Investment Analysis: Manufactured Housing Demand Growing Faster than Supply
“Manufactured housing industry has been drastically reduced over the last 30 years but has now bottomed and is unlikely to keep up with growing demand for the foreseeable future. This should lead to high returns on tangible equity for operators with a long runway of opportunity to reinvest capital at high rates.”
That summation and the following contain excerpts from a comprehensive researched narrative by Joe Kuefler, CFA, a brand marketing executive, posted at Seeking Alpha titled “Secular Tailwinds Will Propel The Manufactured Housing Industry.”
It isn’t a secret that we have an affordable housing crisis that continues to worsen, yet there is surprisingly little dialog on how to solve the problem beyond various subsidy schemes for low-income multifamily housing. Manufactured housing is a competitive alternative to other forms of housing, whether new or existing, for rent or for purchase.
Structural advantages of manufactured homes vs site-built homes
The primary competitive advantages of manufactured homes are operational efficiencies and lower cost to produce. These advantages stem from the ability to use standardized processes in a controlled plant environment, which reduces waste, eliminates weather-related delays, and avoids risk of vandalism and theft. Additionally, manufactured housing enables operators to employ a more effective labor force that is centrally trained and managed, which provides more flexibility and avoids the complexities of managing a complex network of paid contractors. Finally, procurement efficiencies and scale provide manufactured home builders a cost advantage of materials and appliances.
The average all-in price per square foot of manufactured homes is roughly half as much as new site-built homes (excluding land value).
Additionally, new site-built home prices continue to rise at a rapid rate, while manufactured home prices have been much more measured. In the period of 2009-2019, the average sale price for new single-family homes has increased 47% (not including land) compared to just 30% for manufactured homes.
Favorable Industry Capacity Set-up For Long Cycle Growth
Declining capacity over the past three decades has created a classic set-up for high economic returns going forward now that demand has bottomed and a long-term cycle of growth appears on the horizon.
In 1990 there were 100 different manufactured housing companies operating 250 plants, while today there are 32 companies operating 129 plants across the country. Some of the best investment opportunities come from industries where few take notice that demand is quietly growing faster than supply.
Favorable migration and demographic patterns
Of the129 manufactured housing plants in the U.S., about two-thirds are located in the south. The high transportation cost of homes means homes are only sold within a few hundred-mile radius of the plant. It is no surprise then about two-thirds of the industry shipments are also in the South (Texas represents 20% itself). People are piling into these states due to favorable taxes, mild climates, and affordable costs of living. The “work from anywhere” mentality after COVID will also feed these migratory trends as knowledge workers relocate to lower-cost areas. The sunbelt is a prime destination for retiring “baby boomers”.
The demographic trifecta of coming-of-age millennials, retiring boomers, and migration trends will lead to increased demand for affordable housing for years to come.
The current state of the industry
Demand remained strong for manufactured homes in 2020, but deliveries appear set to finish the year slightly lower than the 95K homes shipped in 2019 driven by operational constraints. The results by the operator have been uneven.
When COVID-19 hit the country last March, some manufacturers pulled back on production quickly, only to learn that demand did not evaporate. Hiring then became the issue while competing with the additional federal unemployment benefits. Some manufacturers also experienced supply chain problems, further restricting the ability to produce at previous rates.
The overall result is lower 2020 industry shipments with much larger backlogs that will take some time to work through. Quickly increasing material costs in lumber and steel have resulted in price increases but manufacturers have been able to pass these along without significant cancelations to the backlog.
All-in-all, the near-term demand picture remains strong in 2021.