Manufactured home REITs: Is it time to take a new look? Bookmark has been added
Manufactured home REITs: Is it time to take a new look?
Manufactured homes (MH) cost only two-thirds the rate of existing site-built homes and less than half the cost of new site-built ones. Restrictive zoning regulations and financing hurdles have limited the growth of manufactured housing (MH) segment, but federal agencies are gradually recognizing the need to ease MH financing and regulation.
October 3, 2018
A blog post by Saurabh Mahajan, real estate manager, Deloitte Services LP
Home affordability in the US continues to decline due to mounting home prices and rising interest rates. In June, favorable demand-supply dynamics pushed up US home prices by 6.2 percent year-over-year, nearly twice the rate of inflation, and to the highest level in more than 30 years.1 In addition, financing continues to be costlier, with the 30-year fixed mortgage rate forecasted to rise from 4 percent in 2017 to 5.4 percent in 2019.2 So it's no surprise that in July, existing home sales declined for the fourth consecutive month to their most sluggish pace in the last two years.3 The decline comes at a time when demographics remain positively skewed towards new household formation as young Americans "leave the nest."4
Are manufactured homes an answer?
Enter MHs, which present a suitable option to solve the current affordable housing crisis. On average, these factory-made abodes cost only two-thirds the rate of existing site-built homes and less than half the cost of new site-built homes.5 The overall cost is even lower, since MHs are smaller in average size (nearly 1,500 square feet) when compared to existing home (about 2,100 square feet) or new site-built ones (around 2,700 square feet).6 It is not just about owned homes: Single-family home rentals have also emerged as a key asset class. MHs present a more affordable option for home rentals, with average monthly gross housing costs between $500 and $600, compared to $1,000 to $1,100 for site-built homes or multifamily apartments.7 Investors recognize the value proposition that MHs present and are increasing their exposure to this asset class. Not surprisingly, MH Real Estate Investment Trusts (REITs) have outperformed other REIT categories and are trading at a premium to their net asset values.8
All of this sounds great for an affordable housing revival led by MHs. However, restrictive zoning regulations and financing hurdles have limited the growth of this important housing segment. For instance, zoning and land use regulations in many jurisdictions include outright bans, minimum lot sizes, and location restrictions for MH communities.9 In addition, financing for MHs has been difficult, due to a limited secondary market for MH loans. Another issue is that many borrowers finance MHs as personal property loans, which have higher rates and shorter payback periods, even though borrowers own the land.10 This could be due to greater convenience and faster approval or borrowers' limited knowledge of ways to finance these properties, in some cases.
MH financing and regulation is easing
Not surprisingly, new MH sales are way below their highs, and the share of MHs remains under 10 percent of all single-family housing in the US.11 New MH shipments declined from approximately 300,000 units a year in the late 1990s to below 50,000 units in 2009, following the subprime crisis. Since 2009, the MH shipments increased to more than 93,000 units in 2017, but remain low compared to pent-up demand for affordable housing. Nonetheless, federal agencies are gradually recognizing the need to ease MH financing and regulation. Early in 2018, both Fannie Mae (FNMA) and Freddie Mac (FHLMC) committed to buy more MH loans for the next three years, and Housing and Urban Development (HUD) announced plans to review MH regulations with an aim to reduce regulatory hurdles.12 In fact, FNMA recently introduced the MH Advantage loan program, which lowers required down payments, increases maximum loan-to-value allowed, and reduces lender fees to boost affordable housing.13
Finding continued growth opportunities
Given this scenario, what could MH REITs do to enhance their prospects for continued growth? Since the ease in regulatory standards through federal authorities could take some time, it is important for MH REITs to work with local authorities to develop collaborative solutions that can help address the critical affordable housing shortage in many communities. MH REITs can offer attractive deals, such as product warranties, and may also convert renters who aspire to become home owners and benefit from rising in home prices. MH REITs can also increase new MH sales by smart targeting of customer segments, such as aging baby boomers who are looking for more affordable retirement housing options. Further, MH REITs, which hold only 5 percent of overall MH stock, could look at inorganic growth opportunities by acquiring MH communities from the private space.14 They could also redevelop older communities with more state-of- the-art amenities and designs to encourage sales, increase occupancies, and satiate the demand for quality affordable housing.
In their redevelopments and newer communities, MH REITs can aim to increase the social and livability quotient of their sites to make them more attractive for residents, especially when these sites are located a distance from the urban areas.
1 S&P Dow Jones Indices LLC, S&P CoreLogic Case-Shiller US National Home Price Index [CSUSHPINSA], retrieved from FRED, Federal Reserve Bank of St. Louis; https://fred.stlouisfed.org/series/CSUSHPINSA, August 28, 2018
2 Dr. Daniel Bachman and Dr. Rumki Majumdar, "Deloitte United States Economic Forecast: 3rd Quarter 2018," Deloitte Insights, September 14, 2018
3 "Existing-Home Sales Slip 0.7 Percent in July," National Association of REALTORS®, August 22, 2018
4 Dr. Daniel Bachman and Dr. Rumki Majumdar, "Deloitte United States Economic Forecast: 3rd Quarter 2018," Deloitte Insights, September 14, 2018
5 Laurie Goodman, Ed Golding, Alanna McCargo and Bhargavi Ganesh, "Manufactured homes could ease the affordable housing crisis. So why are so few being made?," Urban Institute, January 29, 2018
7 Louise Witt, "Can the Once-Lowly Mobile Home Help Solve America's Housing Shortage?" National Association of REALTORS®, June 25, 2018
8 "Manufactured Housing: Home Sales Power Another Stellar Quarter," Seeking Alpha, July 31, 2018
9 "Unfair Zoning Laws Can Restrict Manufactured Home Placement," Manufactured Housing Institute
10 Laurie Goodman and Bhargavi Ganesh, "Challenges to Obtaining Manufactured Home Financing," Urban Institute, June 2018
11 Laurie Goodman, Ed Golding, Alanna McCargo and Bhargavi Ganesh, "Manufactured homes could ease the affordable housing crisis. So why are so few being made?," Urban Institute, January 29, 2018
13 Bonnie Sinnock, "Fannie Mae makes mobile home loans cheaper to boost affordable housing," National Mortgage News, June 6, 2018
14"Manufactured Housing: Home Sales Power Another Stellar Quarter," Seeking Alpha, July 31, 2018
QuickLook is a weekly blog from the Deloitte Center for Financial Services about technology, innovation, growth, regulation, and other challenges facing the industry. The views expressed in this blog are those of the blogger and not official statements by Deloitte or any of its affiliates or member firms.