Insights Industry Insights Financing a Key to Recovery

       

Manufactured Housing: Financing a Key to Recovery

A manufactured home is a single-family house that is constructed using assembly-line techniques in accordance with the Federal Department of Housing and Urban Development (HUD) construction and safety standards in a factory environment rather than at the home site. There are two basic categories of manufactured housing: single-section and multi-section. Today's manufactured homes offer many features typically associated with site-built homes, such as central heating, name brand appliances, quality carpeting and cabinets, walk-in closets, vaulted ceilings, attractive wall coverings and porches. Optional amenities include fireplaces, wet bars and spa tubs, as well as retailer-installed options such as central air conditioning, garages and furniture packages.

SUPPLY

Shipments declined to a 46-year low

The manufactured housing industry grew significantly from 1991 to 1998 but has deteriorated since then. According to the Manufactured Housing Institute, domestic shipments increased from 170,713 homes in 1991 to 372,843 homes in 1998, before declining to a 46-year low of 95,752 in 2007. The growth in the late 1990s was fueled, in part, by liberal credit standards and by lenders eager to participate in a growing market. These trends quickly reversed when borrower default and repossession rates soared, causing industry shipments to fall dramatically over the following five or six years. Today, shipments have continued to decline, although at a much reduced rate.

Retail volumes continue to decline

The manufactured housing industry is cyclical and it is affected by general economic conditions and consumer confidence. For the most part, the industry has worked through the issues created several years ago related to excess manufacturing and retailing capacity, high dealer inventories, and competition from repossessed units being resold at greatly distressed prices. Dealer inventories and levels of repossessed homes are now more in line with current shipment levels but enforcement of very stringent consumer credit standards has constrained some potential buyers of HUD-Code products. Retail volumes continue to be below the levels of the late 1990s, however, due to the replacement of loose credit practices and relatively low interest rates with unusually tight credit practices and relatively high interest rates. In response to the scarcity of financing nationwide, the industry has trended toward more "land and home" or mortgage-type financing.

Industry bankruptcies

There are approximately 1,200 prefabricated home manufacturers in the U.S. The four industry leaders are Palm Harbor Homes, Clayton Homes (Berkshire Hathaway), Champion Enterprises and Fleetwood Enterprises. The industry has experienced a significant decline as sales have decreased over recent years resulting in closures as well as the bankruptcy filing of Fleetwood in March 2009.

DEMAND

Shifts between multi-section and single-section homes

The increased availability of fully featured homes that remain affordable, combined with scarce financing for single-section homes, has caused the mix of manufactured housing products to shift toward larger, multi-section homes, which accounted for 68% of industry shipments in 2007, up from 47% in 1991. This shift to higher-priced units contributed to an overall increase in total retail sales from approximately $4.7 billion in 1991 to more than $5.7 billion in 2007, despite reduced industry volumes. More recently, single-section homes have experienced an uptick while multi-section homes have declined. This is attributed to the slowdown in the site-built market, which has delayed the movement of potential customers, oftentimes retirees, who want to downsize from a site-built home to a manufactured home.

Demand decreasing in response to financing challenges

Interest rates for the financing of manufactured homes are generally higher and the length of loans shorter than for site-built homes. In addition, some lenders have stopped extending loans to manufactured housing buyers. This has had the effect of making financing for manufactured homes even more expensive and more difficult to obtain than financing for site-built homes, which had enjoyed a period of sustained low interest rates and liberal lending practices until the beginning of calendar 2007. Competition from plentiful sources of traditional, site-built mortgage financing, which enticed home buyers with adjustable low-interest-rate and interest-only loans, minimal down payments and nominal documentation requirements, also curtailed demand. The recent turmoil in the subprime sector of site-built home financing may narrow the disadvantage experienced by manufactured housing.

Limited retail financing available

Industry manufacturing and retail capacity have been reduced significantly in response to the financing environment, but manufacturing capacity in the industry still greatly exceeds current retail demand. More than half of the retail lending capacity available in 2000 has exited the business. Although a few lenders have entered the market since late 2003, the volume of financing is still insufficient and has not yet translated into higher shipments. Ultimately, the availability of reasonable retail financing will be a key to an industry recovery.