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Need for the Partnership for Advancing Technology In Housing

The federal government has a long history of involvement in housing policy and support of R&D on technological innovations. The residential sector of the construction industry provides unique opportunities for pursuing both social and environmental policy goals. The nation's new and existing housing stock are potential vehicles for reducing energy use, reducing accidents, promoting public health by reducing exposure to hazards, such as lead, radon, and molds, and reducing housing costs.

The impact of housing on the everyday lives of Americans is enormous. For example, according to the most recent consumer expenditure surveys, housing is the largest single expense for most Americans (BLS, 2000), and residential use constitutes a significant portion (11 percent) of national energy consumption (DOE, 1999). Illness and accidents on the work site are significant risks for the millions of people involved in housing construction (NAHBRC, 1998a). Although in-home accidents are not addressed directly by the current PATH goals, large numbers of accidents occur within the home (falls in the home were alone responsible for almost 12 percent of all accidental deaths reported in 1998) (National Safety Council, 1999), and exposure to health risks in the home contributes significantly to the cost of health care (NRC, 1993; IOM, 2000). Clearly, society could reap large benefits if the private sector were to work with the federal government to cut costs, reduce adverse environmental impacts and energy consumption, and promote health and safety in the home.

FEDERAL HOUSING POLICY

Federal involvement in housing policy dates back to 1892 when the federal government provided funds for an investigation of safety and welfare issues in city slums. More significant federal involvement dates to the early 1930s when Congress passed several measures to stimulate housing construction, renovation, and home improvements, created institutions to supply and insure mortgage credit, and provided emergency relief to homeowners.

The Housing Act of 1949 expanded the role for the federal government by declaring that the welfare and security of the nation required a decent home and suitable living environment for every American family (P.L. 81-171). Since then, the federal role in housing policy has taken on the fundamental goal of ensuring that affordable homes are available for all Americans. The federal government now directly subsidizes tenants and homeowners, provides tax incentives for homeowners and developers of low-income rental housing, insures mortgages, and provides block grants to state and local governments to improve housing and community development.



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Page 10 2 Need for the Partnership for Advancing Technology In Housing The federal government has a long history of involvement in housing policy and support of R&D on technological innovations. The residential sector of the construction industry provides unique opportunities for pursuing both social and environmental policy goals. The nation's new and existing housing stock are potential vehicles for reducing energy use, reducing accidents, promoting public health by reducing exposure to hazards, such as lead, radon, and molds, and reducing housing costs. The impact of housing on the everyday lives of Americans is enormous. For example, according to the most recent consumer expenditure surveys, housing is the largest single expense for most Americans (BLS, 2000), and residential use constitutes a significant portion (11 percent) of national energy consumption (DOE, 1999). Illness and accidents on the work site are significant risks for the millions of people involved in housing construction (NAHBRC, 1998a). Although in-home accidents are not addressed directly by the current PATH goals, large numbers of accidents occur within the home (falls in the home were alone responsible for almost 12 percent of all accidental deaths reported in 1998) (National Safety Council, 1999), and exposure to health risks in the home contributes significantly to the cost of health care (NRC, 1993; IOM, 2000). Clearly, society could reap large benefits if the private sector were to work with the federal government to cut costs, reduce adverse environmental impacts and energy consumption, and promote health and safety in the home. FEDERAL HOUSING POLICY Federal involvement in housing policy dates back to 1892 when the federal government provided funds for an investigation of safety and welfare issues in city slums. More significant federal involvement dates to the early 1930s when Congress passed several measures to stimulate housing construction, renovation, and home improvements, created institutions to supply and insure mortgage credit, and provided emergency relief to homeowners. The Housing Act of 1949 expanded the role for the federal government by declaring that the welfare and security of the nation required a decent home and suitable living environment for every American family (P.L. 81-171). Since then, the federal role in housing policy has taken on the fundamental goal of ensuring that affordable homes are available for all Americans. The federal government now directly subsidizes tenants and homeowners, provides tax incentives for homeowners and developers of low-income rental housing, insures mortgages, and provides block grants to state and local governments to improve housing and community development.

