction of the national HUD codesystem for the sharp drop in “manufactured” (mo-bile) home sales.

In addition to the problem of market fragmenta-tion, industry spokespersons cite the time and moneydemands involved in complying with current codes.As one housing producer asserts, in the absence ofa national—or sometimes even a State—code:

. . . the factory is forced to deal with local buildingofficials at a city, township or county level. Themagnitude of effort needed to deal with so manydifferent agencies and people takes company re-sources and engineering skills away from moreproductive activities. And most important, the un-ending local changes to the building codes createunbelievable difficulty on the factory assembly line.3

This lack of uniformity adds to the expense of tech-nological innovation, making developers of newproducts “unable to afford the enormous cost of sell-ing the new technology to numerous regulatory offi-cials.”4 The closest thing to a national approval inthe non-’ ’manufactured” (mobile) home industry isthe “NER” National Research Board approval. AnNER can cost up to $10,000, and has significant limi-tations. This detailed approval procedure itemizesevery aspect of a given technology. Any change re-quires reevaluation, and adds expense as a result.5

A number of States refuse to accept NERs “becausethey do not include follow-up production line inspec-tions or inplant visits of any kind.”6 Eleven Stateshave formed a special task force to certify productapproval agencies.

3Ed Starostovic, “Changes in Manufactured Housing and Construc-tion of Non-Residential Modular Buildings in the United States,” un-published paper prepared for the Office of Technology Assessment, 1985.

41bid.51bid.‘National Conference of States on Building Codes and Standards, Inc.,

May 25, 1986.

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America’s building codes and enforcement systemsmay not impede technological innovation directly.They seldom forbid the use of newer materials, com-ponents, structural forms, designs or processes; whenexplicit prohibitions do exist, they are of secondaryimportance. The real point is that the present sys-tem detects technological innovation indirectly, bycreating market fragmentation.

Inadequate Study of Total BuildingSystems and Information Dissemination

Unlike Japan and Sweden, the United States doesnot sponsor extensive research on new housing ma-terials, technologies, systems, or fundamental con-cepts. Generally, research efforts tend to be shortterm and related to a specific problem, rather thanlarge-scale, well-publicized projects designed to in-crease overall productivity. Industry analysts agreethat this research gap impedes innovation, and thatthe lack of institutional and financial research sup-port aggravates the problem.

Fluctuations in the Building Cycle

Unpredictable demand for housing mitigatesagainst capital investment in new technologies. Fluc-tuations in the building cycle discourage home pro-ducers from investing in capital-intensive, highlyautomated production technologies. In fact, one in-dustry analyst notes that “manufacturers have re-lied on a highly elastic labor supply in lieu of auto-mation. Large fixed investments in automated andmechanized processing equipment would eliminatemuch of the flexibility that is so vital to success ina seasonal industry.”7

On the other hand, other industries have begunto employ systems that manufacture a variety ofproducts; this decreases their dependency on spe-cialized markets. Such flexibility within a sophisti-cated production system would be preferable, fromthe worker’s perspective, to the current cyclical pat-terns of layoff, bankruptcy, and startup.

HOUSING REGULATIONThe Current Regulatory Framework

Four model building codes form the basis for mostU.S. housing regulation, with the exception of HUD-regulated “manufactured” housing (mobile homes).The model codes are developed by the InternationalConference of Building Officials (ICBO), Building Offi-cials and Code Administrators International, Inc.(BOCA), Southern Building Code Congress Interna-tional, Inc. (SBCCI), and the umbrella organization,the Council of American Building Officials (CABO).These organizations enjoy a broad-based member-ship, including both regulatory officials and a vari-ety of private sector building and construction profes-sionals. This membership plays a significant role inmaintaining responsive, consensus-oriented codesthat serve the public interest.

Each model code group publishes a building code,a plumbing code, a mechanical code, a fire preven-tion code, and other such documents. These codescorrespond to the model code package, to avoid con-

flicting requirements for the same condition. Neweditions of the code appear periodically, in 3-yearcycles. The membership conducts annual codechange hearings, voting on amendments to the cur-rent edition of the code. The approved amendmentsenter the next edition of the code.

Each model code tends to be regional. Althoughcertain States have adopted one model code exclu-sively, some overlap exists. The prevailing regionalpatterns are: the Uniform Building Code (UBC), pro-mulgated by ICBO and used west of the Mississippi;the BOCA Basic/National Building Code, promul-gated by BOCA and used throughout the Northeastand Midwest; and the Standard Building Code, pro-mulgated by SBCCI and used in the South. CABOoversees the three. Currently, local governments ap-ply several thousand major and minor variations ofthese basic codes. There are at least as many inspec-tion systems, with differences in building code inter-pretations and varying degrees of enforcement. Thevarious fire safety codes and inspection systems that

71

relate to buildings compound this regulatory com-plexity.

Thirty-four States have adopted preemptive Statecodes for modular housing. Those codes cover com-ponent housing systems, including panelized homesin 28 States, large components such as “wet cores”in 31, and precut houses in 6. While these preemp-tive codes reflect significant efforts by States to con-solidate codes for industrialized housing, they havenot eliminated the problems of diversity and com-plexity. Twenty-five States prescribe mandatory min-imum standards, 7 establish mandatory maximums,and 11 set both mandatory minimums and maxi-mums—"mini-max, ” or single mandatory codes.Two of the preemptive State codes are mandatoryunless specified otherwise. In one State, a local po-litical jurisdiction may amend the mandatory Statecode with State approval.

Enforcement systems also vary, both among andwithin States. Inspections are conducted by State offi-cials in 31 States, by county officials in 8, and bymunicipal officials in 13. Twenty-three States allowinspections by third-party private firms. Omitted fromthese figures are the 16 States that do not have build-ing codes for any type of factory-built housing,

This complex regulatory system poses formidableproblems for large U.S. homebuilders. The producermust satisfy hundreds, if not thousands, of buildingcodes and inspection systems in order to serve thenational market and still abide by the law. Dispari-ties between State transportation codes governinglarge trucks add to the confusion. A spokespersonfrom the National Association of Home Builders esti-mates that a uniform code for modular and pane-lized homes would reduce costs by 3 to 5 percent.8

Producers of modular and panelized homes faceother problems. Because the walls of some of thesebuilding systems are closed at the factory, certainfeatures cannot be inspected at the final building site.Instead, they must be examined at the factory, whichmay be located far from the site. These factory in-spections replace a significant part of the onsite workthat is traditionally done by government building in-spectors.

A number of communities around the Nation cre-ate de facto building regulation through zoning and

‘( ki)eriil A(I ( )11 nt I [ 1(+ f )fflc(!, (Jp ( I t

other local codes. Zoning can be employed in waysthat “exclude people from the community,”<) suchas confining “manufactured” (mobile) homes to“trailer parks” in disadvantaged locations, or requir-ing significant lot or house sizes.

As a result of this situation, U.S. housing producershave been slow to introduce either innovative hous-ing designs or advanced production technologies.

The HUD Code System

The HUD regulatory system for “manufactured”(mobile) homes represents the only uniform nationalbuilding code and enforcement system for factory-produced housing. 10 Consequently, this 10-year-old“HUD code,” which replaced and adopted large sec-tions of an earlier voluntary code system developedby the industry, serves as a model against whichothers may be measured.]]

Due to the establishment of this system, a uniformnational building code for “manufactured” (mobile)homes now exists throughout the United States. Ap-proximately 400 manufacturing plants in 24 Statesare currently inspected by a system that involvesState agencies, third-party private inspection firms,a national monitoring contractor, and HUD, HUDadministers the program with a small staff of Fed-eral employees, at minimal cost to the Federal Gov-ernment. Covering the program’s cost are inspec-tion fees—up to $75 per transportable unit—paid forby the manufacturers, and ultimately by customers.

— ---- ——5tei]hen SeIdel, ‘ Flo(IsIng (’ost~ dnd Regl]ldtion\ (’t)ntr{)l]tir]q ttl(’

Regulator hlaze” (Ne;j Burnswlck. N.] Center for [ lrt)all I)CJIIC \ Rtw’,ir( II1978), p 174.

