The Grissim Guides to Manufactured Homes and Land

The Grissim 2009 Report

Note: Annually at the beginning of the year I offer on my web site my assessment of the manufactured housing landscape, principally to help informed home shoppers better understand the market conditions they will likely face in the next 12 months. However, in my role as an independent industry observer, my comments also deal with the state of the industry and the challenges it’s facing, which MH professionals may find helpful. Inevitably, my industry discussion tends to get wonky. Readers looking for specific buying advice should feel free to browse or skip ahead to Now the good news at the latter portion of this report.

For information of industry developments throughout this year (e.g., mergers, court cases, trends), see the News & Notes pages. I recommend browsing at least the previous six to eight months of postings. Finally, the latest Updates & Revisions to the Grissim Ratings Guide to Manufactured Homes, available on this site to owners of the book, contains additional developments concerning individual manufacturers that have occurred since the last printing. Home shoppers would be well advised to check this resource to learn of any changes to the listings of the manufacturers with whom they may be dealing. JG

The manufactured home industry in 2009

Simply put, here at the beginning of 2009, the manufactured housing industry—like the entire housing industry—is in a deep slump as a major recession tightens its grip on the economy. More than a few companies may go out of business. The silver lining: for prospective homebuyers with good credit, this industry is capable of building a damn good home fully comparable to a site-built home, at a lower price, and there has never been a better time to purchase one. More on that in a minute, but first, here’s my take on where the manufactured home industry (MH, for short) stands nationally.

By way of brief background, for the past ten years, the MH industry has been in decline, largely as the result of its own easy-credit subprime meltdown that began nearly a decade before the same phenomenon hit the mainstream housing marketplace. From a high of 373,000 homes produced in 1997, the total dropped to 175,000 in 2002, and has continued south ever since. By late November, 2008, the projected annual total MH production was estimated at 61,200. That’s a whopping 84% shrinkage since 1997. I won’t be surprised to learn that the final total will end up being closer to 55,000 when the figures for all of 2008 are tallied.

Ironically, over the past decade, the MH industry, especially the lenders who specialize in MH financing, has made great strides to clean up its easy credit excesses and put in place more rational lending practices. Add to this better construction quality and in-plant technology improvements and the industry was poised to recover. Instead, last year it found itself swept along with the near collapse of the mainstream housing sector, the credit freeze, chaos on Wall Street and the advent of the worst economic crisis since the Great Depression.

The forecast is for the carnage to get worse before it gets better. A few current examples: The venerable builder Patriot Homes is in Chapter 11, seven of its plants shuttered, its future very much in doubt. Once mighty Fleetwood Enterprises is closing seven plants, its stock so low (less than 10 cents, as I write) that it’s been de-listed from the New York Stock Exchange. In a last-ditch attempt to turn its fortunes around, Fleetwood has put up a substantial chunk of its assets (property, plants, etc.) as collateral to raise funds on the bond market. Four Seasons Homes, the well-regarded Indiana-based builder, has opted to quietly close its doors forever, including its modular division, Admiration Homes, rather than pursue a Chapter 11 bankruptcy restructuring (Another MH builder will continue to offer the brands—see Ratings Guide updates). In Idaho, Nashua Homes last fall notified its retailers that it was suspending its HUD-code production until the spring of this year (at the earliest) while it instead built housing for “man camps” in the booming Canadian oil fields around Edmonton, Alberta. In the interim Nashua Homes made arrangements for Palm Harbor Homes to fulfill orders from Nashua’s dealer network. How well that agreement will sit with Nashua’s dealers remains to be seen; some will likely drop Nashua for competing builders.

Nor has the crunch spared the MH industry’s two largest players—Champion Enterprises, Inc. (with 12 subsidiary builders) and Clayton Homes, Inc. (with nine). Both have closed plants and laid off staff. Champion Enterprises, its stock well below a dollar, is also looking at a NYSE de-listing. Of the two companies, Clayton (a subsidiary of Warren Buffet’s Berkshire Hathaway Corp) is far stronger financially by virtue of its two Clayton-owned finance companies, Vanderbilt Mortgage and 21st Mortgage, which provide MH buyer financing to Clayton-owned retailers and independent retailers, respectively.

It is tempting to think of Clayton as more a bank than a builder—the largest chunk of Clayton Homes’s bottom line profit derives not from the sale of homes but from the combined revenue generated by its two finance companies and homeowner insurance services. I have joked that Clayton Homes is a little like Kodak was its heyday. Like Kodak, which could probably have given away its cameras and still made a handsome profit because it made almost all the camera film used, Clayton could probably do the same with its homes as long as the homebuyers got their financing and insurance from Clayton subsidiaries. This is one very successful vertically integrated company.

