Why It's Still So Expensive to Build Homes in America

24:52But there is that trade-off is that you're not getting those geometric effects that traditionally like a lot of this like processing type equipment has relied on to get cheaper. This actually reminds me of something I wanted to ask, not necessarily about nuclear, but just manufacturing in general. When I think about efficiencies, I think about stuff like reducing costs as much as possible, maybe just-in-time inventory management and stuff like that. The problem is that if something goes wrong, there's very, very little cushion for protection. And I'm curious, when it comes to efficiency, how do people balance streamlining production with, I guess, building in redundancies in case the worst happens.

25:32Yeah, that's that's really interesting. And the Toyota production system slash lean, which is like a descendant of it, which I talk a lot about in the book, is kind of an interesting balance of these two things, because everybody thinks lean or Toyota production system. It's like, oh, yeah, just in time, get rid of inventories. You don't have all the costs. Your factories can be smaller, blah, blah, blah. But really what it is, it's sort of a balance of like for every factor that you can control, try to like have like the flow be like as smooth as possible and eliminate all this like, you know, slack and waste in the system.

26:03But for the things that like you can't control, you should have your system adaptable to sort of accommodate that and be have sort of a flexibility built into it. So like one example is after the sort of, you know, to bring it back to nuclear after I believe the sort of Fukushima nuclear accident in Japan, And Toyota had a ran into like a shortage of like automotive semiconductors for a while. And they realized that this was like a big like potential like just bottleneck in their process. So after that, even though they're like so focused on, you know, inventory minimization and whatever, after that accident, they basically decided they were going to like stockpile certain critical things that maybe had difficult lead times or something like that.

26:46And so they stockpiled like automotive semiconductors. And so during COVID, when all of a sudden there was all of a sudden a huge shortage of like automotive semiconductors, Toyota for a while was like much less affected by some of these other car manufacturers because they had learned the lesson that, oh, yeah, in sort of logistics crunches, these semiconductors can be quite difficult to get. And so basically people were saying, hey, I thought you were all about like inventory minimization or whatever. But then somebody, you know, some spokesman basically responds like, no, this is basically a standard lean solution where it's you try to minimize the sort of waste in the sort of areas that you can control.

27:23But in the stuff that you can't control, you need to sort of adapt your system to accommodate it. I want to talk more about housing, but I want to do a little detour. America seems to have gotten, because I'm trying to understand sort of big picture the trajectories in this country for various things. You know, I joked in the beginning, the problem with housing is that we haven't found a way to offshore it to China. If we did, then probably housing would have gotten cheaper like everything else that we have manufactured there. But I'm curious, do you have like a theory, because I have heard a satisfactory answer, why the U.S.

27:55seems to have gone backwards in plane construction? Like, why does Boeing seem to be worse at the job of building an airplane than it was, say, 20 years ago? Oh, yeah, that's interesting. One point about your housing construction in China. There actually are companies that like try to do this stuff in China. They will like manufacture these modules. But again, to my point about, you know, you incur all these extra costs. Yeah, shipping and all that stuff. You know, they have to break them into modules and put them on these boats and bring them over. So it's, you know, it's a very sort of niche business.

28:22In terms of Boeing, I mean, the standard, you know, story there is that they went into this merger with McDonnell Douglas. The finance people. I don't like the standard story. Yeah. And here's why, because I love it so much, right? And so it's like, oh, it's such a good story. It's too perfect. It's too perfect. They brought in the finance people. They care about the shareholders too much. Looking at the Boeing stock chart, you would not think this is a company that cares a lot about shareholders. Right. They care about shareholders too much. And if they had just stuck with the engineers, I love that story.

28:51And because it feeds all of my biases, I'm like skeptical. Yeah. And, you know, a big part of it is just manufacturing commercial aircraft is like extremely hard. There's like a reason that only like right now to maybe three, maybe four companies in the entire world do it. Boeing, Airbus, Embraer in Brazil, of all places. And then And Comac looks like it's going to be the big fourth one. You know, Japan tried for many years to sort of break into the commercial aircraft manufacturing market. And they were, you know, after spending like billions of dollars, they were basically gave up just because it was so difficult.