I{T[lC \Il rllrllull} propertj st~ndard~ for One dIl(l T\\ ( ) FdIIIIl\ [ )U (’11-

ings, uvxf to approt’e federallj’ guaranteed mortgaqes dI~d I n other F’tY-eral housins programs, IS another type of ndtlond] t)uildln~ c{)dt’ dIIdenforcement s}stem, administered b} HLID This s~stem has c~x]itedSI ncc the 193[ )s, much longer than the H ( I [) cwle s} stern for ‘‘111,1 n ~1-facturecf ” (mot)i]e) homes. Howe\er, th]s s!rstt>m relles hed\Il\ 1)11 othercodes and enforcement systems [t f~’as not designed to dddrei~ t I}t’unique pr(hlems of factc)n’-[)ro(i~lcc’d housing, especicdl~ 011 t Ilt’ III\l KKt]oll side, nor did it replace other Ijull(llnq t II(le\ dn(i IIl\lxK 11(111 ~) +

tem~ of the idme build]n$ L’nt]] recent]!’, it tncluded v)rn? fedt[]rc+of bul]dlng codes. but dlso included site and bu]ldlng design~, ~nd [)t herdc’cept cibl I It\’ crlterla n(’t usual 1} co~’ered I n building (’( de$ ,+41s( 1 t IIeF“ederdl dlrI;ensIoII of the Act h& I)eel] w cdk(i]ed t]~ r(~{ crlt l~gl~ldtl( IIIttldt II]]OM’S for th(’ \(l])>tlt Ut 10[1 ( )f f(l 11(’tlolld] Stdt(’ dl](j ]()( cl] (’( Ki(’i f( Jrnd:Ic)nd standards

Ekrnhdr(it. ()!) (It

72

Problems of the HUD Code System

Congress will need to examine the HUD code sys-tem if alternative regulatory schemes for factory-builthousing are to be considered. Various problems thatsurround today’s HUD code homes may become morepronounced if this regulatory scheme is “stretched”to cover other categories of manufactured buildings,or to serve higher income markets where ownersmay be more critical.

The Potential for a Conflict of Interest.—Theexisting HUD code system creates the appearanceof a conflict of interest on the part of design and con-struction inspectors, since fees and services are ne-gotiated directly between manufacturers and HUD-approved private firms. The housing manufacturersthemselves hire both the third-party firms that as-sess home designs against HUD code standards—Design Approval Primary Inspection Agencies (DAPIAs)—and those firms that conduct in-plant inspectionsduring the construction of approved designs—Pro-duction Inspection Primary Inspection Agencies(IPIAs). The manufacturer pays these firms, and alsohas sole discretion over future rehiring decisions.Currently, 8 private firms do over 90 percent of thedesign approval work, and about 35 percent of thein-plant inspections, for the Nation’s “manufactured”(mobile) homes. State government agencies, actingas exclusive inspectors, conduct the remaining de-sign approvals and in-plant inspections, which hasgiven rise to other problems.12

PIAs must meet rigid HUD criteria to avoid con-flicts of interest, but whether HUD can ensure thatthese criteria will continue to be met is uncertain.Some members of the “manufactured” (mobile)home industry would like to modify the existing sys-tem by eliminating the exclusive right of States toact as IPIAs. At the same time, they would like tomaintain Federal preemption of State and local codesthat, in many cases, are more stringent than the Fed-eral standards. If Congress wishes to ensure effectivenational regulation of the industry, HUD’s statutoryauthority in these areas will need to be strengthenedand made more consistent.

— — .IzI-J.s, @partrnenl of Housing and Urban Development, ~jlth Report

to Congress on the Manufactured Housing Program (p. 51) illustratesperformance problems of State agencies and private firms through 1982.Although HUD has not yet published data for subsequent years, otherinformation indicates continuing problems as well as improvements sincethat time.

While there are similarities between the functionsserved by IPIAs and certified public accountants,IPIAs are not subject to many of the certification re-quirements faced by CPAs. Both are charged withserving the public interest; however, CPAs—unlikeIPIAs—are subject to rigorous preliminary examina-tions, as well as to professional and State regulation.The threat of removing a CPA’s certification providesthe public with protection against default.

It is important to note that the concept “potentialfor a conflict of interest” is used to avoid the needto prove impropriety. Certain public individuals mustnot only be above criminal behavior, but shouldavoid situations where the public trust and confi-dence would be shaken by even the possibility ofillicit financial considerations. For example, judgescannot vote on cases when they own stock in a cor-poration that is before the court, even if there is nosuggestion of individual venality. The IPIA/DAPIAsystem, however, does not guarantee that a conflictwill not arise; for example, the system allows a reg-ulated party to discharge an inspection agency.

Various administrative remedies may reduce theincentives for abuse. HUD, rather than the manu-facturer, could set and collect inspection fees. Man-ufacturers and private inspection firms could be re-quired to sign 2- or 3-year contracts for services,giving the firms more independence from their em-ployers. Firms might be permitted to do engineer-ing design and drawings, or design approvals, or in-plant inspections, but not all three. The Federal en-forcement agency could assign Federal inspectors,or select private inspection firms, in cases wheremonitoring indicated frequent violations of minimumstandards. As matters now stand, only IPIA’s havethe authority to pull Federal labels for noncompli-ance with HUD standards; the government can actonly to counter an imminent safety hazard. Techni-cally, HUD can inform the IPIA or the manufacturerthat a unit failed to conform with a code require-ment, but whether steps have been taken to use thisauthority in a meaningful way has not been dem-onstrated.

This is not to suggest that private firms cannot per-form responsible inspections; the advantages of non-governmental inspection systems will be discussedlater in this report. Nevertheless, the potential fora conflict of interest is built into the present system.Existing monitoring and enforcement practices pro-

73

vide insufficient protections against the potential forabuse. The steps described above suggest some waysin which enforcement might be improved.

Responsibility for Compliance With Codes.-–The HUD code system clouds responsibility for com-pliance with national standards. The regulations donot require that the consumer be notified as towhether the “manufactured” (mobile) home com-plies with the standards. The manufacturer must cer-tify to the dealer or distributor that the structuresmeet the code,13 but the approved label for retailunits provides no such assurance. This consumerlabel states:

As evidenced by this label No. ABC 000001, themanufacturer certifies to the best of the manufac-turer’s knowledge and belief that this manufacturedhome has been inspected in accordance with re-quirements of the Department of Housing and Ur-ban Development and is constructed in conformancewith the Federal Manufactured Home Constructionand Safety Standards in effect on the date of manu-facture. 14

The label certifies inspection, but not compliancebeyond a good-faith effort.

Homebuyers have limited recourse without an ex-press guarantee. In fact, certain State laws may beof no help to the consumer, since the manufacturermay avoid State regulations in excess of Federal stat-utory requirements. While consumers may pursueremedies involving repair of minor defects, the le-gal framework seems to prevent States from actingon their behalf, which would constitute an alterna-tive regulatory structure.

HUD does not permit “false” advertising, whichwould imply HUD endorsement of a “manufactured”(mobile) home. Indeed, HUD has issued a categori-cal denial of responsibility:

Any assertion that the Department directly or in-directly approves the construction or sale of any mo-bile home or that the Department inspects mobilehomes is false, except in the rare case where a mo-

IJsection 616 of the Natjonal Manufactured Housing Construction andSafety Standards Act states:

Every manufacturer of manufactured homes shall furnish to the dis-tributor or dealer at the time of delivery of each such manufactured homeproduced by such manufacturer certification that such manufacturedhome conforms to all applicable Federal Construction and SafetyStandards.

143282 .362( c)2(c), p. 253.

bile home has actually been inspected by an em-ployee of the Department. Even in those cases theDepartment has not approved the home. 15

The recent Varig Airline case confirms that underHUD regulations, the Department cannot be heldresponsible for failure to ensure proper inspection.

Failure To Require Full Compliance With AllStandards.--HUD regulations and enforcementmechanisms also fail to assure that every home com-plies with all HUD code standards. The present HUDcode system requires inspections by State agenciesor third-party private firms of a sampling of homesin a manufacturer’s production line. Each home isinspected in at least one stage of production, andthe number of production stages varies; the currentAcceptable Quality Level (AQL) list includes 174 in-spection items. Furthermore, HUD has not pre-scribed uniform test procedures to assure compli-ance with its performance standards.

Complete data have not been compiled on non-compliances with HUD standards. However, HUD’scontractor, the National Conference of States onBuilding Codes and Standards (NCSBCS), conductsmonitoring inspections of each manufacturing plantat least twice a year. These inspections aim at evalu-ating the manufacturers’ internal quality control sys-tems, as well as the performance of State agenciesand third-party private firms that do in-plant in-spections. ,

Although not intended for this purpose, the NCSBCSdata developed from these semiannual inspectionssuggest the frequency of noncompliance of all unitsproduced in HUD-inspected factories. Manufacturersoften learn of NCSBCS visits in advance, and pre-pare accordingly; as a result, nonconformance iden-tified through such inspections may underestimatethe actual figure. Data provided to OTA by HUD forDecember 1984 through May 1985 indicate that mosthomes produced during that period failed to con-form to one or more AQL items, averaging 3.6 non-conformances per inspection (see table 13). Anotherbreakdown of NCSBCS data, for November 1984through March 1985, indicates that 8 percent of allnonconformances related to AQL items in planningand fire safety, 55.5 percent to construction, 16.9 toelectrical items, 11.3 percent to thermal items, and8.1 percent to plumbing items.

