Here's A Question For You Ray Re: MHPs - Posted by Robert

Posted by Robert on June 14, 2007 at 12:49:16:

Thank you for that very insightful response.

Here’s A Question For You Ray Re: MHPs - Posted by Robert

Posted by Robert on June 12, 2007 at 09:26:51:

Hello Ray,

What makes a good or bad climate for MHP investments? low interest rates? sacres finance for MHs? high foreclosure rates?

I appreciate your opinion. Thanks.

My Take on the Outlook for MHPs - Posted by ray@lcorn

Posted by ray@lcorn on June 14, 2007 at 10:45:28:


Good question.

In my view the worst that can happen for MHPs has already occurred. Low rates and easy money for traditional housing; an industry-wide meltdown of chattel lenders for single and multi-section homes without land; and a resulting decrease of production levels to fifty year lows, with a decline in single-wides to 10% of total floors produced.

That’s what the manufactured housing industry has lived through over the past few years, so a case can be made that the industry must be at the bottom, with nowhere to go but up. However, understand that all of the above happened in the midst of the greatest housing boom ever. The industry brought most, if not all, of the problems on itself, and the finance issues mentioned above are the key to both the problem and the cure.

To survive, MH producers and retailers have been forced to focus on the land/home finance model, using multi-section homes, and completely abandon sales of single-wides in land-lease parks. Realize that this is not due to a lack of demand for single-wides, or parks, but a result of the lender backlash due to the industryâ??s demonstrated lack of integrity in single wide finance.

The result for MHPs is a weakening of fundamentalsâ??steep decreases in demand and supply, higher vacancy levels, and lowered pricing power for space rents. Obviously, the interests of MHP owners do not always jive with the production/sales side of the industry. Just as apartment fundamentals are counter-cyclical to housing sales, parks must compete with land/home deals for their share of the mfg housing market, as well as apartments and site-built housing.

Some MHP owners have turned to rental mobile homes to bolster cash flow, and most have learned the hard lesson that the revenue is an illusion that creates more problems than it solves. Others have closed existing parks for redevelopment, a by-product of an ever-expanding demand for real estate in favored areas. But the majority of park owners have suffered in silence, wondering if the days of waiting lists and annual rent bumps will ever return.

I think there is hope, and opportunity, but like most change it will require the MHP owner to look further up and further down the supply chain to create and deliver a total housing product, rather than just the land.

Two points of background are necessary to support my thesis.

First, existing MHPs have what I call a government protected franchise. It stems from the near impossibility of getting zoning approvals to build new parks in most jurisdictions (yes, there are exceptions, but few). That means the supply of land-lease spaces is constricted, which is known as a high barrier to entry for competition. That’s a good thing, but only if the problem of reduced supply of the MHs, and the financing issues, can be solved.

Second, as a housing option MHs have an inherent advantage over apartments… to own rather than rent, for about the same monthly cost. Regardless of personal opinions about quality, realize that many people value the privacy of not having conjoined walls, a parking spot at the front door, and the freedom to accessorize their home as they please. MHs are still a valid housing alternative, and can be very profitable if packaged correctly.

So, with all the above in mind, consider the following:

The current increase in foreclosuresâ??both from sub-prime borrowers as well as the natural cycle of a slowing economyâ??is in essence bringing the MH customer home again, pun intended. Those subprime borrowers were the natural constituents of the MH market before the sub-prime lending frenzy stole them away, albeit aided by the dearth of finance for MHs.

So there are a rising number of people in need of housing, with credit problems for sure. It stands to reason that the land/home model is not going to be a viable option for a buyer with a recent foreclosure, but salvageable as MH buyers and MHP tenants if handled correctly. This creates a huge opportunity for land-lease MHPs to recover lost ground.

But again, this is only an opportunity if the supply/finance issues can be solved. The field is clear for MHP owners to solve both problems for the consumer, and then market the product as a package solution that makes the MH buying process simple, affordable and quick. Notice I did not say cheap. Affordable yes, but to think MHs compete on price alone is a mistake. The value is in the preparation, packaging and convenience, just like frozen food.

How do you do that?

We here on CREO are certainly no strangers to the finance side… the “Lonnie deal” is the perfect solution for both note dealers and MHP owners, and we’ve been doing it right all along. Had Conseco paid attention to Lonnie Scruggs they would still be in business.

However, don’t be fooled into thinking there is a dead lock as a Lonnie dealer to be the only source of funds for chattel loans. There are a few lenders now who also see the opportunity and are exploring programs for park owners to finance in-park sales. More will follow as soon as a viable model emerges. My guess is this will become a niche lending space with increased competition as the model proves itself.

The supply side is a little more difficult. The drop in s/w production is not going to turn around overnight. Right now the only thing keeping the s/w production numbers from falling to zero are FEMA purchases. However, there is one major player, Clayton Homes, who also sees what I’m describing here and is already gearing up a plant to build “park model” s/w homes. Their finance affiliates are also ahead of the curve in reaching out to park owners to offer the wholesale credit lines for park model homes, and a small (so far) secondary market for retail installment contracts.

Trends start at the margins, and this may be the edge of the wave. Homespun humor aside, Warren Buffet did not buy Clayton for funsies… he saw his favorite playâ??a best-of-class player available at a discount price in a troubled industry. This is how he makes the big bucks.

In many ways this is a return to the very business model that my dad used over forty years ago to become one of the largest M/H dealers in the south. He owned two mfg plants, a network of sales lots, each integrated with one or more MHPs, and in-house chattel financing. We specialized in delivering a total housing package; home, land to put it on, financing, and service after the sale.

Honestly I think the opportunity in the MHP segment right now may be the best in twenty years. The property type is out of favor, more than a few unhappy owners, and competitive financing to fund purchases and improvements. As always, local market conditions must be in place to support any property type, but given positive demographic trends, and the right product in the right place within the market, the MHP housing package as a value proposition can capture higher market share, improve MHP fundamentals, and create long-term upside for investors at each step of the supply chain.