2010 Home Buyer's Outlook
Note: Annually at the beginning of the year I offer here my assessment of the manufactured housing landscape 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 industry professionals may find helpful.
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 using the Ratings Guide should 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 2010
Simply put, here at the beginning of 2010, the manufactured housing industry–like the entire housing industry–is in a deep slump as The Great Recession maintains its grip on the economy. Since late 2007, eight manufactured home producers (out of 83 total around the U.S.) have gone out of business, including marquee brands Patriot Homes and Fleetwood Homes (Note: Fleetwood survives as a brand, having been purchased from bankruptcy by Cavco Industries).
At this writing, Champion Enterprises, a major industry player, is working its way through bankruptcy but is expected to emerge intact and with a new cash infusion from a trio of investors. This year may see a few more companies shutter their doors, but the industry consensus is that the worst is passed.
The silver lining: for prospective homebuyers with good credit, this industry is capable of building a really good home, fully comparable to a site-built dwelling, at a lower price, and there has never been a better time to purchase one. Moreover, buyers who can pay cash (after having sold their previous home, for example), have an even greater advantage, because they can get a beautiful home at significantly less cost than a new site-built home without having to pay the typically higher interest rate or a one-time fees often associated with new manufactured home loans. For example, many banks routinely charge 1% more in discount points (loan fee) to a customer for a manufactured home/land real estate loan. More on that in a minute, but first, here’s my take on where the manufactured home industry (MH, for short) stands nationally.
First, a bit of background: for the past twelve years, the MH industry has been in decline, largely as the result of its own easy-credit subprime meltdown that began in the early 90s, 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. The final figures for 2009 are not yet in, but I won’t be surprised to learn that the final total will end up being close to 50,000. That’s a whopping 87% shrinkage. To be sure, the ’97 total of 373,000 homes was at the top of the boom and should not be regarded as an achievable total for a healthy marketplace in normal times.
Back in the go-go 90s there was an ocean of sub-prime easy money sloshing around the MH industry, and manufacturers, caught up in the frenzy, annually built and shipped to retailers tens of thousands more homes than there were customers out there, a sure-fire recipe for the crash that followed. A more realistic figure, going forward, is an annual total of 160,000 to 175,000 HUD code homes built annually.
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, as recently as 2008, the industry was poised to recover. Instead, late that 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.
Now, finally, things are finally beginning to look up. A review of economic indicators and informal assessments provided by a number of industry executives reveal a consensus on what 2010 likely holds for the manufactured home industry: an up-tick beginning in the early Spring that will initially yield break-even profitability for the rest of the year, then gradually accelerate in 2011 as a housing rebound gains self-sustaining traction. In sum, the market will finally reach the bottom. As bad a shape as industry is in, it is better situated going into a new year than it has been in years.
Lack of financing for MH the #1 problem
This said, the biggest challenge facing the MH industry, even more than the mainstream housing industry, is the lack of retail financing for home buyers, even for those with good credit. This is especially true for those wanting to buy a new home in a land-lease community (a.k.a., mobile home park) where the homeowners rent, not own, the land under their homes. Loans to purchase these homes are called personal property (or chattel) loans, the same as for automobiles, RV and boats, and in these recessionary times, local banks are pretty adverse to making such loans to anyone but buyers with pristine credit.
Consumers who plan to site their manufactured home on a permanent foundation on land they own (and which will be legally tied to the property and taxed as improved real estate just like a site-built home) have much better chances of getting financed, and at rates fully comparable to those for site-built homes. This said, keep in mind that if a manufactured home does not meet the specifications for a permanent foundation, landscaping, decks and porches, and other elements associated with a new site-built home, the homebuyers will likely not qualify for a construction loan with a local bank, and may have to go with a national lender who specialize in manufactured homes. In that instance, they may find themselves paying a higher interest rate (around 9% or more) compared to, say, 5-1/2% for a comparable site-built home. This punitive interest increase can easily put a home buyer’s monthly mortgage payment out of their each, negating the significant cost savings a manufactured home has over a site-built dwelling.