IWJ.S, f)epartment of Housing and Urban Development, ~ou~th An-nual Report to the Congress on Mobile Homes.

74

Table 13.—Compliance With Acceptable Quality List(December 1984-May 1985)

Percent of AQL Percent of units in theitems in compliance specified compliance range

95-1oo . . . . . . . . . . . . . . . . . . . . 30.190-95 . . . . . . . . . . . . . . . . . . . . . 30.185-90 . . . . . . . . . . . . . . . . . . . . . 23.680-85 . . . . . . . . . . . . . . . . . . . . . 9.8<60 . . . . . . . . . . . . . . . . . . . . . . 6.5SOURCE: U.S. Department of Housing and Urban Development.

Although this record appears to be poor, thepresent HUD code system does protect the publicfrom “imminent safety hazards” that present “im-minent and unreasonable risk of death or seriousinjury”; it does guard against major defects whichoccur when a series of homes exits the productionline; and it does initiate a consumer complaint proc-ess, operated by HUD and by State administrativeagencies who can respond without Federal enforce-ment authority.

However, the Federal system provides limited pro-tection for the individual purchaser whose home failsto comply with the standards. HUD addresses con-sumer complaints from States that have not estab-lished administrative agencies for the HUD “manu-factured” (mobile) home program. Although thepurchaser may go to the courts, he bears both theexpenses of this action and the burden of proof. Ex-cept for health and safety problems, such as for-maldehyde emissions from plywood and particle-board materials, court action has little use or effectin the present HUD code system. Furthermore, mostHUD code “manufactured” (mobile) homes are soldto lower income purchasers, who tend to avoid thecosts of litigation.

The experience of the HUD code system raisesquestions that may affect the formulation of indus-trywide regulations for all categories of residentialconstruction. Even the existing HUD regulations mayneed review, in light of newly available information;although HUD’s data for estimating nonconformancesin production, and for evaluating regulatory perform-ance, need improvement, Department statistics doindicate a number of important issues. For exam-ple, production defects can now be detected, counted,and reported. What levels of quality, what standards,and what degrees of conformance should be con-sidered acceptable? How should the regulatory sys-tem employ the data for enforcement? Should fac-

tory production involve inspection of productionlines rather than of individual units, as is done forsite-built housing?

Weakness of Remedies and Penalties for Non=compliance.—HUD may lack the legal authority toenforce full compliance with certain code standards.Under HUD regulations: “A manufacturer. . . shallcorrect, at its expense, any imminent safety hazardor serious defect that can be related to an error indesign or assembly of the manufactured home.”16

HUD has interpreted this congressional enabling leg-islation to mean that it cannot require manufacturersto bring defective homes into code compliance, un-less “unreasonable risk of injury or death” exists.According to this interpretation, questions of dura-bility, quality, and amenity remain outside HUD’sjurisdiction. On the other hand, the HUD code’s“Statement of Purpose” calls upon HUD to improvethe quality and durability of manufactured homes. ’7Federal legislation may be needed to resolve thisdouble standard.

Formal rulemaking guidelines dictate attempts toincrease inspections, and steps to disqualify PrimaryInspection Agencies for improper or insufficientinspections—or for improper awarding of Federallabels—are complex and protracted. Moreover, un-der the preemption section of the statute,18 Statesmay not enforce the Federal construction and safetystandards more stringently than the Federal Gov-ernment. Still, some States have used their businesslicensing or registration laws to enforce the HUDcode standards when HUD has failed to require com-pliance.

Inadequate Provisions for After-Factory In=spections.--The present HUD code system empha-sizes in-plant inspections, an important area of codeenforcement for all types of industrialized housing.However, the present HUD code system lacks anefficient framework for after-factory inspections.Through no fault of either the manufacturer or themanufacturing process, many “manufactured” (mo-bile) homes with Federal labels fail to meet HUDstandards on arrival at their final destination. Unitsmay be altered or damaged at dealerships, wherethey are stored and shown to customers; or, the

1e3282.406.ITTitle V], Section 602.183282.11.

75——

rigors of transportation from factories to dealer lotsand from dealer lots to final building sites may de-crease quality, especially when units are transportedalong uneven country roads. The problem of “torque,”or the twisting of the entire unit, can arise if the homedoes not rest on a level foundation at the final site.“Tie-downs” to foundations, connections betweendouble-wides or multiple units, and utility hook-upspose additional problems at the building site.

The after-factory inspection process depends onState and local regulatory systems. Under HUD reg-ulations, dealers may not sell units that have failedto meet HUD code standards. However, many Stateand local agencies do not conduct visual inspectionsof units on dealer or buyer lots; when inspectionsare made, reporting and followup are minimal.NCSBCS has developed a voluntary consensus stand-ard for “siting” of units, but although CABO andNCSBCS have developed code language for thispurpose19 —which may or may not be used—a Fed-eral onsite system of inspections or enforcement doesnot exist.

Lack of Incentives for Improving Durabilityand Quality.--The HUD code program was de-signed to improve durability and quality, along withsafety. While the safety record of “manufactured”(mobile) homes has improved, it is still less than thatof site-built housing; also, it is difficult to show thatdurability and quality have been addressed. Further-more, while some manufacturers satisfy HUD codestandards with ease, the regulatory system for “man-ufactured” (mobile) homes does not recognize differ-ences in quality. As a result, many producers builddown to minimum safety, rather than up to mini-mum quality standards.

The implications of this extend to energy costs,which are higher in HUD code homes than in thosethat satisfy the requirements of Title V of the FarmersHome Administration (FmHA). A recent study con-ducted for the Department of Energy revealed thatif FmHA energy standards were used instead ofHUD’s Title V standards, energy consumption ofmost units would be reduced by 37 to 46 percent.HUD’s own Title II-E standards, which apply onlyto “manufactured” (mobile) homes on a permanent

foundation, would improve energy performance by4 to 23 percent.20

A proposal to establish quality grades within cat-egories of industrialized housing offers a solution tothis problem, and will be addressed in this report.The marketplace, rather than market advantages cre-ated by government regulations, would then deter-mine the levels of quality that home producers couldoffer to informed or affluent customers.

The Role of Federal Oversight. -In general, the“manufactured” (mobile) housing industry supportsthe preemptive Federal standards that currentlyguide all U.S. “manufactured” (mobile) homes, whileHUD would like to grant more control to the mar-ketplace, and to State and local standards. Also, HUDand the industry have differing views on enforce-ment procedures; many industry representativeswould like to see less Federal oversight, as well asthe elimination of the States’ right to act as exclu-sive inspection agencies. Many States, however, haveexpressed concern over proper levels of inspection,and worry that a weakening of the preemptive Fed-eral system could aggravate problems.21 The Stateshave assumed some blame for the present situation;they are now developing recommendations on howto improve the State role in national housing regu-lation reforms.22

Criteria for a New Regulatory System

The following sections of this report suggest pos-sible alternatives to the present system of housingregulation in the United States. First, however, a setof criteria is presented, against which such proposalscould be judged. Throughout the discussion, thephrase “a national system of building codes and in-spections” is used generically to imply a high de-gree of national consolidation and organization. Anational system may be legislated or operated by theFederal Government, by State or local governments,or with the regulatory participation of third-party pri-vate firms. It may be a single consolidated systemfor the entire country, or a national organization

z~~pacific Northwest Laboratory, “Impacts of Alternative ResidentialEnerqy Standards,” November 1985, p. 9.2.

19 NCSBCS, May 1986, op. cit.

~lc~-mbined Meeting of the NCSBCS Regulatory Affairs Committee,

State Manufactured Building Administrators, and State Building Offi-cials Subcommittees, Arlington, VA, Apr. 23, 1986.

ZZNCSBCS, May 1986, op. cit.

76

comprised of subsystems for different types of man-ufactured buildings, for manufactured buildings thatmeet certain criteria, for different code-setting or in-spection functions, or for different multi-State geo-graphic regions,

In order to remove regulatory impediments to resi-dential construction and its related industries, a mod-ified national code and inspection system might beevaluated against the following criteria:

1. Does the system apply to all categories of in-dustrialized housing and modular nonresiden-tial buildings? Those buildings that containclosed components, factory-made to fit and func-tion together, could be emphasized.

