The Grissim 2008 Report
Note: Annually at the beginning of the year I offer my assessment of the manufactured home landscape to help home shoppers better understand the market conditions they will face in the next 12 months. In addition, monthly during the year I provide word of recent industry developments on the News & Notes pages (e.g., mergers, court cases, new products) that may be helpful to consumers. I recommend browsing at least the previous six to eight months of postings. JG
The manufactured home buyer’s market place today
As I write this, the US economy during the past few months has already been taking some hefty hits as a result of the subprime mortgage meltdown in the mainstream housing sector, causing huge losses and write-downs in the financial markets, not to mention hundreds of thousands of home foreclosures. Upwards of a million or more foreclosures may happen before the housing sector turns around, probably in early 2009. Add rising prices of crude oil that have topped $100 a barrel and the resulting outlook for the US economy for 2008 is fairly grim. Some economists, as well as former Fed chief Alan Greenspan, believe the country may already be in a recession. How severe a recession, if any, remains to be seen.
As for the manufactured housing sector, which accounts for about 6% of the overall housing market, the outlook for 2008 is flat, with some regional exceptions. For example, business is nominally improved up through the middle part of the U.S. In 2006, the total number of manufactured homes (MH) produced was about 117,000. Preliminary figures for 2007 show that total will be somewhere around 96,000–an eight percent drop.
Most manufacturers are not anticipating any significant growth until the housing market in general turns around. Three states that historically lead in MH sales–California, Arizona and Florida–are all down significantly. Only Texas shows a positive trend, up about 25%.
For the prospective buyer of a manufactured home (often erroneously called “mobile homes”), the question is, how do all these events affect me? The answer: the challenges facing the manufactured home industry make for a buyer’s market for prudent home shoppers. Moreover, unlike the conventional housing market, which is suffering from a self-induced credit crisis brought about by years of insanely lax lending standards, the MH industry has been largely untouched, because it experienced its own out-of-control lending spree during the 1990s.
Here’s the background: In 2005 the MH industry finally began to emerge from a severe, painful downturn that began in late 1999. I say “began” because there has been no real rebound. The 1990s boom that preceded that downturn is described in The Grissim Buyer’s Guide to Manufactured Homes and Land, but the gist of the story is, during that decade easy credit and lax lending standards sparked tremendous growth–an average of 300,000-plus homes produced annually, sold through as many as 8,000 retailer sales centers (a.k.a. dealerships).
The party abruptly came to an end in ‘99 when hundreds of thousands of bad home loans began defaulting–the foreclosure rate at one point was running around 50%–triggering an avalanche of repossessions, huge losses, and a 65% industry contraction. The MH industry had no one but itself to blame. They did nothing to discourage the funny money lending spree, took the money and looked the other way, allowing dishonest dealers and fast-buck operators to flourish. There are still a lot of retailers out there who are not to be trusted, even though most are reputable.
Today the marketplace has pretty much stabilized, the number of repossessions is back to a manageable number, and the best-managed companies–and dealerships–have survived. As important, the lending environment, in particular home-only loans (otherwise known as chattel or personal property loans) is once again improving.
Still, things are shaky. Many MH builders are going into this year on the endangered list. In 2007 several players went out of business while others were acquired by stronger companies. You can expect to see more failures this year if the country experiences a recession, but in my view there will be little if any further consolidation.
The problem MH producers are facing is that manufactured homes are costing more (around $65,000 on average for a multi-section home), while site-built homes, especially new single family models, are very competitive, especially as home prices fall and builders lowered prices to cut losses, putting many homes within reach of families for whom manufactured homes would be the only option.
So, overall, whether the housing is site-built or MH, this is a buyer’s market. But gone are the days of easy credit. No matter what type of home you buy, any lender you use will have stricter standards for borrowing. Consumers with less than good credit will find getting a loan very difficult, if not impossible.
This said, today’s manufactured home represents a terrific value–many models built with construction quality comparable to their site-built counterparts look indistinguishable from site-built homes and cost significantly less. That’s the best-kept secret in American housing. And that value proposition may become more attractive as the cost of site-built housing continues to increase.
Manufactured homes are still less expansive than site-built homes, new or used.