29:27There used to be many more competitors in the 1970s, and they sort of got winnowed down one by one, one or two plane projects that don't pan out. And you're basically out of business. That's essentially what happened to Lockheed. And so it's just a very, very difficult business to sort of be in. And so Boeing is having a lot of struggles right now. But, you know, earlier in the 21st century, you have Airbus having a lot of struggles. They had all sorts of problems, I think, on their A380 that they were rolling out. They had a lot of delays and stuff they had to fix on it as well. So a big part of it is just it's a very difficult business to be in.

30:02There's very few people that can kind of really do it effectively.

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32:22Do that with the all-new Adobe Acrobat Studio. Learn more at adobe.com slash do that with Acrobat. Here's a question that I've wondered about, and maybe it relates to planes and maybe it relates to housing. Maybe it relates to other things. Like when you see us going backwards or stalling out, like here's my question. Could we have some sort of I don't know if Dutch disease is the right answer, where it's like maybe in the middle of the 20th century, there were people who were working on the floor or working in management at Boeing in a plant somewhere in Washington, who are really on the ball and really whatever.

32:57And now in that same person in 2025 could make 10 times as much money working for a startup in Silicon Valley or Wall Street, et cetera, that there's some sort of like levels of, you know, awareness or skill or agenticness or whatever, et cetera. And that because we have these other areas where there's so much money that there's like a type of individual who used to maybe work in a sort of construction related field that left that. And then it's changed the talent distribution. Yeah, I think that's definitely a part of it. There's like a theory in certain circles that we've just we've gotten like, in a sense, too good at like allocating talent efficiently or whatever.

33:34So like somebody extremely like talented and smart, it's like, OK, we're going to send you to be a software developer or an AI programmer or work in finance or whatever. And you're the value that you contribute there is going to be very highly rewarded. But what that means is like there's you know, there's fewer people going into sort of these other sort of, you know, engineering disciplines. I worked as a structural engineer, which is, you know, it plays reasonably well, but it doesn't, you know, not Silicon Valley software developer salary. And I used to sort of tell very young engineers or engineers thinking about in college or whatever, I used to say, you know, if you're smart enough to be a structural engineer, you're smart enough to, you know, switch to like software development and make a lot more money and have a much less stressful job.

34:13Yeah, there's like there's like this is, I think, one part of the reason why, you know, Bell Labs, very famous AT &T R &D Lab, the U.S. invention factory for most of the 20th century. Why it would be very hard to have a sort of organization like that today is because the quality of talent that you could a place like that demanded would be so much more rewarding. They'd be getting those hundred million dollar money deals. somewhere else. Just quickly on aircraft. It's not like the U.S. doesn't have a history of producing like large scale amounts of planes. And the example that everyone tends to turn to is in World War Two, right?

34:50We produced, I think, hundreds and thousands of aircraft very, very quickly. What were the conditions that existed back then that allowed us to ramp up that kind of production so fast? Yeah, I've written about aircraft manufacturing during World War Two. The The U.S. actually built more airplanes during World War II than have actually been built during for commercial purposes for the entire history of aviation. It's because we built, you know, so many of them and not that many commercial aircraft get built. I think a big part of it is just the U.S. was just such a huge manufacturing power at like the mid 20th century.

35:26You know, we weren't building very large amounts of airplanes, but we were building more cars than anybody else. We're building more machine tools than anybody else. were making more steel than any of the U.S. was like, you know, the China of today. It was like by far the largest manufacturing country in the world. And so we just had the ability to sort of redirect this manufacturing capability and talent into sort of these new industries. I think that was a very large part of it. You know, people think about it's maybe since we're talking about war, we're talking about the U.S. is the China of the 20th century, which is kind of funny.

35:59It sounds very Eric Adams, doesn't it? The U.S. is the China of the 20th century. I'm curious when you think about it, like, can there be more than one global manufacturing hub? Because when you think about economies of scale and you think about network effects, you know, it's like how many other cities in the U.S. have tried to be the San Francisco or the Silicon Valley? And they've never you've really never replicated. When you think about sort of agglomeration and network effects, et cetera, and you think about what it takes for manufacturing and you think about, OK, now in the 21st century, China is the China of the 21st century.