2. Does the system facilitate market aggregation?Under a relatively uniform framework, firmsmay anticipate the codes and enforcement sys-tems that factory-built homes must satisfy withina large geographic area. Uniformity would alsoenable manufacturers to achieve economies ofscale from factory production-line systems.Ideally, with appropriate adjustments for cli-matic and other features, such as energy re-quirements, wind and snow loads, and seismicrequirements, a unit produced anywhere in theUnited States could be used nationwide.

3. Does the system include reliable and consist-ent enforcement, to protect manufacturers,dealers, and contractors from subjective or arbi-trary interpretations of codes? This would pro-tect the public from the consequences of codeviolations.

4. Does the system reduce costs and administra-tive burdens associated with regulation?

5. Does the system leave as much control as pos-

6.

sible in the hands of local regulatory author-ities? Regional or national codes need not un-dermine well-designed State or local codes.Instead, the new regulatory mechanism couldbe built on successful State and local expe-riences.Does the system constitute part of a coherenthousing policy that provides Americans with thehighest quality at the lowest cost? This wouldrequire programs that protect consumers whileencouraging industrial innovation and entrepre-neurship.

Alternative Regulatory Systems

Historically, the writing and enforcement of build-ing codes in the United States have been performedby the same unit of government. In contrast, the verynature of industrialized housing invites a separationof these functions. How and by whom codes are writ-ten may differ from where and by whom codes areenforced. Moreover, although the codes themselveshave received the most attention—resulting in fournational model codes—the Nation’s fragmented codeenforcement system poses a larger impediment tothe development of the industry, Consequently, ini-tial alternatives for a national system relate to theenforcement function.

Local factors also enter into play. Until the 20thcentury, most housing construction was a functionof commerce within States. Traditionally, Congresshas deferred to State, county, and municipal desiresin such matters. As a result of technological devel-opments in recent years, housing has entered therealm of interstate commerce. Some industry expertsbelieve that a Federal system would bring the regu-latory function in line with the current residentialconstruction process. On the other hand, this wouldtend to dilute local control, and might provoke op-position from State and local building officials andtheir related constituencies.

The following discussion describes four categoriesof alternatives: systems in which the Federal Gov-ernment has lead role; in which the State Govern-ment has lead role; in which private organizationshave the lead role; or cross-cutting strategies, whichmay combine all or any of the three. These alterna-tives do not represent complete or detailed designsof regulatory systems. Rather, they should be viewedas generic possibilities, which hold the potential todevelop new systems.

Systems Administered bythe Federal Government

An Expanded HUD Code System.—The HUDcode system might be expanded in its present form,making it a federally preemptive, national systemthat would cover other categories of industrializedhousing and related nonresidential modular build-ings. This would require congressional legislation.

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Under this alternative, the system could growstronger through legislative or administrative modifi-cations. Along these lines, the NCSBCS has devel-oped an improved system of quality control and com-pliance evaluation for HUD, in consultation withindustry representatives; the system is now in re-view. These and other administrative steps may im-prove compliance with the HUD code for durabilityand quality features of “manufactured” (mobile)homes.

Alternatives to HUD Code Regulation.—Thepresent HUD code system could be enlarged to coverother categories of industrialized housing and relatednonresidential modular buildings, but would bealtered in one or all of the following ways:

●

●

Congress might create an independent Federalcommission, board, or administrative agency toregulate manufactured buildings covered by theFederal system, replacing HUD’s responsibili-ties in this area. Or, HUD’s regulatory functionsmight be assigned to another existing agency.In either case, HUD would retain the broaderresponsibilities for affordable housing and wouldparticipate in code setting, but would not su-pervise code enforcement.

It is difficult for any Federal agency to regu-late its own constituency. At present, HUD en-courages construction of minimum purchase-price housing, and regulates construction—which may mean increasing housing costs. Thisalternative would separate the developmentaland regulatory functions in residential construc-tion, making it similar to the areas of nuclearpower, transportation, and environmental pro-tection. 23

A Federal system might preempt State and lo-cal regulations for all industrialized housing andrelated construction, but could be limited in sev-eral ways. The system could cover all factory-built homes and related nonresidential modu-lar units that are shipped across State lines,removing impediments to interstate commerce.

Zsf+sponsibilities for promoting and regulating nUClear pOWer’ are

divided between the Department of Energy, and the independent Nu-clear Regulatory Commission; responsibilities in the field of transpor-tation are divided between the Department of Transportation, and theindependent National Transportation Safety Board; and environmentalresponsibilities are divided between the Departments of Energy andCommerce, and the Environmental Protection Agency.

●

Or, such a system might include only integralmanufactured building systems with closed con-struction, such as HUD code “manufactured”(mobile) homes; certain modular homes, com-mercial modular buildings, or panel systems;or large closed components such as “wet cores”—all of these products must be inspected in thefactory. State or local governments would stillconduct onsite inspection of factory-made build-ings when the site and the factory are in thesame State, for “open” manufactured buildingsystems and for large “open” components.

A recent proposal for Federal regulation ofappliances, supported by both appliance man-ufacturers and environmental groups, illustratesthis principle. The proposal calls for certain Fed-eral standards to preempt several State and lo-cal guidelines, creating a more uniform codesystem that would benefit both producers andconsumers.In order to ensure the successful implementa-tion of any alternative to HUD code regulation,Congress might strengthen the language of thestatute that guides the present system. A feder-ally based system for all categories of industri-alized housing could foster technological researchand development by guaranteeing consistencyin Federal standards.

For example, the statutes could specify HUD’srole concerning energy standards. HUD is nowin the process of amending the code’s thermalenergy requirements. These guidelines were in-troduced by HUD, and may soon undergo HUD-initiated changes, even though the original stat-ute did not give specific regulatory authorityover energy to the Department.

Incentive Systems.—The Federal Governmentmight adopt a “carrot and stick” approach to en-courage States to establish a uniform national code.Such a nonregulatory incentive system for industri-alized housing and related nonresidential construc-tion could rely on Federal financing or mortgageguarantees, direct funding to State or local govern-ments, government purchasing, or tax incentives.The incentives need not be new or special subsidies,but could be based on contingent approvals thatwould allow participation in existing Federal pro-grams. The Federal Government already operatesnumerous programs that benefit homebuilding, espe-

78

cially those that guarantee or supply credit throughthe Federal Housing Administration, Veterans Ad-ministration, Farmers Home Administration, Gov-ernment National Mortgage Association, and othersuch agencies.

The HUD-administered Community DevelopmentBlock Grant program could serve as another non-regulatory incentive. Builders might qualify for grantsonly if their homes satisfied quality standards estab-lished by an organization like NCSBCS. This optionwould also encourage States to adopt standards thatresemble a national code, so that their home indus-tries could qualify for Block Grant funds.

Sweden maintains a particularly effective incen-tive system. Only those homes that meet stringentperformance standards are eligible for the Swedishequivalent of FHA or VA housing subsidies. As a re-sult, the performance characteristics of most newhomes exceed those prescribed by statute, especiallywith respect to energy. This system created such highlevels of thermal performance that energy standardscould be increased without affecting most construc-tion methods.

These incentives, combined with reliable inspec-tion systems, might persuade State and local gov-ernments to bring their codes for manufacturedbuildings in line with a single, national model code,and they might convince State and local govern-ments to accept industrialized housing and relatednonresidential modular buildings produced and in-spected in other governmental jurisdictions. Thiswould tend to encourage capital-intensive research,since companies would not have to satisfy a myriadof local codes in order to introduce new technologiesto several parts of the country.

The underlying principle exists in two current Fed-eral programs. The interstate highway program trans-fers funds to the States, contingent on their compli-ance with federally accepted roadway standards, andconditions like the 55 miles-per-hour speed limit andthe 21-year-old minimum drinking age. And the Min-imum Property Standards (MPS), administered byHUD, constitute a powerful nonregulatory incentivesystem; mortgage approvals depend on conformancewith certain standards. This ties improvements intechnology to the financing process, although otherHUD-approved regulation tends to negate such a

connection.24 Also, many previous Federal programshave transferred funds to State and local govern-ments, subject to specific requirements and con-ditions.

Voluntary Systems.—Under this alternative,manufacturers could select between making theirhousing subject to Federal approval under a Fed-eral preemptive system, to otherwise applicable Stateor local government regulations, or to a combina-tion of the two, depending on the type of housinginvolved.