Fortunately, relief may be on the horizon. Not only is the Obama administration working to establish new Federal Housing Administration (FHA) guidelines that could provide government-backed chattel loans to creditworthy buyers of manufactured homes, but a growing number of land-lease community owners are becoming actively involved in selling and financing the homes sold into their communities–in short, self-financing.
The latter development, called captive finance, is an outgrowth of the lack of financing elsewhere, and has run into some regulatory headwinds, especially the just-implemented SAFE act (to protect consumers from mortgage fraud). If you’re offered such financing, be extremely careful and forewarned–such transactions can work for all parties but they are tilted to the seller’s advantage, and the degree of consumer protection built into such contracts can vary considerably. I strongly recommend home buyers invest in an hour or two of an attorney’s time before signing any such agreements.
Lower home prices during the recession?
I am regularly asked if the Great Recession has resulted in lower prices for manufactured homes compared with the price spreads during normal economic times. My answer: a little but not much. Homes with high construction quality have changed little in price, but the bleak dog-eat-dog landscape of the past several years has forced many manufacturers to hunker down and survive by offering lower quality 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 the Southeast–from Georgia to the Gulf Coast states and Texas.
While 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.
A problem for home retailers that affects home buyers
Especially vulnerable during these hard times are the retail sales centers, of which there are about 3,500 nationally, most of them independently owned. What follows is a bit wonky, but bear with me: Not only has the visitor traffic to sales centers dwindled sharply, but the credit crunch has dried up the availability to dealers of inventory financing (also called floor-plan financing). This is money a retailer borrows from a bank or a financial services company to pay the manufacturers of the home models placed on the sales center’s lot. The way this works is, 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.
Going into 2010, as a result of the lack of floor plan financing availability, home shoppers will find fewer models available to inspect on many dealer sales lots. But there are exceptions. Many experienced retailers, leery of relying on national flooring lenders, long ago cultivated relationships with their local banks to underwrite their flooring needs; they’re able to maintain their usual number of model homes on their lots. In a few other instances, the manufactures themselves are offering inventory financing.
But the lack of inventory financing is also impacting a lot of home buyers when it comes to the all-important payment schedule for the homes they custom order (as opposed to one purchased from the lot). Because inventory financing also provides for prompt payment to the factory for the full wholesale price of the home, typically within ten business days, dealers who don’t have that financing must either cover that payment themselves (which few can) or insist that the homebuyer (or the bank that is funding a construction loan) pony up the cash, often the full retail price, before the complete order for the home is delivered to the factory. Banks, for starters, won’t agree to any such terms as part of a construction loan.
As I explain in The Grissim Buyer’s Guide, this all-up-front payment before a home’s delivery should be avoided at all costs, for it puts the home buyer in a very vulnerable position. Should anything go wrong during the home’s delivery or set-up, and/or should significant manufacturing defects be discovered during the process, the homeowner is at the mercy of the retailer who has already received all the money. Without some kind of hold-back of a final payment, even if it’s only a few thousand dollars, the homebuyer has almost no leverage (short of complaining to government agencies or filing suit) to ensure that problems are corrected promptly. To protect all parties, I recommend running the entire transaction through a local escrow company, making sure the terms for disbursement of funds are very carefully described. California is one of several states that requires escrow closings of all home purchases, but most states have yet to adopt this policy.
Hopeful developments
For home shoppers, the good news is that recent federal legislation, beginning with the passage 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 $8,000 (to be paid back over 15 years). In many cases this amount can be used toward a down payment. Last fall the Obama administration extended the deadline for this credit to April 30, 2010, allowing for qualifying home purchases to close as late as June 30, 2010. Plus, in many cases the loan doesn’t have to be repaid.
The Act also updates and revises the Federal Home Administration’s 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.
Elsewhere, the government sponsored enterprises (GSEs) Fannie Mae and Freddie Mac, which buy loans from qualifying banks, have 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. Both of these GSEs have been dragging their feet for many months, but it looks like 2010 will finally see them get serious by implementing new rules to serve affordable housing.
In sum, you’re going to see some new offerings this year that could make a real difference, not only through federally sponsored programs such as the FHA, but also the US Department of Agriculture which, through its Rural Development programs. 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 most humble single-section home can be decent 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 my 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 related issues (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.