In a novel attempt to tackle its persistent housing shortage, California is considering an unprecedented move into the construction insurance business. A bipartisan group of lawmakers last week introduced a slate of bills aimed at encouraging cost-saving innovations in construction, with a keen focus on an industry that has long promised more than it has delivered: factory-built housing.
Proponents have argued for decades that building homes in factories and transporting them to their final destination could revolutionize the housing market. The potential advantages are significant, including faster construction times, safer working conditions for labourers, and lower overall costs that could translate into more affordable homes for Californians. Despite this long-held optimism, the industry has failed to achieve production at a scale that would make a meaningful impact on the state's housing supply.
Boosters of the industry point to a web of regulatory and financial hurdles that have stymied its growth. The new legislative package, championed by Oakland Democrat Assemblymember Buffy Wicks, seeks to untangle some of that red tape. While most of the bills focus on standardizing regulations, one proposal, Assembly Bill 2166, takes a markedly different and more direct approach.
A ‘self-reinforcing cycle’ of risk
Co-authored by Wicks and Assemblymember Juan Carrillo, a Democrat from Palmdale, AB 2166 aims to de-risk investment in modular construction by creating a state-backed insurance guarantee. The bill targets what its text describes as a "self-reinforcing cycle" that has trapped the nascent industry, sometimes referred to as a "doom loop."
Construction is an inherently risky and capital-intensive business. To protect their investments, developers and lenders often require contractors to secure surety bonds. These bonds are a form of insurance where a surety company guarantees that if a contractor fails to complete a project, the insurer will cover the financial losses. This assurance is critical for project financing.
However, many new or smaller factory-housing manufacturers have difficulty securing these bonds. Surety companies are hesitant to back businesses without a long, proven track record of financial stability and successful project completion. But without the ability to secure bonds, these factories cannot win the contracts needed to build that very track record. This cycle makes lenders and developers wary, further chilling investment and preventing the industry from scaling up.
A bonded project is one that ‘puts the developers and the lenders at ease’. If any portion of the project fails, they are not going to be holding the bag.
How the state would step in
The proposed legislation would see California act as a re-insurer. Under AB 2166, the state would agree to cover a portion of the payout if a surety bond is invoked under certain "extreme" circumstances. The specific details, including how large the state's share would be and what qualifies as an extreme event, are still being developed.
The fundamental hope is that by providing this backstop, the state will make surety companies more willing to insure factory-built housing projects. This, in turn, would give developers and their lenders the confidence to partner with these manufacturers, creating a steady stream of business that allows factories to ramp up production, lower costs through economies of scale, and finally begin to meaningfully address the state's housing deficit. The state has long struggled with housing affordability, and crises in other sectors, such as falling enrolment in public schools, are often linked to the high cost of living.
"This is the first time I have seen something like this be suggested, drafted and potentially implemented by a state for housing," said Tyler Pullen, a researcher at the Terner Center for Housing Innovation at UC Berkeley who has provided technical assistance on the bill package. While acknowledging the bill is the "most open-ended and technically complicated" of the bunch, he noted the idea consistently arose during interviews for a recent Terner report on industrialized construction.
While novel for housing, the concept of government-backed guarantees is not new. The U.S. Department of Veterans Affairs and federally-sponsored companies like Fannie Mae and Freddie Mac guarantee private mortgages, and the Small Business Administration guarantees surety bonds for small businesses. The idea is to use public-sector stability to unlock private-sector activity, a challenge not unique to California; even in growing cities abroad, like those in New Zealand, challenges with scaling infrastructure for major events are common, as seen when the popular Polyfest Māori stage had to move indoors after outgrowing its venue.
Scepticism and alternative solutions
Not everyone in the development community is convinced that insuring insurers is the most effective solution. Some proponents of factory-built housing argue that the state’s intervention may be misplaced or could benefit the wrong players.
Ryan Cassidy, vice president of real estate at Mutual Housing California, a Sacramento-based nonprofit developer, questioned the bill's focus. His organization is already committed to using factory-built housing and contracts with established manufacturers like Idaho-based Guerdon Modular Buildings, which has a long track record. "Who are we incentivizing?" Cassidy asked. "We’re incentivizing developers whose only go/no-go is whether the factory stays in business. To me, that’s a developer who is probably not very savvy."
He suggested that a more direct approach, such as providing additional funding directly to projects that use factory-built components, would be preferable. Michael Merle of Autovol, another industry heavyweight, echoed the sentiment that the bill would primarily help newer, less experienced manufacturers who struggle the most to get bonded. His company, with its financial stability and list of long-term clients, rarely has trouble getting coverage.
The implication is that the bill may prop up riskier ventures rather than supporting the established players who are already positioned to scale. The debate highlights a central tension in the state's approach: should it nurture a fledgling industry from the ground up or fuel the growth of its most successful companies?
An uncertain legislative future
The bill is scheduled for its first committee hearing in late April, where lawmakers will grapple with these questions. A major unanswered question is the potential financial exposure for California taxpayers if the state has to make good on these guarantees. The total amount the bill could put the state on the hook for remains undefined. This ambiguity could make some legislators hesitant to tie the state's credit to an industry with a history of high-profile failures.
Despite the risks, supporters maintain that the program could be a temporary catalyst. The underlying premise is that state support is only needed in the short term to help the industry establish a stronger footing and build the reputation it currently lacks.
"This is a problem that could eventually be solved in the private market," Pullen said. If the industry matures as hoped, private insurers may become comfortable offering coverage without a government backstop, and developers may no longer feel the need to demand it. For now, whether state intervention can successfully break the cycle and unlock the promise of mass-produced housing remains a significant ‘if’.