The Nation’s banking system illustrates the prin-ciple behind this alternative. The Federal ReserveSystem gives banks the choice of being either fed-erally or State-chartered, subject to different require-ments and regulations. Savings and loan associationsmay also take advantage of this option.

The present HUD code system operates in a sim-ilar manner, although the advantages offered by Fed-eral approval make it impractical for manufacturersto have the “manufactured” (mobile) homes in-spected at the State or local level. Producers of bothHUD code “manufactured” (mobile) homes and mod-ular homes better illustrate the idea of choice. Thelatter now fall under State or local regulations. Withthe “choice alternative” in force, a manufacturercould select the code and enforcement system thatbest corresponds to the structure being built.

Currently, the Federal Government confers com-petitive economic advantages to building manufac-turers by preempting State and local governmentregulations—primarily because of benefits stemmingfrom market aggregation. Given these advantages,and the potential advantages of a Federal inspectionlabel for factory-built homes, the Federal Govern-ment might set and enforce high-quality standards.This could encourage industry development undera manufacturers’ choice alternative.

Zqln response to complaints of unfair competition from private sectorcertification groups, HUD has instituted a fee for certification of newtechnology in its “Technical Suitability of Products Program.” AlthoughHUD’s charges remain lower than those of the private sector organiza-tions, their presence has led to a decrease in the number of innovativeconstruction programs available to the American marketplace, sincedevelopers have less incentive to introduce new technologies.

79

State Government-Based Systems

Three State government-based systems, in whichState governments have the leading role, are dis-cussed below. State regulators contacted by NCSBCS“showed fairly equal support for all three systems.”25

Multistate Compacts.--Multi-State compacts, orinterstate compacts, are congressionally approvedagreements among or between States. Congress setsthe rules for any such multi-State arrangement, andState legislatures may vote to enter such compactsonly with congressional consent. Having joined, aState may withdraw only under rules established byCongress. The regulatory or operating authority ofthe compact depends on the nature of the congres-sional mandate. Over 200 multi-State compacts havebeen enacted in the United States, for such diversepurposes as water allocation, transportation and portdevelopment, corrections, education, forest fire pro-tection, health, motor vehicles, radioactive waste dis-posal, pest control, planning and development, pub-lic works, recreational parks, civil defense anddisaster, and welfare.

Historically, compacts have been bilateral, re-gional, and national in scope. Until the 1920s, mostwere agreements between two States. The next gen-eration of compacts dealt with regional problems,such as the Colorado River Compact that embracedseven States. The first national agreement was theInterstate Compact for Supervision of Parolees andProbationers, established during the 1930s. Func-tional compacts, or multilateral agreements that didnot rely on regional identification, developed in the1930s as well; the Interstate Compact to ConserveOil and Gas was open to all oil-producing States.Compacts also began to serve regulatory purposes;New Jersey and New York enacted the Tri-State Sani-tation Compact in 1935 and 1936, respectively,joined by Connecticut in 1941. The Ohio Valley Sani-tation Compact represented an early regulatoryagreement for a river basin region. Since World War11, the proportion of regional and national compactshas increased relative to bi-State agreements.

Multi-State compacts create a legal regulatoryframework between or among States, and employconstitutional powers at both Federal and Statelevels. They offer two direct advantages to the ap-

Z5NCSf3CS, May 1986, Op cit.

plication of Federal regulatory authority. First, ini-tial State participation is voluntary. Second, whilethe States give up individual sovereignty for thelarger purposes or programs, the agencies that ad-minister such compacts are controlled by the mem-ber States. The Federal Government may play a role,but in a subordinate capacity.

Multi-State compacts offer the following advantagesfor the regulation of industrialized housing:

1.

2.

3.

4.

Multi-State compacts would establish reciprocityamong States, so that manufactured buildingsproduced and inspected in one State could beaccepted by another.Multi-State compacts could serve as an inter-mediate preemptive system, superseding the au-thority of individual States but under the aus-pices of a federally based preemptive system.Since State codes tend to follow regional group-ings, compacts might be created for a limitednumber of regions across the country. Contig-uous or nearby States may reach agreementswith one another more easily; most manufac-tured buildings move regionally, not nationally,because of transportation costs. Also, multi-Statecompacts might differ according to regional con-siderations like climatic conditions or marketpreferences.Multi-State code enforcement for industrializedhousing and manufactured commercial build-ings might rely on existing State agencies andsystems, instead of spawning additional bu-reaucracy.

The Federal Government might provide incentivesfor States to join multi-State compacts. Federal financ-ing or mortgage guarantees and other contingent ap-provals have been described for a nonregulatory Fed-eral incentive system in a previous section. Anotherkind of incentive involves the Federal Governmentas an equal partner in the compacts. An enlargedHUD code system, or a modified system of Federaladministrative agencies, could have preemptive reg-ulatory authority over manufactured buildings pro-duced in or shipped to States not belonging to multi-State regulatory compacts, encouraging States to joinsuch agreements. In this way, the Federal Govern-ment’s activities would tend to diminish over time.The Abandoned Mine Reclamation Program illus-trates this principle: once a State develops a feder-

—. —

80

ally approved program for mine reclamation, it as-sumes full control of the program.

Special Regional State Legislation Allowed byCongress.–The recent Supreme Court decision ofJune 10, 1985, Northeast Bancorp, Inc., et al. v.Board of Governors of the Federal Reserve System,et al., suggests an alternative that resembles themulti-State compact. The court held that since Con-gress had authorized States to determine what bankscould operate within their borders, States were notobliged to accept all banks. The New England Stateslimited approval to regional banks, excluding NewYork.

The ruling in favor of this policy has importantimplications for the housing industry. Citing this asprecedent, Congress could pass a Federal statute al-lowing for regional reciprocal cooperation by Statesin the area of manufactured buildings. This differsfrom the concept of a multi-State compact, since noregulatory authority would be established.26 Rather,States would cooperate with one another based ontheir respective market needs. For example, a Statemight declare that if other States accepted its owninspection and certification standards, it would re-spond in kind. This would enable States to limitagreements to nearby “acceptable” States, whichhold similar views on codes and code enforcement.

Essentially, such an agreement would representa lesser form of the multi-State compact in manner,geographic extent, and strength of commitment.However, while this would improve geographic mar-ket aggregation by regionalizing the manufacturedbuilding industry, it would tend to impede the de-velopment of a national system.

Non-Federal Negotiated Agreements.—Thisalternative involves agreements negotiated betweenState or local governments, or between a State orlocal government agency and a private third-partyinspector or manufacturer. There is no Federal par-ticipation, and agreements need not be accompaniedby specific legislation. Such arrangements may bemade on a case-by-case basis, and do not requireassociation with a statutory system.

26Although A~& 1, section 10.1 of the U.S. Constitution holds that“no state shall enter into any treaty, alliance, or confederation” with-out congressional approval, associations that do not legislate actual reg-ulatory power—as was the case with Northeast llancorp-have beenpermitted.

A broad spectrum of formal and informal agree-ments are covered by this alternative. At one ex-treme, construction that is not covered by HUDcodes—in particular, modular housing and modu-lar nonresidential buildings–could be regulated byad-hoc arrangements made at the discretion of publicofficials. State or local governments could agree toaccept units that have been produced and inspectedin a different jurisdiction. Such negotiated agree-ments may employ third-party private inspectors, orState inspectors situated close to the factories.

At the other extreme, reciprocal legal arrange-ments among States for the acceptance of manufac-tured buildings other than HUD code “manufactured”(mobile) homes can and are now being developedwithout Federal assistance. Eleven States report sometype of agreement with one or more States. Florida,Georgia, and South Carolina will soon conclude areciprocity agreement, and may be joined by Loui-siana, Mississippi, North Carolina, Tennessee, Texas,and Virginia.

Developments within States have facilitated Statereciprocity. Many States have begun to confront theproblems of manufactured buildings other than HUDcode homes, and have consolidated codes and en-forcement systems already. Although differences re-main both between and within States, 34 differentstatewide codes preempt local government standardsfor modular buildings; 28 States have adopted suchcodes for packaged panelized buildings systems; 31preempt local standards for large closed componentslike “wet cores”; and 5 cover precut homes. On theenforcement side, 31 States use State inspectors formanufactured buildings, 21 use county or munici-pal inspectors, and 23 use third-party inspectors.27

In the absence of more complete solutions, nego-tiated agreements have allowed State and local gov-ernments to combat the regulatory problems pre-sented by industrialized housing, especially thoserelating to factory construction. However, this typeof governmental oversight presents problems of con-sistency, and abuses have been reported. Assum-ing that the manufactured building industries willcontinue to enjoy sizable growth, negotiated agree-ments would be the weakest of all State-based alter-natives. Such agreements may be easy to implement,

Z7NCSBCS, unpublished data.

but uniformity over a large multi-State region is dif-ficult to achieve and may not stand the test of time.