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Page 11 The federal government also engages in a wide range of other activities intended to reach national housing goals, including making homes more affordable to build, safer to live in, and less costly to maintain and operate. In 1992, for example, Congress passed the Lead-Based Paint Hazard Reduction Act (P.L. 102-550, Title X) and the Removal of Regulatory Barriers to Affordable Housing Act (P.L. 102-550, Title XII). As part of HUD's office of PD&R research portfolio, HUD has sponsored research on cost-effective construction techniques, energy-saving innovations, and designs that promote health and safety. Historically, the federal government has also played an active role in the development and promulgation of standards for housing that address health, safety, and welfare issues. Federal laboratories and federally supported research have made contributions in the areas of materials development, structural design and testing, seismic resistance, tornado and hurricane resistance, flood resistance, and fire protection. Since the early 1970s, the U.S. Department of Energy (DOE) has been a leader in the development of model codes to reduce energy consumption. As a result of these and other efforts, houses built since 1987 consume only 60 percent of the heating energy of houses built before 1980 (DOE, 1999). HUD has also assisted in the development and enforcement of standards for manufactured housing that preempt local codes nationwide. The Environmental Protection Agency (EPA) is involved in identifying indoor pollutants and improving the quality of indoor environments. The PATH Program fits well within this long tradition of federal involvement in housing. GOVERNMENT INTERVENTION IN PRIVATE MARKETS Economists generally agree that some common market failures lead to deviations from the ideal of a perfectly competitive market and that correcting these failures may warrant government intervention. The most common failures are referred to as public goods, externalities, natural monopolies, and information asymmetries. Of these, only natural monopolies are not relevant to residential technology development and diffusion. Arguably, the other three are applicable and support the need for the PATH Program. Public Goods Public goods are goods that are nonexcludable and nondepletable (i.e., goods that are available to all but are not diminished by use). Information in the public domain is one such public good. Anyone can consume it, and consumption of it does not diminish its usefulness to others. The PATH Program could produce public goods that might lead to a broader diffusion of innovations, such as methods of measuring product performance. Because it is in the public interest that all manufacturers producing building materials and systems subscribe to similar standards, and because private producers will be unable to recoup the costs of creating standards, it is appropriate for the government to establish the standards for building materials and systems.

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Page 12 Externalities Externalities arise when parties do not bear the full costs, or reap the full benefits, of their actions. For example, if early adopters of an innovation bear all of the risks of testing its performance and achieving market acceptance and competitors are likely to reap the future benefits, firms may be reluctant to be the first to use new technologies. Under normal market conditions, builders, as the main decision makers, have little real incentive and some disincentives for employing new technologies. The PATH Program could help overcome market failures in product diffusion resulting from externalities and encourage the rapid, widespread adoption of new technologies by ensuring that local barriers do not impede their adoption, by educating builders and consumers, and by developing testing standards and methods. Information Asymmetries Information asymmetries result when buyers and sellers in market transactions have different information. PATH could develop impartial, credible information that rates the quality and value of new technologies. PATH could support existing product evaluation programs and ongoing efforts to develop product evaluation methods. PATH could also assist in the development of programs to increase public awareness and to make information about housing technologies available to builders and consumers. STRENGTHENING THE TECHNOLOGY INFRASTRUCTURE The federal government already plays a productive role in the development of the nation's housing technology infrastructure; however, government efforts to increase the development and effective application of new technologies in the housing industry could be expanded. Coordinating Technology Research and Development According to the National Association of Home Builders Research Center (NAHBRC), public and private investment in R&D for residential housing has been modest. In 1992, it is estimated that total R&D spending was 0.2 percent of the total value of new housing construction. The private sector funds 85 percent of R&D in housing; the remainder is made up by the federal government (8 percent), state and local governments, universities, and nonprofit organizations (7 percent) (NAHBRC, 1998a). Manufacturers and suppliers of construction materials and products account for 80 percent of private funding for R&D, but this represents only 0.6 percent of their sales. Home-building firms, contractors, and related trade associations spend less than $10 million on R&D annually, a large part of which is devoted to regulatory compliance (NAHBRC 1998a).