36:30And you think about the efforts at U.S. sort of re-industrialization because there's all this angst about whatever we can't build advanced things. It's like, well, can we have advanced things if we don't also do the simple things like washing machines, et cetera? Can there be more than one in the world at any given time? Or does market logic sort of dictate that one will be the powerhouse? Yeah, that's a really interesting question. And so my first answer is that I don't know. And the second answer is, I think historically kind of what you see is that like transportation costs have kind of been something of a barrier to preventing one country from like just dominating production of a certain thing.

37:10So even like when in the 80s and 90s, when Japanese like car manufacturers were like trouncing the U.S., it was still so expensive to like ship them from Japan or whatever that, you know, they still it was still valuable to like set up local manufacturing operations in the U.S. They still wanted to build their plants in the U.S. to sort of make it not so expensive to sort of transport these things. So I wonder if like as transportation has gotten more and more inexpensive, I wonder if that has like shifted the logic of this. And you can have this sort of like concentration of production in a way that maybe it wasn't quite didn't quite make sense to do before when like these transportation costs bit a little bit harder.

37:53I don't know, but it's an interesting way of your interesting question. Just going back to Boeing for a second. So we talked about the classic story of what went wrong at Boeing, and it's that tension between, I guess, the manufacturers on the ground and the executives in the boardroom who are trying to cut costs and boost the share price and things like that. Is that like a trend or a thing that you tend to see across manufacturing where the manufacturers are constantly under pressure from the finance execs on the top? Or are there companies out there who have like cracked that relationship where finance and manufacturers, engineers kind of work together?

38:29Yeah, I think the pressure definitely seems to be constant pushing to find lower costs, which is one reason why the trend in the second half of the 20th century was just outsourcing, finding new places to make this stuff that is cheaper. I talk about Nike in the book, and there's sort of an interesting path that Nike takes where it's like constantly hunting the cheapest sources of labor where they start out manufacturing somewhere cheap, right? They start out manufacturing their shoes in Japan because it's much cheaper to make them there than in the U.S. But then as Japanese labor starts getting more expensive, they move their manufacturing to Taiwan and then from Taiwan to China.

39:06I think now it's almost all done in like Vietnam and Indonesia. So it's just constant hunt for the new sources of labor. And you see that just broadly across industries like we're in New York, which used to be sort of a garment manufacturing center. But as New York labor got more and more expensive, they moved, you know, first, you know, out of state into New Jersey and then to the south and then overseas. So there's this constant pressure. But then there's also companies that have like, I think, bucked that trend and been, you know, more like we think the returns from like investing in our workforce and its capabilities is going to be valuable enough that we're going to do it.

39:45I think, you know, a company like Nucor, which is a steel company in the U.S., which is like very famous in terms of like how it invests in its workforce and things like that. And they've been extremely successful in doing that. They grew from nothing to being the largest steel manufacturer in the U.S., I believe. That just reminded me something that I really want an answer to. And you might actually have it. Why are communists obsessed with steel? Oh, good question. I just think in, you know, sort of the early 20th century, late 19th century, these were the things that like represented like industrial might and like successful country or whatever and then they never kind of like got out of that sort of framework or whatever so like one criticism of i you know the soviet union was that you know they were really maybe good at sort of building these like industrial things but they never managed to build like a successful computer or anything like that they couldn't get out of their sort of mindset it's it's sort of maybe easy to measure like success in terms of like output or whatever.

40:43It's just like relatively, relatively simple commodity that you can. Right. This physical thing you can point to. You can point to the more tons you have, the better you've done with more complex things. Maybe it's not maybe so amenable to sort of this like top down management style. I don't know. But those are some of my theories. Let's get back to housing, because when we started and Tracy was talking about the fact that even setting aside the prefab stuff and you're talking about it, The actual on the ground, one off, et cetera, home building, it's arguably by some measure, productivity has gone backwards or maybe it's flat.