Proposals of NAHB and the Building CodeAssociations. -As noted earlier, the National Asso-ciation of Home Builders, NCSBCS, CABO, BOCA,ICBO, and SBCCI have agreed on principles for aState-based regulatory system that would affect codesand inspection systems throughout the country. Theyare now in the process of converting these proposalsinto a formal regulatory system with adequate fund-ing. The system would be based on the followingguidelines:

●

●

●

●

●

●

One of the three major model building codeswould be adopted by the States. Local jurisdic-tions could not make amendments.States would enforce the regulations that appliedto factory-produced housing, and local jurisdic-tions would oversee codes for site-built housing.The selected model code would be mandatoryfor all factory-built housing, and for all site-builthousing constructed in jurisdictions that usebuilding codes.Amendments to the codes would be reviewed“through channels currently used for the modelbuilding codes” and “the States would estab-lish a uniform procedure for evaluating and ap-proving new products, design concepts, andconstruction techniques. ”States would agree to reciprocity agreements forall industrialized buildings.Education and training would be provided forbuilders, building trade workers, and regulatoryofficials .28

Private Responsibility Systems

Private companies and associations play a substan-tial role in governmental processes for regulating theU.S. housing industry. This participation takes vari-ous forms, such as developing consensus standards,establishing model buildings codes, and testing ma-terials.

The American system resembles a gigantic volun-tary regulatory scheme, considering the number ofprivate organizations that participate. An estimated1,800 private American companies manufacturecomponents for homes, and many of these help to

%4B0 News Release, Llav 1986

develop consensus standards for their products thatare later incorporated in building codes. Private firmsand industry representatives do much of this workthrough organizations like the American NationalStandards Institute and the American Society forTesting and Materials. Industrial trade associationsalso implement consensus standards, and, as noted,the three major model building codes come from thenongovernmental organizations and CABO.

In addition, numerous profitmaking and nonprofitlaboratories test materials, products, and buildings.Underwriters Laboratories, Inc., a private nonprofitfirm, occupies a unique position in the industry. Theapproval of electrical items by Underwriters, or bya laboratory of equal stature, stands as a legal andpractical prerequisite for government approval.

Application of Private Regulation. -Private re-sponsibility systems raise questions of accountabil-ity: who is responsible, how, and to what extent?Are there any models or examples of effective pri-vate responsibility systems that can apply to resi-dential construction, especially in matters of en-forcement?

In response to these questions, European systemsof private assurance deserve analysis. Belgium hasa strong private liability law, under which architectsand builders are held responsible for 10 years in mat-ters of building safety and durability. SECO—roughlytranslated as the “Bureau of Control and Proofingof Building Safety and Construction’’—is a nongov-ernmental engineering consulting organization thattests and inspects all types of structures. Governmentapprovals require SECO inspections; insurance com-panies also call for SECO inspections as a prerequi-site for issuing policies to builders and owners. SECOdivides its attention between municipal authoritiesand the private sector—builders, manufacturers, in-surance companies, and building owners. SECO’swork includes laboratory testing, reviews of designsand plans, onsite and factory inspections of build-ings and components, and plans and reviews of qual-ity control systems. The firm handles approximately90 percent of all such activities in Belgium, and Bel-gian courts interpret “good practice” consensusstandards developed by SECO. In turn, SECO is le-gally liable for the advice and approvals that it gives.

Similar systems exist in other countries. In France,several nongovernmental organizations operate like

——. ——-——— .

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SECO. Local governments or councils in Great Brit-ain and Sweden are legally liable for the inspectionsmade under their auspices. A British law passed in1984 provides for home liability, and enables thegovernment to accept inspections performed byproperly bonded private firms.

More investigation of the effectiveness and prob-lems of European systems is needed. However, thesemodels do suggest possibilities for a “private respon-sibility” approach i n this country, where most gov-ernment entities have not been legally liable forcodes and inspections made under their auspices.Congress might choose to make them liable, in or-der to make codes and inspections more effective.Under this approach, codes would continue to beset through official government processes, but theenforcement system could be made private in casesof liability transfer Several ways to implement thisapproach are described below:

1. Manufacturers’ and dealers’ warranties could berequired on all industrialized housing and non-residential modular buildings. New Jersey main-tains such a mandatory requirement, and sev-eral other States are considering the option.

2. Mandatory inspections could be conducted bythird-party law firms. The government couldlicense the firms, but payment would come fromthe various involved parties, following the Euro-pean model: manufacturers, dealers, contrac-tors, government entities, homeowners, andother building owners. The private inspectionfirms would issue inspection certificates and af-fix approval seals that certified full code com-pliance for manufactured units. Like certifiedpublic accountants, they would be bonded andinsured as a requirement for licensing, andwould be legally liable for their advice on codecompliance during inspection.

3. Because they provide liability coverage andbuilding insurance after construction, private in-surance companies might become more in-volved in setting qualifications and require-ments. In effect, they would perform a privateregulatory function based on risk assessment.Insurance coverage could be required as a mat-ter of law, and companies could set competi-tive premiums. Currently, U.S. insurance com-panies engage in loss prevention activities forcommercial buildings only; in Switzerland, com-

panies that issue any form of fire insurance re-quire annual inspections and maintenance ofheating systems.

4. Private financing institutions, like private insur-ance companies, could take a more active rolein performing a private regulatory function.Compliance with code standards does affect loanrisks and marketability of buildings, of obviousimportance to private financing institutions.Consequently, in addition to requiring insur-ance, financing institutions may set specificguidelines for those seeking credit for mortgagefinancing, or construction loans for manufac-tured buildings. HUD’s Minimum PropertyStandards, used to approve federally guaranteedmortgages, illustrates this principle.

Cross-Cutting StrategiesA single code for all types of industrialized hous-

; 1;> ITI Y may not be tee] [ ~ .~gicail~ realistic orcj(J:;~;” < ,[, “. I lrthe~” studj’ is I I \ ~: d, Alternatives to

! \j : I .: f’ c(]~e C(jl i. ] acc~l, . {l:~ic i he different cat-} ~Jt housi T , and C( ~’ I I ~ S(JI grades of housingb $, ~ at ?gori (-4>.

Labeling.--In the United States, appliances arerated for energy efficiency, meats receive qualitygrad{: r , ~ lgs, i; I f 1,!l]obiles ar-e given gasoline miie-

~ C;C I ‘ <, ai’Ld truck and J !~.)mobi]e tires have~J[~It~~ rati r’qs. Housing colll[: .-~pt a similar system,‘. ): “ 1’ :1:; !L alth a~d wret~, ‘S jr-ability, and quality.

hli’1 sting building re~;l ! lations mandate “ac-cepta~le’i ,minimum health and safety standards.Acceptable minimums indicate the absence of abso-lute levels, even in health and safety of buildings.For e~”ample, differences exist in fire protection—

i.i Ials have distinct interior surface flamewall ,+fi~”spread tij ,ies, and placement and enclosure of fur-naces, number of smoke detectors, number and dis-tance to exits, and exit capacities all differ accord-ing to local conditions.

Housing grades may be based on other factors:durability, quality, amenity, and operating or life-cycle costs. HUD has already demonstrated the fea-sibility of establishing grades through the potentialfor evaluation of quality, livability, and durability in“manufactured” (mobile) homes.29

“’l-l S Dep~rtment of Housing and (Irban Development, Sixth An-J)II;II f<eport ~() (’ongress On kfanulactu~ed Housing Program.

83

There are three approaches to grading homeswithin categories. First, each key attribute of a housemight be rated, with the cumulative result given tothe home purchaser. Second, minimum acceptablelevels of each attribute might be established for eachgrade of house. A “Grade A“ house would have cer-tain features, a “Grade B“ house might be lower, andso on. Third, a house might be graded only for min-imum standards of health and safety. Higher gradesof homes would carry stickers, demonstrating com-pliance with selected standards of durability, qual-ity, amenity, and operating or lifecycle costs.

Such improved information about building qual-ity would allow banks to estimate the market valueof the structure more accurately. Also, it would per-mit banks to project potential operating costs, suchas energy, for use in qualifying individuals for hous-ing loans. Both features would facilitate the opera-tion of housing markets, and would encouragegreater construction quality without prescription.