Especially vulnerable during these hard times are the retail sales centers, of which there are between 3,500 and 4,000, most of them independently owned. Not only has their visitor traffic dwindled sharply, but the credit crunch has dried up the availability of their floor-plan financing. This is money borrowed from a bank or a financial services company to pay the manufacturers for the inventory of home models placed on the sales center’s lot (the finance company retains a security interest in the financed homes, and the retailer pays back the finance company with interest when the home is sold to a home buyer). Modeled after the auto industry, this arrangement is essential to operating a traditionally configured MH sales center.

Last fall, the three largest national providers of inventory financing—General Electric, Textron and 21st Mortgage (yup, Clayton’s in-house bank)—announced they were getting out of the floor-planning business (or severely restricting underwriting new business), because they couldn’t find the money to lend. These moves have caused panic with many retailers around the country. If they can’t find other sources of inventory financing, such as their local lenders, you can expect to see many retailers going out of business. Parenthetically, many experienced retailers, leery of relying on national flooring lenders, long ago cultivated relationships with their local banks to underwrite their flooring needs; they should do just fine.

For the record, Vanderbilt Mortgage will continue to offer floor planning to Clayton-owned dealerships. Interestingly, Clayton’s 21st Mortgage hasn’t completely shut the door on floor plan lending to independent dealers. Rather, they will agree to underwrite only one-third of a dealer’s wholesale cost of each home (paying that amount to the manufacturer upon delivery to the dealer’s lot), but the manufacturer must wait until the home is eventually sold off the lot before receiving the remaining two-thirds owed. With those terms I don’t know of any manufacturer who has pockets deep enough to wait many months (sometimes a year or longer) before being paid, except perhaps Skyline Homes. That company has deep reserves—more than one hundred million dollars, mostly in U.S. Treasury securities—but don’t count on Skyline hiring new corporate staff to sit around all day clipping coupons. Twenty-first is also continuing to offer short-term flooring (usually 30-45 days) for homes ordered from dealerships by homebuyers who are paying with cash or who have obtained a bank loan.

Some within the MH industry have voiced suspicion that 21st Mortgage, as the last national flooring lender remaining in MH, is dictating drastic lending terms as part of a calculated strategy to crush its remaining competition and achieve unchallenged industry dominance. They also cite Berkshire Hathaway’s 2008 purchase of a meaningful stake in General Electric months before GE’s announcement they would write no new MH flooring contracts. I find this argument unpersuasive. Last fall Berkshire Hathaway informed Clayton Homes that it, too, was having trouble finding money at decent rates for its many enterprises, and that no B-H funds would be available for Clayton in the near term. This in turn drastically cut the funds 21st Mortgage had available for floor plan lending (which may partly explain why late in 2008 Clayton laid off 90 people from its Maryville, TN headquarters). Moreover, everything I’ve learned about Warren Buffet suggests he would never countenance unethical strong-arm behavior by any of his companies. I can say the same about Clayton Homes’ CEO Kevin Clayton.

One senior MH industry executive who agrees with me on this issue commented, “Nonetheless, for all practical purposes, the result of 21st’s new policy is the same—it contributes enormous pressure on Clayton’s competition.” Well, 21st, alone of the three, is at least offering something in the way of flooring. At bottom, the fact of the matter is, in the last 18 months somewhere between $300 million and $500 million in inventory finance dollars has been taken out of the equation of the MH business model. The free market can be brutal.

Big challenges for manufacturers

Currently the HUD-code building industry in the US is comprised of 65 corporations that together operate about 180 plants. By early February, the total number of plants is expected to be less than 170, a total that still represents a significant amount of over-capacity. Here’s why:

Let’s assume, generously, 65,000 HUD-code homes were built in 2008. Divided equally among 170 factories, this means each plant built 382 homes. Figuring 255 work days a year, each factory produced on average only 1-1/2 homes a day. That rate is barely enough to cover the plant’s operating cost, let along make any profit. A typical plant has a capacity of four-and-a-half to five homes a day, with three-to-four homes a day considered the sweet spot. Add to this a vicious credit squeeze that has all but dried up the availability to manufacturers of routine short-term loans (or lines of credit) to cover payroll, overhead and materials costs, and without a meaningful up-tick in HUD home orders in 2009, you can expect to see a lot of factories close their door before year’s end.

This bleak dog-eat-dog landscape has forced many manufacturers to hunker down and survive by offering homes at lower prices, because the typical MH buyer is primarily price driven, especially those who can only afford low-end, entry level homes. This strategy entails lowering construction quality to remain profitable while slashing prices. Nowhere is this strategy more evident than in the coastal sunbelt states of Southeast—from Georgia to the Gulf Coast states and Texas. As some MH builders in the region have abandoned the bottom step of the housing ladder to appeal to more upscale consumers, adopting features such as tape and textured dry wall and higher quality construction, new companies have moved in to fill the vacuum, offering basic single-section homes for as low as $25,000, and double-section homes starting at $32,000—“Bubba houses” as some industry wags call them. These new companies include Legacy Homes (Texas) and New River Homes (Mississippi). Moreover, they appear to be doing quite well.

