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Manufactured housing’s trek toward acceptance

Does the case for manufactured housing as a vehicle for intergenerational wealth stand up?

In policymakers’ hunt for a scalable, quick solution to the affordability crisis, one model has attracted more attention of late: manufactured housing.

Manufactured housing received a prominent shoutout in the Biden administration’s affordable housing plan, which touted the potential role Freddie Mac could play in that market.

Now the government-sponsored enterprises are each weighing whether to finance the most deeply affordable segment of the manufactured housing market. Freddie Mac has a plan — pending its regulator’s approval — to roll out a test program to provide liquidity for loans on manufactured homes titled as personal property. Fannie Mae also is considering whether to provide liquidity to the segment.

But the manufactured market faces hurdles it must clear before it can be viably viewed as a sustainable source of affordable housing. Homes titled separately from the land on which they sit are depreciating assets, meaning it’s riskier to finance them. Loans on manufactured homes often have shorter terms and higher rates than single-family homes. And those borrowers rarely refinance their loans — allowing the refinance boom, which gave site-built homeowners to chance to grow equity, to largely pass by manufactured homeowners.

Proponents of manufactured housing say the industry has made great strides in the past several decades. They argue the federal government, by providing GSE financing, can help smooth over some of the remaining rough patches, and encourage a more equitable market.

In a recent report, researchers at the Urban Institute argued for the viability of manufactured homes as an affordable housing solution. In it, Karan Kaul and Daniel Pang estimated during the next decade, improvements to credit availability for manufactured homes could result in 700,000 more homes.

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HousingWire discussed changes to the asset class with Kaul and Pang, as well as what obstacles remain before manufactured housing can become an avenue for sustainable affordable housing.

This interview has been edited for length and clarity.

Georgia Kromrei: You write, “Chattel loans are secured by only the structure, which depreciates in value over time and exposes lenders to increased risk.” What’s the solution for depreciation? Is there a solution?

Karan Kaul: You’re not going to be able to change the fact that a personal property loan is secured by a depreciating asset. That’s inherent to chattel financing.

But I try to draw a parallel to auto financing. A car is a depreciating asset, but you can get a car for a lot less expensive financing than a chattel loan. The question you have to ask is, ‘What’s the difference between a chattel loan on personal property and an auto loan made on a car for a depreciating asset?’

The other issue with chattel financing is it’s largely a non-agency market — Fannie and Freddie do not offer chattel financing.

Chattel financing is largely fully private, the interest rates tend to be higher, it’s a niche product. It’s a small market, so if you were to talk to the largest mortgage lenders in the country and say, ‘Hey, why don’t you get into this market?’ They’d say the volume is just not there.

All of those factors combined translate to higher rates for borrowers to get loans.

Final thought — last year, when rates were at record lows, something like 60-65% of homeowners with site built mortgages refinanced their mortgage.

For people who lived in manufactured homes, that figure was 40% or so. For homeowners who had chattel financing, it was less than 10%. It was a once-in-a-generation opportunity to refinance your mortgage, and homeowners with chattel financing were not able to take that opportunity. That tells you something is broken in government.

GK: Manufactured housing was initially developed for migrant farm workers, and later used in disaster recovery. How has manufactured housing changed since then? In your view, when did manufactured housing cross the threshold to become a viable source of affordable housing?

KK: A few things have changed, [including] the quality of manufactured homes that are being shipped out in the past decade, compared to those shipped two decades ago.

The American Housing Survey, every two years, surveys issues facing site-built and manufactured homes — like rat infestations, plumbing issues.

You can see that for homes built in the 70s and 80s, there’s a big quality differential. A high percentage of those manufactured homes experience those problems. As you observe numbers and trends over time, we find the incidents of the issues in manufactured housing have come down substantially over the years. They are still slightly more likely [than site-built homes] to have these issues, but the quality gap between them is much narrower.

That tells you something profound — that previous generations did not look at manufactured housing as a viable alternative, partly because of quality and partly because of stigma. But the data clearly show the quality has improved substantially to where it’s very comparable to site-built homes. And beyond just quality, [new manufactured homes] are virtually non-distinguishable from site-built homes.

The second thing that has changed is the economics of buying a manufactured home relative to a site-built home. They’ve always been cheaper, but the differential was much less than it is today. For a buyer 10 years ago, yes, a site-built home was more expensive [than a manufactured home], but you could still afford a site-built home. With the differential becoming so big, that really improves the relative affordability of manufactured homes.

(The median loan amount for a chattel-financed manufactured home is $59,000, compared with $237,000 for a loan on a site-built home, according to 2021 figures from the Consumer Financial Protection Bureau.)

GK: One attractive quality of securities backed by manufactured home loans is the low prepayment risk. But if the GSEs were to enter the market, borrowers would have more opportunities to refinance. So do they then become less attractive for investors?

KK: There’s always a middle ground to be had. Investors want to invest in a security that has slower prepayment rates. 

But the difference is so big. (Kaul and Pang found the refinance share of originations in the site-built market in 2021 was 61%, compared with 43% for manufactured home mortgages and just 7.5% for chattel loans.)

I’m not saying you could do chattel financing at the same rate as site-built, but you could do something in between the two.

More importantly, you could offer a 30-year product. You have this issue of, yes, it’s affordable, but then the financing costs are much higher, the repayment term is much smaller, compared to a loan on a site-built property. Both of those argue for a larger role of the federal government.

GK: The federal government’s role in the single-family market has not just been about housing people, but creating a vehicle for intergenerational wealth. Can manufactured housing be a vehicle for building intergenerational wealth?

KK: This is data that’s not in our report, but the median price of a manufactured home over time has increased. This is not something [that is] common knowledge. Manufactured homes have increased by 25%, 27% year-over-year. If you purchased a manufactured home for $100,000 a year ago, and have chattel financing, it’s probably worth $125,000 today.

There certainly is the potential, compared to just renting. So, the point here is yes, there’s certainly a wealth-building aspect to manufactured homes. Yes, it’s always going to be less if you don’t own the land, but it’s still a lot better than renting. If you also own the land you have the same wealth building opportunity as site-built homes.

Daniel Pang: One thing we’ve found is that manufactured housing is an opportunity for Black and Hispanic renters to enter homeownership. The current landscape of those who reside in manufactured housing right now tends to be a white, rural population.

GK: The typical arrangement that comes to mind is someone putting a manufactured home on land owned by a family member. How dominant is that model? Are renters without those sort of connections disadvantaged as they look to enter the market?

DP: It is certainly not dominant, but it is meaningful enough. As we look at ways in which manufactured housing can play a bigger role in the context of supply crisis — it’s good if you can put your manufactured home on land owned by a family member or friend, but you can’t rely on that certainty.

You have to have opportunities available for people perhaps who are moving to a new city and looking for a home close to a job opportunity. We’d be better served if manufactured housing infrastructure moved in that direction, versus putting the manufactured home on land that is owned by a family member or friend.

Solutions need to be more standardized, there is a need for a national mortgage finance system for manufactured housing that does not depend on what kind of connection a borrower has.

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