The establishment of categories of factory-builthomes, together with grades within such a system,would yield two important benefits. This market-based solution would allow market forces, and notstatutory regulation, to govern supply and demand.Also, it would create incentives for producers to“build up” in order to satisfy better-informed con-sumers.

Other Models.—Japan maintains national stand-ards for certifying building components. The Japa-nese Ministry of Construction provides group insur-ance and a “Better Living” label for housingcomponents that meet specified standards. The Min-istry publishes the standards in the Japanese equiva-lent of the Federal Register, and invites firms to ap-ply for certification. Applications must includedetailed design drawings and test results, and arereviewed by a 25-member certification commissioncomposed of consumers, members of “local publicorganizations, ” and technical experts in housingcomponents. Certification must be renewed every3 years.

By June 1985, 541 companies had received cer-tification for 1,417 products in 31 categories. Thesecategories include hot water systems, ventilationunits, gas appliances for kitchens, gas leakage alarmsystems, solar energy systems, bathtubs, “housinginformation systems, ” and even mailboxes, front

door units, door locks, window sashes, handrails,interior doors, kitchen cabinets, “master televisionantennas,” and more. Products that carry the “Bet-ter Living” label receive two types of insurance: prod-uct warranty insurance, which covers costs associ-ated with replacement of a defective component; andproduct liability insurance, which covers claims re-sulting from injury or property damage attributableto a failed component.30

The French “Agreement” system, where a singlenational private corporation makes comprehensivetechnical investigations and certifies building inno-vations, has been adopted with variations in over10 countries. The “Agreement” organization assesseslikely performance of factors not covered by exist-ing building codes. Its recommendations encompassthe design, manufacture, assembly, and installationof products. It also conducts research on testingmethods and quality control for manufacturing andbuilding erection procedures.

Dozens of energy rating systems have been de-veloped in the United States. For example, Califor-nia Utilities began rating new homes in the late1970s, providing builders with discounts on utilityconnection charges if their structures met minimumstandards of electric energy efficiency. The programsucceeded in attracting consumer interest in energyefficiency, but some building officials found the Cali-fornia rating systems “difficult to enforce”31 due totheir relative complexity.

Several other types of systems exist. Austin, Texas,has a “five-star” rating system for new houses. TheWestern Resources Institute has organized builders,bankers, insurance companies, and realtors into acoalition that provides an “Energy Rated Homes”label for units sold in western Washington; thisproject is designed to operate by industry consensus,not government intervention.32 Appraisals leadingto a rating are conducted much like standard ap-praisals.

The State of Florida has combined energy ratingwith a “minimum standards” approach. New homes,residential additions, or significant renovation mustsatisfy a minimum standard for energy efficiency,

~ocovernment of Japan, Ministry of Construction, Housing Produc-

tion Division, Quality Housing Co&onenK CerMication $\rs/ern, 1985,~INCSBCS, May 1986, op. cit.sZJav Luboff, private communication, February 1986.

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84

which varies between three “climatic zones”; beyondthis threshold, houses receive grades that indicatefuture performance. However, as with the Califor-nia Utilities model, effective enforcement has beendifficult to achieve, especially in rural areas with lowlevels of construction.

Presently, California is considering a statewideenergy rating system. The California State BuildingCode mandates stringent energy-efficiency require-ments for new homes, which made obsolete the Statestandards set by the electric utilities and which ledto the abandonment of utility-based labeling pro-grams. The California code requires builders to sub-mit certification plans prior to approval. A computer-based analysis then determines whether the pro-posed structure meets minimum levels of energy per-formance. Since the computer-based analysis appliesto all structures receiving code approval in Califor-nia, labels with the number of “points” scored canbe supplied at no additional cost to the builder. Intwo demonstration municipalities, the State EnergyCommission has established a rating scale for exist-ing residential structures of 1 to 6, where 1 indicatesthe highest level of energy efficiency. Were thissystem applied on a statewide level, most existinghomes would receive relatively poor scores, illus-trating the benefits of purchasing a new home andaiding builders as a result.

Also, banks have been encouraged to considerenergy costs when reviewing a borrower’s ability topay. Standard rules call for an owner to pay no morethan 28 percent of his or her annual income for prin-cipal, interest, taxes, and insurance (PITI), but manylenders have abandoned this standard in the faceof skyrocketing housing costs. California loan offices,for example, now allow PITI to reach 32 percent ofa buyer’s income. If a label allowed lenders to projectthe energy bills associated with a home purchase,the rules could be extended to include PITI + E, orexpected annual energy bills. This would permitlenders and borrowers to integrate operating costsinto purchasing decisions with greater accuracy.However, few lenders have moved to consider suchquality features as energy efficiency, and the Fed-

eral Government has been slow to use its power asa secondary lender to encourage similar considera-tions. The Federal Home Loan Mortgage Corpora-tion (“Freddie Mac”) does account for energy effi-ciency when a borrower is on the borderline of thePITI equation; the Federal National Mortgage Asso-ciation (“Fannie Mae”) allows for an increase of twopercentage points—28 to 30, for example—in themortgage payment-to-debt ratio, if the home satisfiescertain energy requirements; other agencies havenot yet followed suit. Freddie Mac has indicated thatif projected energy costs could be specified withgreater accuracy, then the agency would considerincluding them as a loan determinant.

Other Measures

Four additional options were identified as poten-tially important, but were not investigated in detail:

1.

2.

3.

4.

Mandatory training and examinations for cer-tification of inspectors might be required for allbuilding inspectors. Enhancing the skills andprofessional qualifications of inspectors willimprove code enforcement. The model codeagencies and NCSBCS already offer training andexamination systems, and 10 States require in-spectors of manufactured buildings to take ex-aminations for certification. In fact, most States“strongly endorsed the need for mandatorytraining and certification examinations for in-spector and third-party personnel.”33

Design approvals for manufactured buildingsmight require reviews and signatures from reg-istered engineers.Improved quality control of factory production-lines for manufactured buildings could beachieved, perhaps borrowing and adapting tech-niques from other industries.Consumer participation in code-setting for man-ufactured buildings could be improved, and con-sumer complaint and appeal processes short oflawsuits could be facilitated.

qJCSBCS, May 1986, op. cit.

85

FOSTERING TECHNOLOGICAL INNOVATIONMany housing experts urge the U.S. Government

to play a more active role in promoting fundamen-tal building research. They claim that without suchstudy, the U.S. residential construction industry willbecome increasingly vulnerable to foreign compe-tition, and American homebuyers will continue toreceive less than their money’s worth. The argumentconcludes that because even the largest housingfirms cannot or will not conduct basic research, theFederal Government must make the kind of long-term commitment that has succeeded elsewhere.Sweden’s Council for Building Research, for exam-ple, spent $39 million on research in 1983, morethan three times as much as HUD, despite the factthat Sweden’s residential construction industry is ap-proximately one-twentieth the size of its Americancounterpart. The U.S. Government does support suchresearch in health and agriculture, both of whichare based on small establishments that lack the re-sources to conduct independent research. However,even the 100 large companies that produced 25 per-cent of all housing units in 1985 did not make sig-nificant investments in research. It may be time toreevaluate the historical “laissez-faire” approach tohousing research.

Research funds from the private sector, includingboth individual firms and trade and professionalassociations, have been inadequate in the past, anda change in this trend seems unlikely. Most largeU.S. homebuilding firms do not maintain a researchbudget, which implies a lack of industry confidencein the cost-effectiveness of technological innovation,at least in the short run. Professional associationsof architects and builders, like the American Insti-tute of Architects, conduct some research, but theirbudgets are minute in relation to the size of the in-dustry as a whole.

Trade associations do sponsor useful research. Forexample, the NAHB Foundation, Inc., has developeda research house to demonstrate advances in con-ventional construction techniques, has instituted cer-tification programs for manufacturers of buildingproducts, and conducts economic and regulatoryanalysis for public and private groups. Nevertheless,compared with the resources available to other U.S.industries of a similar size, this construction researchprogram is, at best, limited.

As for public funding, historically small agencybudgets have decreased even further. Still, severalagencies do sponsor relevant research, including theDepartment of Agriculture through its Forest Prod-ucts Laboratory, the Commerce Department throughthe Centers for Building Technology and Fire Re-search at the National Bureau of Standards, the De-partment of Housing and Urban Development, theDepartment of Energy, the National Science Foun-dation, and the National Institute of Building Sci-ences. However, due to poor coordination of theseactivities, research efforts have remained fragmentedand have fallen short of their potential.