41:16Setting aside like prefab, you mentioned zoning, regulations, et cetera. What is your view for why just the normal sort of style of housing construction hasn't gotten any more efficient over the years? Yeah. And so I talk about the kind of this in the book. This goes to sort of the main thesis of the book where I sort of break down. There's a specific points of intervention that you can do in any process to make it cheaper. I've talked about these a little bit. You know, economies of scale, you can make more of what you're doing. You can introduce some like fundamental new technology. You know, an example of this to talk about steel, like the Bessemer process for making steel, which like fundamentally was simpler and took less inputs than the processes that that came before it.

41:57So I kind of break down these different factors in the book of like what you need to do. to make some process more efficient. And if you can do those things, your process can get cheaper and you can sell it for less. And if you can't do those things, you can't make the process any cheaper. And all those basically paths to improvement are either blocked or very difficult to do in construction. So we talked about economies of scale. That's a big one. We talked a little bit about risk aversion. It's hard to kind of introduce fundamentally new technology. The cost of your inputs is like a big one, you know, the materials and sort of energy and labor that you're using in the process.

42:35Those costs are hard to sort of reduce in construction, sort of. It's very hard to make building materials any cheaper than they already are. I'm kind of in like, you know, dollars per pound or dollars per like cubic foot terms. They're basically as cheap as anything that civilization produces. It's not easy to make those things cheaper than they already are. It's also hard to use less of them in a way that doesn't make the house worse. And so all these paths are that you have, you know, that a process can take advantage of to sort of get less expensive. They're all very difficult to do in construction.

43:11I just remembered another question that I always want to ask people, and I feel like you will also know the answer to this one, which is why does America build houses out of wood frames and timber versus the rest of the world where they tend to use a lot more cement and concrete? Yeah. So the wood, U.S. has historically built a lot of stuff out of wood because we had such huge supplies of it. In places like Europe, a lot of those large forests got cut down way earlier. And so they just didn't have the huge, huge supplies of wood that the U.S. had. And so that kind of shaped how the technology developed.

43:45Because wood is very, very inexpensive. You can use it. It's a very inexpensive way to sort of build a house. They do actually do sort of still timber frame construction in other parts of the world. It's maybe not quite so dominant, but it's like used in the UK. Germany uses it. Germany, actually, they have some like prefab construction startups that are using like timber frame, timber panel construction. It's used in a lot of the Nordic countries that have a decent amount of supply of wood. So it's not like unheard of. It's most dominant in like the US and in Canada, but in other places that have a decent amount of wood, they tend to use it as well.

44:17Should we completely give up on prefab or major efficiency gains in housing in the U.S.? Or like, is it just there's not a way to do this? Or is there still out there some magic bullet that's waiting to be found? You should tell us what happened to the company you were working for as well. Yeah. So they raised a huge amount of money. And they basically, after raising several billion dollars and building all these factories to mass produce housing, they basically ended up going bankrupt, partly because they were never able to sell enough of these buildings that they were trying to sell. It's very hard to pivot your operations when you're invested in all this physical infrastructure.

44:57And then COVID was kind of the final nail in the coffin. I'm not completely pessimistic. I mostly just think if you're going to sort of try to change the industry with prefab, you need to have a very strong thesis as to what specifically this time is different and why it didn't work previously and what is now has changed, what constraints have been relaxed that will make it possible now. And I don't have any number of things could change that. Certain materials get cheap enough. It gets inexpensive enough to build a factory, you know, any number of things. I think that very, very good automation and robotics have a good chance of changing this just because even if nothing else, you know, I'm not the most creative person in the world.

45:38You know, I can't necessarily come up with like some amazing new way of putting a house together. But if even if nothing else works, if you have like a robot that costs$5 ,000 and like basically duplicate, you know, 90, 95 % of what a person can do, that would effectively solve your problem, right? You drop in these robots and you build, you know, whatever it is that you're trying to build using this robotic, much less expensive labor. And I have a sort of vignette in the conclusion of the book as to what that might look like in the future. So we could get the drones that go up on the roof and fix leaks and stuff like that.

46:11Anything's possible. All right. Brian Potter, thank you so much for coming on All Thoughts. Really appreciate it. Thank you. It's great to be here.

