The Residential Construction Market

The construction market is comprised of residential, commercial and industrial building. Within the market for residential and commercial construction, manufactured construction competes against site-built products. Manufactured homes are made up of two types: HUD Code homes and modular homes. HUD homes are often referred to as "trailers" and typically serve the low-end, non-mortgage financed home market under $100,000. Modular homes have been typically sold to low- to upper-middle income households with finished construction costs (excluding land values) in the $100,000 to $500,000 range.

In 2000, there were 1,592,267 new construction homes (site-built and modular) built in the US. In 2001, new homes rose 3 percent to 1,636,676 units. Then, new home starts in 2002 rose 5 percent to 1.7 million units before falling 11 percent in 2003 to 1.5 million units. The housing market rebounded back to 1.7 million new construction housing starts in 2004. The modular home construction market rose again in 2005, leveled off in 2006 and has fallen to nearly similar levels as the site-built housing market in 2007 and 2008.

The Market for Modular Homes

In 2002, modular home sales reached historic highs of 36,000 new home starts nationally. This represented an 11% growth rate over 2001 compared to overall growth of 8% for all new housing starts in 2002. During the period from 1998 through 2001, which is characterized as a strong market for new construction homes, the market for modular homes had remained at approximately 30,000 units per year until 2002. The strong demand which fueled growth for modular homes in 2002 has been followed by consistent increases in 2003 and 2004 to 37,800 and 42,500 modular homes, respectively, representing growth rates of 5% and 12% in those years. This compares to an 11% drop nationally for all new construction in 2003 and shows significant market penetration over the last decade when compared to 26,000 modular homes delivered in 1994.

The Manufactured Housing Institute's National Modular Housing Council tracks only 24 states where modular homes are delivered since the top ten states in 3 regions of the US account for 61% of the total market for modulars. The Southeast and Midwest regions make up 21% and 20%, respectively, of the total US demand for modular homes; the Northeast is third with 17%. Of the top ten states in these 3 regions, North Carolina (SE), New York (NE) and Michigan (MW), are the states with the strongest demand. For the fifth year in a row, North Carolina leads the nation in modular homes being set. Many of the New England states are seeing increases as much as 20% annually. Maine, in particular, is seeing some very strong increases. Domestic producers are creating most of these New England homes but, until 2007, builders and buyers had also been importing from Canada to take advantage of the strong U.S. dollar against the loon. When the US dollar was strong, Canadian imports rose 25% in a single year, from 800 homes in 2003 to more than a 1,000 in 2004 with the majority of them destined for the New England states.

Strong Regional Growth for Modular Home Construction

Another region seeing comparable growth in 2004 is the area of North/South Carolina and Virginia. The South Atlantic region has grown from 26% of all modular housing activity to 28%. Virginia is up 19% and South Carolina is up 12%. Over time, it is estimated that this region will make up 6% of the national market, whereas currently it's about 3%. Looking south along the coastline, modular sales are growing in nearly every state. The industry is definitely moving south, following home buying trends. The remarkable aspect of the growth in South Carolina is that there isn't a local presence there by manufacturers. Years ago that same statement could be made for North Carolina. Now, the growth in NC supports local and out-of-state manufacturers. It is believed that the potential market for modulars in the southern coastal states, especially South Carolina and Georgia, is the greatest in the US.

Similarly, Michigan currently has only two in-state modular production facilities and is faced with limited production during the "frost law" period in March and April that often halts deliveries in the state for up to 4 weeks at the beginning of the new building season. Despite these restrictions, Michigan ranks as one of the top three states for modular home demand in the US.

Low interest rates and a growing consumer awareness of the quality inherent in factory construction have been fueling the modular home growth. In addition, consumers and builders have learned of the advantages factory-built modulars have over the general chaos of site building and its vulnerability to weather, thieves and poor workmanship.

More importantly, two factors driving much of the growth in the modular market are the conversion of HUD-code manufacturers to the modular building system and the fact that modular manufacturers are increasingly investing in designs and architectural features that match or even beat site builders for curb appeal.

Buyers are now choosing the modular building system over more conventional construction because they have more choices in options and amenities than many site builders offer. This allows independent, small volume builders using the modular building system to compete better with site builders on a host of issues ranging from cycle time to design to standard amenities. More and more modular companies are seeing success by targeting more affluent buyers, especially those that are above the median household income. As a result, modular homes have grown larger over the years, on a per square foot basis, echoing what is happening in site building as well. Although most modular homes are often sold to first-time buyers looking for an affordable or medium priced house, an increasing number of buyers are choosing more expensive, custom-built modular homes.

According to the National Association of Home Builders, market share of factory-built modular homes will increase from the 6% to10% range to 10% to 15% range for the following reasons:

• shortages of skilled labor for site-built homes;
• technological advances which have made modular housing much more similar to site-built houses;
• the need to control home building costs through more efficient production;
• security issues during construction especially at urban and downtown sites;
• the ability for builders to grow at a faster pace without employment and training issues.

Even site-builders are aware of the advantages of factory built components. According to industry magazine, Automated Builder, 8 percent of homes constructed in 1997 contained significant modular features. National home builder, Pulte Homes, is an example of a site builder investing $25 million in a factory to build components for its stick-built homes. According to Nationwide Homes, 85% of new homes use at least one pre-assembled component in the floor, walls and roof while almost 100% use pre-assembled windows and fixtures.

Industry experts predict that in the next five years modular building systems will capture market share of six to eight percent of all new housing starts, or approximately 102,000 to 136,000 units given total new construction of 1.7 million new housing starts per year. An average delivered cost of $150,000 (excluding land values) represents a total market for modular home manufacturers between $1.530 billion and $2.040 billion. Delivered costs usually represent 60% of the total cost to finish a modular home.

The Modular Construction Industry - Summary

The US modular home construction market is fragmented among 75 to 100 producers. Factory built modular home producers range in size from $10 million in annual sales (General Housing Corp - Bay City, MI) to $185 million (All American Homes - Elkhart, IN). The largest modular home builder in the US is All American Homes followed by Excel Homes, Haven Homes, Palm Harbor (Nationwide Homes) and Ritz-Craft Corp.

• Production facilities are located regionally - deliveries are often 200 miles or less
• Modular buildings have Inherently stronger construction due to the over-the-road delivery of mod home products.
• Traditional product distribution is through dealer/builders with model sites
• Modular home manufacturer's sales forces manage the retail dealer/builders of scattered lot sales
• Very little modular business in housing developments
• Market awareness of major manufacturers is very limited.
• There is only one national modular manufacturer (Champion/Genesis); at least 3 mod manufacturers (All American/Mod-U-Kraf, Excel/New Era and Ritz-Craft) have solid regional presence in the Midwest, Northeast and South Atlantic where mod demand is strongest.
• Financing - mortgages (rather than chattel loans common to manufactured, or trailer, homes) through traditional bank and mortgage sources with more than a few committed to modulars home construction:
  • Example: Countrywide Home Loans -
    • Sets up draws suited to modular home builders.
    • Offers less paperwork than traditional mortgage companies.
• Marketing is focused on local builder/dealer support of scattered lot sales, usually through local newspapers and regional magazines.

Modular Home Construction versus Site-built Homes

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