HUD has not promoted aggressive policies forbasic housing research. A 1982 GAO report statesthat since 1974, “HUD has funded only one projectwhich demonstrated (in one geographical area) thecumulative cost saving potential of a wide combi-nation of innovative technologies.’’34 Some indus-try representatives assert that HUD’s research servesto back up or justify a proposed building regulation,and is seldom made public in any case, althoughHUD’s “Joint Venture on Affordable Housing”--initiated in several cities in 1982—has achievedlimited success.

Recognizing the need “to encourage all sectors ofthe building industry to devise voluntarily a moreefficient way of introducing technology into hous-ing and building,”35 Congress established the Na-tional Institute of Building Sciences (NIBS) in 1974.NIBS was designed to spearhead new housing-relatedresearch for the industry, a goal that has not yet beenachieved. This stems from the specific mandates thataccompany NIBS funding, as opposed to funding forthe kind of long-term, basic research that enabledJapan to develop its ceramic building material. In1979, NIBS issued a report that identified “the reg-ulatory environment” as the major constraint on re-search, development, and demonstration projects.The Institute attributed its own sluggishness to en-courage new technologies to a shortage of financialresources.36

~qceneral Accounting office. Op. ~lt‘5 Public Law 93-383‘6”A Study of Existing Processes for the introduction of New Prod-

ucts and Technolog~ into the Bu]lding I ndusto, ” prepared by’ TheEhrenkrantz Group for the National Institute of BuildlI~g Sclen~es, 1979

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Summarizing its review of HUD and NIBS as of1982, the GAO observed that “the statutory author-ity given to HUD and the National Institute of Build-ing Sciences to encourage the development and useof innovative technology in homebuilding has beenreceiving only limited attention by HUD and the In-stitute. "37 Neither agency appears ready to promoteresearch and development of new homebuildingtechnologies or materials unless funds are earmarkedspecifically for this purpose.

Preparation of a comprehensive list of prioritieswould help to increase Federal support for housing-related research. Previous sections of this report havediscussed the need to integrate such research intoa program that considers the performance of an en-tire residential structure, in the areas of construc-tion, energy efficiency, safety, and comfort. In lightof this situation, a list of research priorities mightinclude the following:38

1. Analytical tools that could facilitate the designof low-cost structures. For example, most ex-isting computer models for evaluating heatingand cooling costs are difficult to use, and arenot tied to advanced building design systems.As a result, few architects or builders employsuch techniques.

2. Advanced manufacturing technologies, includ-ing a variety of numerically controlled produc-tion systems, which have been developed forother manufacturing industries and could beadapted for use in factory and field housingconstruction. New standards and communica-tion protocols have accompanied the introduc-tion of these innovations into other sectors,and the residential construction industry mayneed to repeat this process.

3. Analytical tools for determining the effect ofbuilding design decisions on energy consump-tion; present techniques for this purpose areinadequate. Improved estimates for buildingperformance in all types of warm-weather cli-mates are needed. Most existing methods can-

SIGeneral Accounting Office, Op. cit.jg.$ee National Institute of Building Sciences, “Building Technologies

Research Agenda: A Technical Report,” May 1985; a report entitled“Third Edition of a National Program Plan for the Thermal Perform-ance of Building Envelope Systems and Insulating Materials, ” BuildingThermal Envelope Coordinating Council, is in preparation. See also E.Hirst, et al., Energy Efficiency in Buildings: Progress& Promise (Wash-ington, DC: American Council for an Energy Efficient Economy, 1986),

not project the effect of different design alter-natives on peak electric loads of residences,and energy costs in many southern areas de-pend more on peak electric loads than on to-tal energy consumption. Also, more efficientanalysis of the implications of different win-dow locations, shadings and glazings, patternsof moisture penetration, noise propagation,and heat exchange could be developed.

4. Simplified and accurate methods of energylabeling, and improved techniques for project-ing energy costs. Financial institutions couldemploy this data in order to gain a better de-termination of a borrower’s ability to repay amortgage loan. The present system estimatesthe principal, interest, taxes, and insurance ona home, and measures this against a bor-rower’s expected annual income; adding pro-jected energy costs would provide for a moreaccurate equation.improved data on the actual performance ofdifferent energy efficiency strategies and con-struction techniques. Current information onlifetime operating experiences for different sys-tems, especially for residential construction,is poor; maintenance costs of industrializedhousing cannot be compared with conventionalconstruction techniques. For example, per-formance of insulation, sealants, and othermaterials is not well documented, and thedurability of residential retrofits is poorlyunderstood, Differences between the predictedperformance of structures and the actual fieldexperience need to be clarified.Improved techniques for characterizing theperformance of residential appliances, makingthe estimates of performance for these itemsmatch actual field experience with greater ac-curacy.

7. Techniques for integrating residential electricsystems with utility dispatch systems. Controlson individual appliances could also be im-proved.

8. Technologies of a variety of building compo-nents. Examples include glazing materials,high-efficiency lighting, water heaters with flue-gas condensation, heat-fired–or gas-powered—heat pumps, integrated appliances, and com-ponents like compressors and refrigerants.

9. Controlled interior air quality, which may be-come a critical public health issue, particularly

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where significant amounts of radon from soilor groundwater have been introduced. Also,more study of interior air pollution is needed—especially of the sources of this factor, andof possible techniques for mitigating its effects.

10. Industry standards and tests, which could per-mit rapid, inexpensive analysis of the perform-ance and safety of new components andsystems.

Some industry analysts advocate the creation ofa quasi-governmental corporation to test and certifynew building technologies for construction. A sin-gle approval source for innovations in building tech-nologies could marshal public and private supportfor innovative development, especially to confrontproblems of technology transfer. Consensus stand-ards and model code organizations represent exist-ing industries, known product-lines, and currenttechnologies, and tend to resist technological change.Also, because new technologies do not assure cer-tainty in performance characteristics, there is justifi-able market resistance to unproven innovations.Homeowners prefer not to gamble with an enormouslifetime investment.

Consequently, one approach calls for existing in-stitutions to continue code setting for older, proventechnologies, while a new, quasi-public corporationwould test, approve, and promote newer buildingtechnologies. Such an institution would serve as aprestigious, unbiased source of information, whoserecommendations would be accepted by other in-stitutions.

The Center for Building Technology at the NationalBureau of Standards performs a similar function, con-ducting research for the development of testingstandards. The Center acted much like the proposed“quasi-public corporation” in its involvement withOperation Breakthrough. Another example is therelationship between the Federal Food and DrugAdministration (FDA) and the National ResearchCouncil (NRC) of the National Academy of Sciences.The NRC’s independent scientific reviews of phar-maceuticals provide the basis for actions by the FDA.

Stabilizing the Building Cycle

Variable housing construction rates in the UnitedStates impede long-term planning and heavy invest-ment in capital equipment and worker training, and

discourage long-term technological research. Twomillion housing units were started in 1978, as op-posed to under a million in 1982.39 Large invest-ments in production equipment can prove financiallyruinous during periods of low housing demand, asin the case of U.S. Home (see ch. 2). A strategy forevening the fluctuations in the housing cycle mayencourage greater capital investment on the part ofthe building industry. This discussion does not in-tend to provide a comprehensive review of this com-plex but important subject, but several options havebeen suggested for stimulating short-term housingdemand (see box B).40

Concerning the potential result of such policies,GAO observed that:

Past housing stimulus proposals have generallybeen thought to be inefficient because of a varietyof leakages arising from: (1) credit diverted to pur-poses other than housing; (2) windfalls to sellers;(3) purchases by buyers who receive the subsidybut who would have bought without it at roughlythe same time; (4) purchases by buyers who wouldhave bought later but move up their purchases.However, the last group, those who move up theirpurchase decision, are really doing what a stimu-lus proposal attempts to do—moving forward con-sumer decisions to buy at a time when housing isin a slump and reducing demand during the nextupswing in the economy. These consumers mayalso buy more expensive housing than they other-wise would have, which would tend to create morejobs and help the homebuilding industry. Whetheror not a stimulus program which would result inmoving consumer decisions is desirable dependsheavily on the economic outlook. If strong recov-ery is anticipated it may prove helpful to shift startsforward. If only a weak recovery is anticipated, shift-ing starts may yield an even weaker recovery. Theextent of these leakages have been heavily de-bated. 41

WU,S, Department of Commerce, Bureau of the Census, Sttitktkd Ab-stract of the L’nited States, 1984, p. 743,

WU, S, Congress, General Accounting Office, “Countercyclical Stlrn U-

Ius Proposals for Single-Family Housing,” Washington, DC, 1982, pp 7-8.~]lbid., P. 6 .

1 ,, “,

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