The modular building system is different from traditional construction in that buildings are constructed out of boxes, called modules, which are constructed off-site, transported to a building lot, and assembled into a finished home. All of the materials, from framing, roofing, and plumbing to cabinetry, interior finish, and electrical, are identical to what you would find in a conventional stick-built home. The most striking thing about a modular home is nothing you can see, nor how it is constructed but rather where it is made. The modular building system takes place entirely within a modern factory.

Modular homes built with the modular building system are one of four building systems that compete with traditional construction. The other three building systems other than the modular building system are precut homes, panelized homes, and manufactured homes. All four building systems involve some type of factory work.

Stick built homes are constructed from individual sticks such as 2 x 4's or 2 x 10's that are delivered from a lumberyard and cut to size and assembled at the building site. Since stick-built homes are constructed on-site, they are sometimes called site-built homes.

Precut homes are assembled out of the same basic sticks as conventional homes except that the correct pieces are preselected and cut to size at a factory. Of the four building systems, precut "kits" provide the least factory assistance to the builder, since the factory does not assemble any of the building materials.

Panelized homes are constructed out of factory-built wall panels that are typically 8 feet tall and 4 to 40 feet long. Some panelized systems include plumbing, wiring, and insulation already installed in what are referred to as "closed panel systems" while others include only the framing and exterior sheathing. These are called "open panel systems". The panels are assembled into a home by using a crane to set them onto the foundation.

Manufactured homes, also known as mobile homes, are similar to modular homes in that they are made out of boxes. This similarity accounts for much of the mistaken impression that the two building systems produce identical homes. The fact that both types of homes are manufactured in a factory also confuses people. The differences between modular and manufactured housing, however, are quite substantial.

Manufactured homes are built only to preemptive federal codes governed by the U.S. Department of Housing and Urban Development (HUD), which among other things requires that they be constructed on a nonremovable steel chassis. Modular homes, along with stick, precut, and panelized homes, are always build in compliance with state and local building codes which are much more strict than federal codes. Furthermore, state building codes and local zoning regulations significantly limit where manufactured homes can be erected, but they do not constrain where modular home can be built.