Prebuilt Homes Attract
Another Look from Buyers
June 5, 2003 -- What a difference some drywall makes.
Manufactured homes, those prebuilt dwellings long derided for being of low quality, have enjoyed a design renaissance -- and the business of building them is poised for a resurgence.
Financing problems have plagued the industry since the late 1990s, when a proliferation of bad loans caused lenders to tighten standards. Shipments have reached historic lows because some potential customers can't get funding, bringing down the stocks of builders, including Fleetwood Enterprises Inc. of Riverside, Calif., Clayton Homes Inc. of Knoxville, Tenn., and Champion Enterprises Inc. of Auburn Hills, Mich.
Those funding woes should subside as the economy rebounds and healthier lenders market financing to more fiscally sound consumers. Likewise, sales of new homes will improve as fewer homes repossessed by lenders from delinquent customers are resold.
The stigma of living in a manufactured home also may be disappearing, drawing customers who in the past might not have considered such housing.
"The old vinyl interior that the industry had in the past is falling by the wayside," said John Diffendal, a stock analyst with BB&T Capital Markets in Nashville, Tenn. Makers are using higher-quality components such as those found in conventional housing, including drywall.
These structures are "not your daddy's trailer house," said Lyle Larkin, Fleetwood's treasurer.
Still, the median household income for manufactured-home residents was $26,900 in 1999, according to data supplied by the Manufactured Housing Institute, an industry association. That compares with $42,187 for all Americans in that year, according to Census Bureau data. But higher-income families may provide a lift to the industry, as some retiring baby boomers opt to raise cash for their golden years by selling their existing home, buying cheaper housing and pocketing the difference.
The idea among those evaluating their retirement plans that their "home is untouchable is eroding," said Ellen Dorle, a certified financial planner with Dorle Financial in Columbus, Ohio. "It's just not the sacred cow it used to be."
Some people seeking more modest residences may buy prebuilt homes. On the flip side, relatively well-to-do families who want an inexpensive second home also may turn out to be manufactured-home buyers.
Berkshire Hathaway Inc. sees value within the industry, given that the holding company run by investor Warren Buffett recently made a $1.7 billion offer to buy Clayton Homes. Clayton, a manufactured-housing producer, has weathered the manufactured-housing depression better than its rivals, analysts said.
But buying a successful company whose value has diminished along with its peers is a classic Buffett move that surely doesn't indicate the famed investor is making a bet on the entire industry.
"The key lesson here is go find the most out-of-favor industry, go do your work on that industry and find a company that didn't participate in all the stupidity that brought the industry down," said Whitney Tilson, a hedge-fund manager with New York-based Tilson Capital Partners, which owns Berkshire shares.
Analysts agree Clayton is the cream of the manufactured-housing crop and suggest Berkshire is getting a great deal. Barbara Allen of Natexis Bleichroeder in New York said Clayton's growth in book value per share, a Buffett-favored valuation technique, has been "head and shoulders" above its peers. Ms. Allen owns Fleetwood shares and sold her Clayton stake after Berkshire's offer was announced April 1.
Nonetheless, some factors are bound to improve broadly, which will help the entire industry's prospects.
For instance, though trade-group data show the number of new-home shipments from builders fell to 168,000 in 2002 from 193,000 in 2001, Mr. Larkin noted a decline in the inventory of repossessed homes should help matters.
Resales of repossessed manufactured homes have been a major drag on new-home shipments during the past few years. Last year alone, lenders sold about 100,000 repos to new customers, more than one-third of all sales industrywide, Mr. Larkin said. Clearing away that inventory of repossessed homes should help revive the market.
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