What does this mean for manufactured home shoppers? For one, with the median cost of a new single family site-built home now just under $295,000 (existing single family homes are at $215,000), a comparable manufactured home (with land) can be purchased for significantly less. For another, that home can be ready for move-in far sooner, in some cases months sooner. True, these two advantages have long been associated with manufactured housing, but given the great improvements in the construction quality of many factory-built homes in the past decade, here in 2008 many of the best MH models can go toe-to-toe with their site-built competition and hold their own–and at less cost.
The challenge for home shoppers
On the other hand–and there’s no avoiding this–there are still a lot of MH builders out there whose products don’t begin to approach the quality of an entry-level site-built home. And this contributes to the public’s perception that the MH industry as a whole is a provider of poorly constructed, unattractive “mobile homes” that are sold like cars, that don’t appreciate in value, and when placed in neighborhoods of site-built homes, contribute to lower property values. Truth to tell, there are regions of the U.S., parts of the Southeast, for example, where the facts support this perception. The challenge for the home shopper is to separate the wheat from the chaff, to identify amidst a broad range of offerings those home with the quality, value and price points that answer their needs–no easy task.
The 2008 landscape
While the MH marketplace has stabilized, there have also been some changes in the landscape that home shoppers should keep in mind:
Consolidation – As the MH industry has limped along this decade, bigger players went on buying sprees. Clayton Homes, for example, after being purchased in 2004 by Berkshire Hathaway, the huge holding company managed by billionaire Warren Buffet, went on a buying spree, picking up Oakwood Homes and its stable of MH brands (Schult, Marlette and Golden West), followed in 2005 by the acquisition of Karsten Homes, and in 2006 Southern Energy Homes and its subsidiary, Giles Industries). Champion Enterprises, Inc. purchased New Era and its Castle Homes subsidiary. I don’t expect to see any significant acquisitions or mergers in 2008, but I won’t be surprised to see several builders file for bankruptcy. In general, the consolidation has been positive but if any one company becomes too dominant, reducing the competition to niche players, home shoppers will have fewer choices–never a good sign.
The Florida market – In the wake of the brutal hurricane seasons of 2004 and 2006, major home insurers have bumped up their premiums significantly (23% on average), plus many major underwriters such as Allstate and Farmers have all but stopped writing policies on HUD-code homes. Homeowner premiums in the $2,000-$2,300/year range are common. A government-backed program (Citizens Insurance) provides minimal coverage, at around $1200/year. Suggestion: if you can afford to, look into buying your home in a modular code configuration. You’ll pay more ($25,000 - $30,000 and up) but the home goes on a permanent foundation, you don’t pay sales tax, you’ll qualify for cheaper homeowner’s insurance, and you’ll likely qualify for a conventional loan if the home is tied to the property as real estate. Note: The Florida market slowed considerably in 2007 as the post-hurricane home replacement demand has been satisfied, especially given the absence of hurricanes making landfall during the 2007 season.
In addition, the Florida boom in site built homes, apartments and condominiums came to a screeching halt in 2007 as the easy credit crisis kicked in, driving out speculators and marginal creditworthy home buyers. It may take all of 2008 and then some for the inventory of new homes to fall into alignment with the demand, but this will happen–every year some 300,000 people (mostly retirees) move to Florida.
Lending environment – The old easy-credit days (at sub-prime rates) are long gone. Don’t expect their return, ever, but lenders are returning to the marketplace to offer financing, including chattel or home only loans, to creditworthy home buyers. Chattel loans (i.e., personal property loans) are typically around three percentage points above those for conventional home loans (the interest rate in January of this year on a 30 year fixed was around 6.5%). Chattel interest rates range as high as 12.5% but as low as maybe 7%. The average is 9.25% to 9.5%. In my view, any chattel interest rate higher than 6 percentage points above the rate for conventional (i.e., conforming) home loan, is a sub-prime rate (and a blight upon the lending industry – see The Buyer’s Guide). Tip: Texas-based San Antonio Credit Union, www.sacu.com, has an excellent lending program for MH buyers nationally. I’m impressed by them and have heard good things about them from my readers.
Borrowing guidelines are more conservative and home buyers can anticipate loan applications will be scrupulously verified, but these are welcome signs of responsible lending. The MH industry has launched a self-policing initiative called Lending Best Practices (LBP), a program under which banks and finance companies voluntarily agree to follow strict lending guidelines designed to prevent fraud and predatory practices that hurt everyone, especially home buyers.