An industry divided

It is testament to the diversity and promise of manufactured housing that this industry is fully capable of providing the full spectrum of housing, from so-called shade-and-shelter Bubba houses to high-end multi-section palaces costing several hundred thousand dollars and that are virtually indistinguishable from site-built homes. Yet herein lies its dilemma: these segments of the industry and the wide economic, demographic and cultural gaps that separate the consumer constituencies they serve (and the way they are served), have made it difficult for the industry to find common ground and to speak with one voice. Add to this mix the owners of the nation’s 50,000-plus mobile home parks(“manufactured home land-lease community owners” in trade industry parlance) with their sometimes diverging interests, and the result is an industry divided.

This reality helps explain why the MH industry’s principal trade association, the Manufactured Housing Institute, is struggling. Despite a talented staff and excellent leadership, MHI currently counts as members only 20 of the industry’s 65 HUD-builders (MHI also has 18 modular code only builders as members, this as part of its effort to include that industry segment in its mission). With the withdrawal from membership in recent weeks of industry giant Champion Enterprises (for reasons I have yet to determine), MHI’s bottom line also took a hit. The association is supported largely by a $17 membership fee for each home section (called a floor) that member builders produce. MHI’s former $3-$4 million annual budget has shrunk to well below $2 million. Last fall the association’s cash crunch was so severe that reportedly one of its board members loaned the MHI money to help it get through the year.

Perhaps no issue better exemplifies the divided character of the industry than a long-contemplated national image campaign to promote manufactured housing the way the RV industry did so successfully in the 1990s with its Go-RV campaign. In 2007 MHI calculated the budget would run $17-$20 million. Using the 2008 figure of 65,000 HUD homes produced, $20 million could handily be raised by tacking on $307 per home, or less than 5% of the average $63,000 price of a HUD home. The cost add-on caused an uproar, notably among the low-end HUD builders who had previously raised hell when MHI’s board voted to raise the per-floor membership fee from $14 to $17 per floor. Months passed with no resolution. Finally, in 2008, after one major manufacturer (reportedly Clayton Homes) let it be known that it was not enamored of helping fund a national campaign that would benefit its competitors, the idea was quietly tabled. I’m not looking for the project’s resurrection any time soon, and more’s the pity. A Go MH national image campaign could give the industry a huge leg up in recovering and thriving in the years ahead.

The MH industry’s other, smaller association, the Manufactured Housing Association for Regulatory Reform, appears to be having troubles of its own. The MHARR, which focuses on lobbying Congress and HUD on behalf of manufacturers, is supported by an undisclosed number of HUD builders, two of whom, Liberty Homes and Fairmont Homes (who left MHI to found MHARR), each chip in $200,000 a year. The other members’ contributions average around $10,000. Reportedly, in recent months Palm Harbor and Skyline, for undisclosed reasons, have dropped their membership.

There’s no getting around it, the effect of two associations with often differing agendas and priorities has tended to weaken the MH industry’s effectiveness on Capital Hill. On more than one occasion Congressional staffers have suggested, “Why don’t you two associations get it together and come to us with one voice. You’d be a lot more effective.” Efforts to that end were made in 2007 but failed.

Now the good news

Despite the foregoing gloomy reports, it is not the Eve of Destruction for the MH industry. In all likelihood you will see this year a shake-out that will leave the industry smaller, the survivors stronger and fewer sales centers competing for a customer base that may actually grow as the Obama administration’s $1 trillion economic recovery plan begins to kick in. I don’t see another round of consolidation; there is currently too much over-capacity, and the last thing surviving manufacturers will be looking to acquire is more factories, even if they’re offered at fire sale prices.

For home shoppers, the good news is that recent Federal legislation, beginning with the passage last summer of the Housing and Economic Recovery Act of 2008, is doing a lot to make home ownership, particularly for first-time buyers, within reach. For example, you may qualify for a refundable tax credit for first-time homebuyers that works like an interest-free loan of up to $7,500 (to be paid back over 15 years). In many cases this amount can be used toward a down payment.

The Act also updates and revises the Federal Home Administrations loan-guarantee program for the purchase of so-called Title I homes, i.e., manufactured homes in leasehold communities (i.e., mobile home parks) where the home’s owner only rents the land beneath his house. FHA Title 1 previously offered to guarantee these personal property loans only to about $49,000. The new guaranteed total is now just under $70,000. See September 2008 News & Notes for details.