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Page 13 Historically, the home-building industry has been slow to adopt new technologies. Materials and product manufacturers face a stiff challenge in obtaining approval from building-code officials in thousands of local jurisdictions, and then they are faced with marketing and promoting the innovation to more than 50,000 builders. Innovations that reduce production costs are most likely to be accepted by the industry. Some past innovations now used routinely by home builders include: engineered roof trusses and other wood components; plastic panels around bathtubs; 24-inch stud spacing, preassembled plumbing trees; and prewired electrical components. The annual federal expenditure for R&D related to residential technology is about $29.1 million. Government spending is distributed among many agencies, including PATH partners: HUD, DOE, U.S. Department of Commerce (DOC), U.S. Department of Agriculture (USDA), EPA, National Science Foundation (NSF), Federal Emergency Management Agency (FEMA), and others. Most federally funded research on residential construction is mission oriented and directed to regulatory matters, rather than focused directly on solving builders' problems or making housing more affordable (NAHBRC, 1998a). Defining the federal role and coordinating public and private R&D will require a detailed inventory of existing housing technology, ongoing private and public R&D, and current data on technology transfer and technology diffusion. Government and Private Research and Development The United States has not established national priorities for housing R&D or a mechanism for coordinating housing technology diffusion. In other countries, such as Canada, Japan, and the United Kingdom, the government works closely with industry to develop research agendas, allocate pooled resources to meet consensus-based research objectives, and disseminate information. By contrast, the regulatory approach taken by some U.S. government agencies often creates an adversarial relationship with builders and manufacturers. A partnership among public and private interests would help to identify an agenda for residential construction R&D and develop programs to achieve common goals. Barriers to Technology Research and Development and Technology Diffusion Technology R&D is only a fraction of the answer to achieving the national construction goals for the housing industry. Benefits to the consumer also depend on overcoming barriers to technology diffusion, which include restrictive regulations, the risk of product failures, the lack of consumer acceptance, and the fragmented structure of the housing industry. Many technologies that could reduce energy costs, reduce maintenance costs, and improve worker safety and health have already been developed and tested but have not improved the overall productivity of the housing industry or affordability of housing. The failure to adopt new technologies not only limits the benefits they could bring, but also discourages investment in future R&D by private

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Page 14 companies. Therefore, it is essential that the barriers to the adoption of new technologies be identified and overcome. Both consumer and builder markets for housing technologies are fragmented. Property owners number some 70 million, and the residential construction industry is comprised of more than 50,000 firms that build an average of 20 or fewer houses per year. The top ten builders in 1996 accounted for only 6.5 percent of total units constructed; the top 100 builders accounted for only 13.5 percent. More than 60 percent of builders construct 11 or fewer units per year (NAHBRC, 1996). This fragmentation inhibits the rapid adoption of innovative technologies for housing. By contrast, in 1992, there were 155 producers of manufactured housing. The top two producers of manufactured housing shipped 35 percent of the total number of units shipped in 1996, and the top ten producers shipped more than 70 percent. Shipments of manufactured housing reached 363,000 units in 1996 (MHI, 2000). Because this segment of the housing industry is less fragmented and because there are more uniform performance-based regulations nationwide, technology adoption in manufactured housing has been faster than in site-constructed units. As a result, the costs associated with the diffusion of new technologies are higher for site-constructed units than for manufactured housing units, and the chances of success are lower. The experience of past government efforts to encourage technology diffusion in the residential-construction industry, such as HUD's Operation Breakthrough in the 1970s, and current programs, such as DOE's Building America, could be used to direct future programs. Program resources could be targeted by selecting existing technologies with the highest potential for reducing construction, maintenance, or energy costs, and then analyzing their successful dissemination or the barriers to their adoption. Role of Partnership for Advancing Technology in Housing PATH provides the government with an opportunity to create a cooperative environment among industry stakeholders based on common goals and to coordinate public and private funding in R&D to leverage limited resources. PATH could facilitate communication among researchers, manufacturers, builders, and consumers to improve the understanding of new housing technologies and the benefits of new materials and products. Government could also facilitate the demonstration of key innovations by sponsoring field trials and participating in performance assessments. PATH could also assist manufacturers in overcoming regulatory obstacles. PATH could also assist in the development of test protocols for the durability of building products and systems to provide more accurate estimates of product performance over their intended design lives. Better testing methodologies could guide manufacturers through the product design and development phase and reduce the frequency of in-field failures. A lower failure rate would increase builders' confidence in innovative building technologies.