Encouraging changes for 2008 at FHA and Fannie Mae
Fannie Mae announces “MH Select” initiative
The Federal National Mortgage Association (a.k.a. Fannie Mae), the huge corporation backed by the U.S. government that buys home loans from banks to enable them to replenish the cash they need to continue lending, last fall announced a new initiative, called MH Select, aimed at helping some manufactured home buyers qualify for loans they previously couldn’t obtain. The program, developed in cooperation with the industry trade group, Manufactured Housing Institute, is expected to be available in the first quarter of this year, and makes qualifying manufactured homes eligible for conforming home loan mortgages at interest rates similar to site-built homes. Please see my September 2007 News & Notes issue for details.
Congress passes FHA reform, raising the price of MH loan guarantees
Late last year Congress passed legislation reforming the Federal Housing Administration (FHA) requirements for Title I (home-only or chattel) and FHA Title II (land-home) initiatives. At this writing, the bill is in conference committee to iron out minor differences. Under these programs, qualifying low-income applicants can apply for FHA programs that guarantee manufactured home loans. The limit for a home-only (or chattel) loan increased 43% from $48,600 to $69,678. In recent years fewer than 2,000 such loans were made because the $48,600 figure (set in the early 90s) was far below the current home price. With the guarantee figure increased, there will likely be many more such loans made in 2008. Ask your lender if they think you may qualify. You may be pleasantly surprised because your interest rate will be markedly lower. On the Title II side, the bill removed a requirement that MH on long-term leaseholds be taxed as real estate to qualify for FHA Title II insurance.
Cost of homes – The median price of a manufactured home is currently at $65,000, about $12,000 more than at the start of the decade. Expect prices to ratchet up incrementally through 2009. In 2008 you may experience average $1,500-$2,000 in so-called “materials surcharges” periodically tacked on to base prices, especially if oil prices stay high. Oil prices not only come into play for gasoline and diesel (transport costs) but for a wide array of petrochemical products used in home building, e.g., adhesives, vinyl siding, plastics, fiberglass, acrylics; carpeting, fabrics, and laminate countertops.
Unfortunately, you can also expect MH dealers to use the threat of upcoming materials surcharge announcements to pressure home buyers into signing purchase agreements to “lock in” the current price. Resist this pressure. It’s often a fear tactic. Be skeptical. If necessary call the factory and speak with someone in management to verify any such pending price raise, and how much it will be for the home you’re looking at.
Delivery times – There’s good news here. If you order your home from a factory with options and customization (called a retail sales order) the average time for the home to be built and delivered to your site is four-to-eight weeks. But if the market is hot in your region, factories there have 10-14 week back logs. But with no region especially hot in 2008, you are more likely to find lead times in the 21-to-30 day range, which is good for the homebuyer. Keep this in mind for project scheduling. In contrast, lot models purchased from a dealer are usually delivered to a site in three to four weeks following the close of a deal. Be sure to ask for specifics on the date of delivery to your home site, whether on land you own or a lot you’re leasing in a park (i.e, MH land lease community).
Sales activity - Dealers in hot market regions may be less inclined to surrender much on price during negotiations, but outside of Texas, there are not hot markets, and Texas is only luke-warm. The Northwest, Northeast, Midwest, and mid-Atlantic seaboard regions are experiencing steady, but not remarkable, sales activity. The Southeast in general is flat but the market for low- to mid-priced affordable housing is crowded, and informed home shoppers should be able to benefit.
Sale prices: Prices can vary widely, depending on the region, and the market. Take, for example, Indiana-based Hart Housing Group which sells and ships to 16 states. A Hart dealer in Wyoming, where the economy is strong, may be able to mark up a home by as much as $30,000 to $40,000. But in Michigan, where the economy is in the tank, dealers there may only be able to mark up that same home $15,000.
In the Southeast, it’s not uncommon to find the same home model of a regional manufacturer varying by as much as $3,000 or more from county to county (as Consumers Union has reported). This is because no manufactured home builder in the US dictates what price limits its retailers must adhere to. In fact, manufacturers are notoriously reluctant to put any restraints on their retailers, something not found in the automotive industry business model.
Conclusion
Everything considered, 2008 is a good time to take a close look at these remarkable factory-made homes. If you do your research, shop carefully, negotiate for the best price, make sure your questions are answered satisfactorily, and pay attention to the details (including the fine print), you can truly find the home of your dreams at a significant time and cost savings over site-built.