Where to Build

by Eddie Hicks

To build or not to build. That's the question. To "take up arms against a sea of trouble." Perchance to "dream"? Is that the rub? Sorry, Bill. I had to take a little license with the gentle Bard's musings.

As a once significant part of the nation's new housing industry, factory built home construction is at an all time low. Interestingly enough, new apartment construction is rapidly increasing to take advantage of many families who have been displaced from their homes, and an increasing number of families who can't qualify under newer, tighter, home financing underwriting.

But where does manufactured housing fit into the picture? There hasn't been any significant new community development in the past 10-12 years. Why? Well, first of all, the rapid rate of defaults on chattel mortgages for homes sold into land lease communities, left lenders with inventories of repossessed homes. Many were sold at deep discounts to new community residents, and others were removed from the communities and taken to sales lots where they were sold at even lower prices using what some would call "usurious" chattel mortgage rates and terms.

Without the securitization the real estate mortgage market enjoyed liquidity for a while through secondary mortgage financing markets such as Fannie Mae, Freddy Mac, and the GSE Ginny Mae (GNMA) for FHA and VA notes, chattel mortgage lenders relied on private investors and placement of bonds on Wall Street.

With the high rate of defaults and the eventual demise of so many chattel mortgage originators, investors demanded tighter credit scores for underwriting, shorter terms, and higher interest rates with larger down payments. The FHA Title I reforms loomed large at first, but eventually that possibility was taken away through the tight fists of GNMA, by eliminating all but 2 lenders Berkshire Hathway associated lenders from the market. Perhaps 3% of all of the sales in 2011 where done under Title 1 loans, according to one source. So while the potential is promising, so far, the reality has not met the potential.

Was that the intent of Congress when it adopted the reforms of the program in HERA signed into law by President Bush back in 2008 Yup folks, we are now in our 4th year of the reforms, and the program still isn't having the impact it was intended to have in boosting manufactured home sales.

Oops, there went the sales of new homes, and sellers had to drop prices low enough to make these new financing terms produce monthly payments which met lowering incomes of families.

Who in these market conditions would be fool enough to build a new community? Especially higher quality communities located on more expensive land in more desirable areas, with increased home prices to math newer nicer looking, site built home looking factory built homes?

Seemed like a good idea at the time to some If the public didn't like the looks and quality of factory built homes which were affordable, wouldn't making them nicer, and more like site built homes with higher roof pitches, more extensive foundation systems, and higher quality construction standards, make sense. Sure it would, unless you had to sell them at minimal differences with site built home prices, especially with the higher interest rates, and shorter amortizations.

And what happened to all those communities who through their restrictive lease and community guidelines restricted homes which were higher priced through limitations on size, architectural characteristics and accessory structures such as enclosed 2 car garages. Several went from sales of 10 to 12 per month to only 6 per year in some markets. Try as they might, the current residents became upset at the prospects of installing a metal on metal "slickside" single section home next to their prized triple wide, 5/12 pitched roof, architectural shingle and dormer adorned rooflines.

Perhaps it's time for the industry to think about getting back to our roots: building safe, affordable factory built homes which sell at prices which are truly less expensive than site built homes, and compete directly with apartment rents, but which may not be virtual "copies" of site built homes. Why? First of all, some assert that it's not possible to build a site built home equivalent at prices which are significantly lower cost than site built, just because it's done indoors. Modulars have proved that fact.

Yup, it's not just the financing burden, but also the image of manufactured housing which is largely to blame. We can build them to be affordable, even with today's tougher standards, and new foundation and installation specifications. But if the general public still believes they are cheaply built, more vulnerable to fires and high winds, depreciate, and are destined for only "gypsies, tramps and thieves," military transients and itinerant farm workers, plus an occasional retirement community for age 55+ seniors.

Still, with all those challenges, the opportunities are looming large. A manufactured home, on a leased homesite, in a well managed community is still a viable source of housing for about 5%-15% of all Americans. Not withstanding some older, badly managed, smaller communities, most community residents are happy with their homes, and enjoy a lower cost, minimal maintenance, safe form of housing.

Where’s the safest place to build? One way to answer the question is to look at how many distressed properties are selling in a particular area compared to the number of new homes. This is not because the demographics of distressed property buyers and new home buyers are necessarily similar, they aren’t, but rather the health of the market that this ratio implies.

Distressed sales create havoc with home values, and make it hard for builders to hold the line on prices. So naturally, areas with a relatively small share of distressed closings make for an attractive new home building environment.

Housing IntelligencePro at http://www.housingintelligence.com looked at MSAs with at least 500 new home closings in 2011 and compared that volume to the number of distressed property closings in the same period. By a wide margin the leader was the active-adult mecca of The Villages in Florida, with an impressive ratio of 18 new home closings per REO closing. Also impressive is that four of the top seven areas were all in North Carolina.

How many of you knew that The Villages in North Central Florida started out as a manufactured housing community; Orange Blossom Gardens MHP?

As an industry, we're not going to survive unless we start building again. You don't have to be a "contrarian" to see where we are in the business cycle. Smack dab at the bottom, with no where to to but up. All the leading indicators say now is the time to start building new communities.

New low interest, 40 year, non-recourse, fixed rate, combination construction and permanent land lease community financing is available via the FHA 27m program. You can even use the FHA221(d)4 program to build single family detached apartments using low cost HUD homes as the units, with proper zoning. # #

(Editor's Note: Eddie Hicks is a member of MHSpeakerTrainer.org)

Edward "Eddie" Hicks Lic. Mortgage Broker, Lic. RE Broker with offices in the Tampa Bay area has been providing development, marketing and financing solutions and consulting services to developers and retailers since 1963.  He has previously been a community developer, HUD Code/Modular home manufacturer, and HUD Code/Modular retailer, was the mobile home committee chairman for the California Association of Realtors, and a VP of the California Mobile Home Dealers Association. He may be reached at (813) 661-5901.  His websites are: www.mobilehomepark.com, www.factorybuilthome.com, and www.FHA207m.com.