Rapidly Advancing Multifamily, Home Markets Leaving Manufactured Housing Far Behind

Posted on July 8, 2013

Mobile Home Production Has Collapsed as Have Per Unit Values in Manufactured Housing Communities; Consolidation Has Ensued

While multifamily investors have had a smashingly successful time at the apartment bash in the past couple of years, and U.S. single-family home prices have surged 12% in the past year, the manufactured housing segment continues to struggle.

Manufactured housing traditionally provides a low cost alternative in suburban and rural areas to individuals and families with annual household incomes generally less than $40,000 – a segment particularly hard hit during the recession and an equally hard time coming back.

“Despite manufactured housing’s modest share of the total housing stock, the drop in manufactured home production is notable both because of the severity of decline and because manufactured homes account for an outsized share of low-cost housing, particularly among owner-occupants,” says Patrick Simmons, director, strategic planning, Economic & Strategic Research Group of Fannie Mae. “Whereas manufactured homes account for 7% of all owner-occupied homes, they represent 16% of owner-occupied units with monthly housing costs of less than $500.”

“Since peaking in 1998 at 374,000 units, manufactured home placements have fallen by nearly 90%,” Simmons said. “As production of manufactured housing declined, its share of all occupied housing units fell from 7% in 2000 to 5.9% in 2011.”

Manufactured home community values are still bouncing along the bottom. While the dollar volume of deals in 2012 nearly matched the peak years of volume in 2005 and 2006, the dollar value per unit are still lower than the crash year of 2008 and per acre values have barely moved since 2010, according to CoStar COMPs data.

During that period, there has been an ongoing consolidation of manufactured housing community owners. Two large owners of manufactured housing communities, Hometown America Corp. and American Residential Communities, have sold more than a half a billion dollars each.

Major buyers include Denver-based YES! Communities, which this past April acquired 64 manufactured housing communities from fellow Coloado-based firm American Residential Communities. YES! has been praticularly active in acquiring manufactured hoime communities, and has seen its footprint grow by more than 300% in the last five years.

However, the largest buyer has been Chicago-based Equity Lifestyle Properties, including the acquisition of 35 communities from Hometown America in a single transaction two summers ago.

In its most recent quarterly earnings conference call, Marguerite M. Nader, CEO and president of Equity Lifestyle Properties, said his firm doesn’t yet have a clear picture of the extent of buying opportunities in this segment.

“I think consistent with what we’ve said in the past, opportunities for purchasing properties comes in a relatively choppy pattern,” Nader said. “The current environment is no different. I think there continues to be an opportunity to buy in the family sector more than the age-qualified retirement destination locations. But we continue to work with owners who may be interested in selling. But it’s difficult to predict the opportunities that we may have.”

“Our focus continues to be on increasing the number of ownership transactions in our portfolio,” Nader said. “To that end, our used home sales volume increased 15% this quarter. Our operating team is focused on continuing this trend.”

Equity LifeStyle recently entered into a venture with Cavco Industries Inc., one of the largest manufacturers of mobile homes, to provide a lending platform for Equity Lifestyles’ homebuying customers. Working with Cavco, the new venture will place homes in its communities for sale and will provide prospective buyers with purchase financing.

According to Cavco Industries most recent industry overview, the manufactured housing industry has been in a protracted downturn. This downturn has resulted in part from the fact that, beginning in 1999, consumer lenders in the sector began to tighten underwriting standards and curtail credit availability in response to higher than anticipated rates of loan defaults and losses stemming from the repossession and resale of manufactured homes securing defaulted loans.

From 2004 to 2007, the industry’s downturn was exacerbated by the aggressive financing methods available offered by homebuilders and mortgage lenders for site-built single-family homes, which had the effect of diverting potential manufactured housing buyers to more expensive site-built homes.

Since 2008, the global credit crisis and general deterioration of economic conditions have extended the depressed market conditions in which the industry operates. As a result, based on industry data as of the end of 2012, the number of active industry manufacturing facilities has fallen to 123, a decrease of 112 plants since the end of 2002, representing a 48% reduction.

According to data reported by the Manufactured Housing Institute, during calendar year 2012, industry shipped approximately 55,000 HUD code manufactured homes. By comparison, for the past 10- and 20-year periods, annual home shipments averaged 91,000 and 193,000, respectively.

Cavco Industries this past month agreed to acquire full ownership of Fleetwood Homes Inc., the parent company of Fleetwood Homes, Palm Harbor Homes, CountryPlace Mortgage, and Standard Casualty business units.

Cavco currently owns 50% of Fleetwood Homes and the acquisition will complete the purchase of the other 50% ownership currently held by Third Avenue Value Fund.

“We believe that the opportunity to obtain full ownership of these operations is attractive at this time. Although the manufactured housing industry remains challenged by overall economic conditions, we are encouraged by recent reports of improved general housing demand, consumer confidence, and unemployment levels,” said Joseph Stegmayer, chairman, president and CEO of Cavco.

However, a revival of manufactured housing production faces multiple obstacles, according to Fannie Mae’s Simmons, including competition from distressed sales of site-built single-family homes, historically low interest rates and record affordability for site-built homes, limited conventional financing options due to titling of most manufactured homes as personal property, an underdeveloped secondary market for manufactured home loans, and pending financial regulations that could further curtail manufactured home lending, he listed.

“These headwinds threaten to prolong the depression in manufactured housing production and further diminish a significant source of low-cost housing,” Simmons said.