Elsewhere, the government sponsored enterprises Fannie Mae and Freddie Mac, which buy loans from qualifying banks, has been directed by Congress with a “duty to serve” the first-time home buyer sector, which means these two corporations will be expanding their portfolios of manufactured home loans, thereby making loans on HUD homes easier to get. See News and Notes for July 2008 for details.

Fannie May in particular has a promising new program called MH Select. Under this program, if your manufactured home has certain attributes found with site-built homes—such as a 4/12 or steeper roof pitch, a permanent foundation and 2 x 6 inch exterior wall thickness—you can qualify for a conforming loan interest rate identical to that given to a site-built home. This can save you thousands over the 25- or 30-year life of your mortgage.

In sum, I think you’re going to see some impressive new offerings in the months ahead, not only through federally sponsored programs such as the FHA, but also the US Department of Agriculture which, through its Rural Development Program, has a number of excellent programs for first-time homebuyers in rural areas. With Congress moving quickly to rescue housing, new laws that guarantee home loans, and for higher purchase prices, will be passed. Prospective MH homebuyers should make the effort to check with their local federal government agencies to see what’s available. You may be pleasantly surprised.

Some recommendations on specific buying scenarios

The Grissim Buyer’s Guide to Manufactured Homes & Land contains detailed information and advice on every aspect of selecting and purchasing a home, but here are several suggestions to keep in mind in these difficult economic times:

First, I should state here a core opinion I hold about manufactured housing: while a manufactured home can be an excellent high-quality dwelling comparable to a site-built residence (and at a lower price), at least 60% of all manufactured homes built are cheaply constructed, unattractive, show significant deterioration after five years, and if not legally tied to the land as improved real estate, will not appreciate in value and will be very difficult to sell because banks are loathe to write loans on “used mobile homes.”

Having said this, I would add that I am no elitist. I will never disparage low-end HUD homes per se, because they answer a huge need. One of the great things about manufactured housing is that it can provide basic shelter for those who otherwise would have no home at all. If properly sited and well-cared for, even the humblest single-section home can be fine affordable housing.

As for where I get the 60% number, it derives from an unscientific calculation involving an estimate of the number of homes built annually with a Ratings Guide construction rating of less than 5, together with nearly ten years of looking at manufactured homes both in the field and on the Web, and regularly talking to industry insiders whose perspective I hold in high regard. Who knows, the percentage may be closer to 65.

Thus, the following recommendation: if at all possible, restrict your home search to the remaining 40% of manufactured homes that are well-built and feature-rich. Shoot for a Grissim construction rating of at least 7, adding options as necessary to upgrade to that rating the home you are considering.

If you’re looking to buy a home in a leasehold community (mobile home park):

  • Your best bet is a resident-owned-community (ROC) which, as the name suggests, is owned by the residents who live there. This may be a cooperative or a condominium arrangement, but such things like rent increases and fees are mutually determined by the shareholder members.
  • Communities owned by non-profit corporations whose mission is providing affordable housing are often good deals. The housing tends toward the low end but these are typically close knit caring neighborhoods of residents who have been carefully screened.
  • Be very careful about communities owned by large corporations, which have no souls. Some are good, others awful. These companies exist to make money for their shareholders and one way is annual rent increases that can really put tenants in a bind. Research carefully.
  • The vast majority of the nation’s 50,000 manufactured home communities are owned by mom-and-pop proprietors who are good souls and who do an excellent job of protecting everyone’s interests, especially avoiding excessive rent increases. Still, when doing your research, be sure to talk to park residents (privately) to ask questions about recent rent increases and more (see the Buyer’s Guide for the full list).
  • Avoid communities that are near to, or adjacent to, neighborhoods where there is expanding commercial development and similar growth. The pressure will likely be on the community owner to sell out to developers for big bucks, leaving the residents owning homes they are forced to move (good luck finding another community willing to take in a “used mobile home”—most won’t).
  • If the manufactured home you’re looking at is a leaky 1986 two-bedroom junker ready for the dump but the site has a million dollar view of Santa Monica beach, and the “lease” is month-to-month, and the rent is protected by a rent-control ordinance, don’t be surprised if the asking price is $300,000, the rent $1,250 a month, and three real estate agents and their clients are waiting in line behind you. Ah, California....

And there you have it. If, despite all the negative reports and buyer beware cautions you’ve read here, you wonder why I am so enthusiastic about manufactured housing, and why I firmly believe it is the best-kept secret in American housing, I invite you to read the lead item in the April 2008 News & Notes. It’s a story about one very satisfied HUD-code homebuyer who saved a bundle on his new home and has enjoyed watching his home appreciate right along with all the site-built homes around him. That home is mine.

Best of luck with your home search.