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Page 15 CONCLUSIONS AND RECOMMENDATIONS The federal government has a long history of involvement in housing policy and support for R&D on new technologies. PATH is a continuation of this tradition. The residential sector of the construction industry provides unique opportunities for fulfilling both social and environmental policy goals. The nation's new and existing housing stock are potential vehicles for conserving and reducing energy use, reducing accidents, promoting public health through decreases in exposure to hazards, such as lead, radon, and molds, and reducing housing costs. Despite the potential of new technologies to improve the quality and lower the cost of housing, the assimilation of new technologies into the U.S. housing industry historically has been slower than in the overall construction industry and other industries. Several reasons can be cited for the low level of technological innovation in the housing industry. First, although technological enhancements have the potential to improve housing performance over the long term and reduce life-cyclecosts, they typically increase first costs,perhaps the major concern of the majority of home buyers. Second, advances in housing technologies have been sporadic; no system has been established for identifying needs and subsequently developing and deploying new technologies to meet them. Finally, the benefits of improved housing technology have not been widely publicized among housing consumers or the housing industry itself. This reflects the collective view of the committee that the benefits of technology (e.g., increased durability, improved disaster resistance, and lower life-cycle costs) are not fundamental drivers in consumer preference or market demand. The committee believes that increasing consumer demand for improved housing is, therefore, a critical step in the advancement of housing technologies. The PATH Program can be a vehicle for addressing many of these concerns. PATH, by definition, is intended to coordinate and focus various federal programs and increase cooperation and information transfer between the public and private sectors. The committee believes that PATH's vital role will be to coordinate ongoing activities, synergize new activities, and provide direction for future activities. Coordinating public and private funding for R&D can leverage limited resources. As a publicly funded agency, PATH can facilitate communications among researchers, manufacturers, builders, and consumers to educate them about the benefits of new materials and products. PATH's role can include: collecting information and disseminating it to researchers, industry, and consumers; providing seed money for the exploration of new technologies and leveraging public and private investments to create the greatest benefit to society; and assisting in the deployment of new technologies and reducing the time required to bring new technologies to market. The opportunities to further social goals, together with the precedent for federal action, provide a compelling case for the value of the PATH Program and on this basis, the committee offers the following recommendations. Recommendation 1. The PATH Program should be continued as a partnership among federal agencies and between the federal government and the private sector. The program should be reviewed and updated continuously to ensure that it evolves into an

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Page 16 effective, efficient vehicle for the development and deployment of beneficial technologies. Recommendation 2. PATH should undertake market research on builders' and consumers' perception of new technologies. Information on the successes and failures-of new technologies and processes for introducing them into the housing industry should be incorporated into PATH's technology development and deployment strategy. PATH strategies for disseminating information to its diverse audiences should be evaluated continuously and refined, as necessary. REFERENCES BLS (Bureau of Labor Statistics). 2000. Consumer Expenditure Surveys. Available on line at: http://stats.bls.gov/csxhome.htm. November 7, 2000. DOE (U.S. Department of Energy). 1999. Annual Energy Outlook with Projections to 2020. Available on line at: http://www.eia.doe.gov/oiaf/aeo99/preface November 7, 2000. IOM (Institute of Medicine). 2000. Clearing the Air. Washington, D.C.: National Academy Press. MHI (Manufactured Housing Institute). 2000. Industry Statistics, Manufacturing Report. Available on line at: http://www.mfghome.org/MC_industry_statistics.html. NAHBRC (National Association of Home Builders Research Center). 1996. Annual Builders Practices Survey. Upper Marlboro, Md.: National Association of Homes Builders Research Center, Inc. NAHBRC. 1998a. Background Research Papers on the Home Building Industry Compiled for PATH. Upper Marlboro, Md.: National Association of Homes Builders Research Center, Inc. National Safety Council. 1999. Report on Injuries in America. Available on line at: http://www.nsc.org/lrs/statinfo/99report.html November 7, 2000. NRC (National Research Council). 1993. Indoor Allergins: Assessing and Controlling Adverse Health Effects. Washington, D.C.: National Academy Press.