While home buying is down, housing prices remain high as inventory remains low. This has caused a boom in the construction of Accessory Dwelling Units (ADUs). The state of California recently passed legislation that allows homeowners to build and sell ADUs on their own residential lots.

Mike McNamara, Samara CEO, joins Yahoo Finance to discuss how his business aims to capitalize on this phenomenon by building customized units for prospective buyers.

McNamara explains the soaring demand for ADUs: "Adding just the cost of the unit itself on to the backyard and be able to get full rental income is very attractive, and it almost creates an immediate free cash flow impact for many areas of California. So what California does is trying to stimulate this housing, more and more housing units. It's affordable by nature because the units are smaller so they tend to rent for less or cost less to build, and so it appeals to many different customers. But the demand for these ADUs on the back of all of these law changes, since 2016 to now, has gone up right about 20x, and it's currently the largest permit request for this form factor is the highest of any in California right now."

For more expert insight and the latest market action, click here to watch this full episode of Yahoo Finance Live.

Editor's note: This article was written by Nicholas Jacobino

Video Transcript

AKIKO FUJITA: Home sales may be down, but home prices continue to remain elevated. The latest S&P Case-Shiller home price index pointing to a 5 and 1/2% increase. In 20 major markets, the lack of inventory has been a key contributor and that has led to a big boom in the build out of accessory dwelling units or ADUs. California recently passed a new law allowing homeowners to sell ADUs.

And our next guest is looking to capitalize on that by building customized units for prospective buyers, the company Samara born out of Airbnb's R&D unit. And let's bring in Mike McNamara. He is the CEO of Samara. And Mike, you guys have a big announcement today about acquiring a factory over in Mexico so you can vertically integrate the operation. What does this mean about your ability to respond to this demand?

MIKE MCNAMARA: Yeah. Hi, and thanks for having me here. We did just announce that we're going to-- we brought on 150,000 square feet in Mexico to actually build our units. And what's really exciting about that is that we now-- within our company, we design, we engineer, we manage supply chain and we now manufacture the units that we build and these are-- we design and we install these beautiful flexible living spaces that people can use in the backyard.

And gives them more ways of being able to operate their life's activity. So the fact that we actually own our manufacturing is really interesting because we now can control the quality. We can control on time delivery. We can control whatever products we want to put into it and our product development cycle time gets much more rapid, because we control all those aspects. So very excited to bring that online.

AKIKO FUJITA: And Mike, for those who haven't necessarily been following Samara's story or this growth in ADUs, talk to us about what units we're talking about, how big are these units and what's the price point you're looking at?

MIKE MCNAMARA: Yeah. Yeah, I mentioned, we like to think about, we're a company that helps people with new ways of living. And one of the most important ways of living is to have a flexible living structure that maybe you can put into your back yard. So what we do is we design these small homes if you will, which today we have a line up of a studio, a one bedroom, one bath, a two bedroom, one bath and a two bedroom, two bath that we're actually announcing this week.

And these are anywhere from 400 square feet to 800 square feet. And you can pop these into the backyard. So if you think about an extraordinarily flexible way to add living space to your home, you've already have a backyard. You've already bought it. It's already part of your cost structure. Why not be able to use your yard in a much better way, both financially and qualitatively?

So what we do is we build these units. As I mentioned, we'll build these in Mexico. And then we just drop them onto the backyard and the entire process takes literally like six weeks to actually be in your backyard. Do the construction of-- so we can hook up the utilities and then be able to truck in the unit into the backyard.

AKIKO FUJITA: And Mike, for years, we have seen ADUs serve as a way for homeowners to be able to get additional income being able to rent out that space, especially with home prices so high, in places like California. We've seen a change in regulation that allows for homeowners to now sell those units themselves. What has that meant for Samara, specifically? Has that pushed up demand even more?

MIKE MCNAMARA: Yeah. And what's really driving this is the California home prices as you know, are very high. And with high home prices comes high rental income. So the ability to bring on more housing units is a real objective of California. They've passed many of these different regulations and laws that enable-- and dozens and dozens in 2016 that enable customers or homeowners to be able to add this capacity to the backyard.

About half the time, the customers may use these for rental income. And because you've already bought the land, you've already owned the backyard, adding just a cost of the unit itself onto the backyard and be able to get full rental income is very attractive. And it almost creates an immediate free cash flow impact for many areas of California. And so what California's does is try to stimulate this housing more and more housing units.

It's affordable by nature because the units are smaller. So they tend to rent for less or they cost less to build. And so it appeals to many different customers. But the demand for these ADUs on the back of all these law changes since 2016 to now has gone up right about 20x. And it's currently the largest permit-- the permit request for this form factor is the highest of any form factor in California right now.

So it's a way for them and it's a tool. It's a vehicle that they make these law changes and that more, and more people will take advantage of it because the economics are so strong. And that it's one way to address some of the housing shortages in California.

AKIKO FUJITA: So Mike, California's led the way on this but there's obviously a lot of other markets that have been looking specifically at ADUs. For Samara, where are your other growth markets right now within the US?

MIKE MCNAMARA: Yeah. We think it's going to pretty much start with California just because of the housing stress. But even independent of the housing stress, this is a representation of a new way of living. So only half the time they're actually rent it out. But to actually have this flexible living space right in your backyard allows you to do many different things to actually operate your life.

The average homeowner in California is there for 17 years. And over the course of 17 years, you might use it for income on demand. You might rent it out for three months or six months, or next year or two years from now at your convenience. But you also might bring your parents back there to live. You might use it when your kids come home from college to help them get started. You might use it for a yoga studio. You might even be a pandemic someday.

And work from home is going to become a thing. But all the while, that unit sits in that backyard, you're appreciating. I mean, it's actual real estate. So you would expect it to appreciate right along with the front of the house. So just in terms of a very cost effective way to bring on the opportunity to either have income on demand or to be able to use it in many different ways to just design a better life for yourself is very high.

So when we think about the other regions, get back to your question on what are the other growth market. Certainly, anywhere where there's going to be housing stress is helpful. But we also think that this is a form factor that people are going to use to operate their life in the future. So independent of the housing stress that may be occurring in the incremental rental rates that are going on, we do think people will adopt this as a different way of living, to have this super flexible space, to be able to have 500 square feet in your yard, use it for many different ways over the course of the decades and also be able to rent it out.

AKIKO FUJITA: It's been-- yeah, pretty impressive to see some of these ADUs and open houses I've gone to. Oftentimes looks better than the actual main unit. But Mike McNamara--

MIKE MCNAMARA: You need to-- you need to come to ours.

AKIKO FUJITA: --talk to you today.

MIKE MCNAMARA: Yeah, thank you.

AKIKO FUJITA: Yeah, I'll definitely have to check out Samara's build out there. Thank you so much for joining us today.

MIKE MCNAMARA: OK. Thank you.