46:30Joe, that was a really fun conversation. Yeah, that's really fun. I love Brian's stuff. And I feel like one of those conversations where both of us could just ask a bunch of questions we've been meaning to ask for a long time. I did read, apparently his new book, The Origins of Efficiency, has a bibliography that's like 600 items long. Which is incredible. to think about him pouring over like 600 different reference sources. We didn't get into it in this conversation, but he's written about his process before. Like, OK, I want to learn about some new industry like fighter jets or whatever it is and how he goes about diving into it, etc.

47:08And yes, it seems like you have to talk about stuff. I should probably read that. Yeah, totally. Speaking of which, I am very proud of us for not mentioning the word deflator at all in a conversation about housing productivity, housing construction productivity. I should just mention that Richmond Fed paper that I talked about in the intro. So their conclusion was sort of an amalgamation of all the factors that we talked about in this conversation. So they basically said they think that smaller construction firms have reduced incentives to invest in technological innovation because you don't get that economy of scale.

47:45And in fact, if you look at areas with stricter zoning laws and things like that, you can see that they actually have even less construction productivity than other areas. Again, because like the incentives and the economies of scale just shrink and shrink and shrinks. That's kind of interesting. It would be interesting. Something I was sort of curious about during that is I wonder if if you just look at one market where it's very flat and dry, I was thinking about Arizona or something like that. Like, have they seen productivity gains there, especially thinking about some of our conversations with Chase Emerson, where there's one master plan and a bunch of houses.

48:18We all have driven by them that all look exactly the same. Do you get those learning curves, at least on some limited effect? I would be curious about that. I feel like to some extent that is the story of the Sunbelt states, right? You have cheaper houses there because you can have these big developments. But it's scale. It's scale all the way down. And so I like that point that he made, which is that you can identify the sources of efficiency gains. It's scale is one. A scientific breakthrough, such as the best of our process in steel, is another one, etc. But they're not magic. They're not just going to emerge.

48:52You probably get some efficiency gains just from a repeatable process or a labor force that gets better over time. But by and large, the silver bullet isn't going to come out of nowhere. And especially the fact that there are all these sort of very fundamental reasons why you can't have scale or even the factories that build the prefab homes cannot be a gigafactory due to distribution costs. You see why you run into that constraint. That's what I was thinking. It's like the tyranny of physics, basically. Like, even though we have all these technological breakthroughs, transportation has gotten cheaper over time, you're still limited by geography and the realities of, you know, real world objects.

49:33And I guess that's why you can have gigafactories for something like chips, which are really easy to send abroad. They're tiny, but you can't do it for something large. And I really am curious about the sort of the point about talent distribution and whether they're, you know, in the 1950s for a certain type of talent, the Boeing factory was the best place they could have gone. That was the cutting edge. And that was the cutting edge. And now the Boeing factory still more or less resembles the Boeing factory of the 1950s with maybe similar pay scales and so forth. I'm sure the nominal pay has gone up a lot, but there are just so many great opportunities to make 10 times or much more money elsewhere.

50:11And so the sort of remaining talent, whether that has an effect on how well it can operate, I'm very interested in. You know what Boeing needs? Go on. They need like a Mad Men style TV series that glamorizes the aircraft manufacturing process and gets people interested in it again. Yeah. No, that's a really good idea. All right. That's a free idea for Boeing. All right. Shall we leave it there? Let's leave it there. This has been another episode of the All Thoughts Podcast. I'm Tracy Allaway. You can follow me at Tracy Allaway. And I'm Jill Weisenthal. You can follow me at The Stalwart. Follow our guest, Brian Potter.

50:43He's at underscore Brian Potter. Follow our producers, Carmen Rodriguez at Carmen Armand, Dashiell Bennett at Dashpot, and Kale Brooks at Kale Brooks. For more All Thoughts content, go to Bloomberg.com slash All Thoughts. We have a daily newsletter and all of our episodes. And you can chat about all these topics 24-7 in our Discord, discord.gg slash All Thoughts. And if you enjoy Odd Thoughts, if you like it when we talk about how stuff gets built, then please leave us a positive review on your favorite podcast platform. And remember, if you are a Bloomberg subscriber, you can listen to all of our episodes absolutely ad-free.

51:15All you need to do is find the Bloomberg channel on Apple Podcasts and follow the instructions there. Thanks for listening.

51:32Thank you.

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