December 11, 2012, Wall Street Journal
Shares of manufactured-housing companies were the big-ticket stocks for real-estate investors in recent years, faithfully posting double-digit annual returns. But now, some investors have soured on the sector.
Stocks of the biggest operators in the industry, Equity LifeStyle Properties Inc. and Sun Communities Inc., delivered negative total returns of about 2.4% and nearly 14%, respectively, in the past three months. That is a significant reversal from the past two years: Equity Lifestyle returned 22% in 2011 and 13% in 2010, while Sun Communities returned 20% last year and 86% in 2010, handily beating overall stock-market gains.
The falling fortunes of manufactured housing appear closely tied to the rising fortunes of traditionally built homes—and to mortgage rates. Sales of new homes have spiked in recent months and are on track to hit 368,000 this year, well above the 306,000 sold in 2011.
Meanwhile, shipments of manufactured homes are declining. In October, 5,100 new manufactured homes were shipped, down from 5,400 in the year-earlier month, according to the latest data available from the Census Bureau. September saw 4,400 shipments, down from 5,100 a year ago.
That wasn’t what analysts were expecting earlier this year, when some predicted another strong year for manufactured-home sales. The conventional wisdom held that many consumers were seeking less-expensive housing alternatives, and manufactured homes, which often can be purchased for less than half the cost of a traditional home, would serve that purpose.
But the conventional wisdom didn’t factor in finance costs. While mortgages for traditional homes are running at record-low levels—some rates for 30-year mortgages are below 3.5%—buyers of manufactured homes are paying much higher finances charges, sometimes topping 10%. Lenders charge higher mortgage rates on manufactured homes in part because the homes tend to lose value over time and lenders can have a hard time foreclosing.
"Interest rates on manufactured homes are higher because they are viewed more as a depreciated asset like a car or refrigerator or an appliance," said David Toti, an analyst with Cantor Fitzgerald. "They’re financed more like consumer wwwucts," he said, noting that the higher rates and tighter credit have hurt demand for mobile homes.
The lackluster sales have altered the plans of some manufactured-home companies that were expecting such housing to play a bigger role as the housing market remade itself following the crash. "We have set up inventory and feel everything is in place for a real boom in sales," said Sam Landy, president of UMH Properties Inc., a manufactured-home company. "It’s not here yet."
Mr. Landy, however, remains confident in his business model. He noted new mobile-home sales are up 33% since the bottom of the market in 2009, and as of the third quarter the company sold 71 new homes, the same amount as in all of 2011.
Equity LifeStyle said it maintains that "our customers choose the lifestyle we offer and are not making a decision between a single-family home and one of our communities."
The setbacks are the latest for manufactured housing, which has spent decades battling a "trailer park" image, even though many homes are considered safe, built in a factory and look like traditional homes, with options such as wooden cabinets and walls made from drywall, instead of flimsy paneling.
Some companies are tweaking their strategy in response to slowing sales by beefing up home rentals and increasingly marketing to recreational-vehicle drivers.
Monthly rentals now make up 11% of UMH’s portfolio, up from less than 9% in 2009. In the third quarter, Equity LifeStyle, which is led by real-estate investor Sam Zell and began increasing its rental program in 2008, increased its rental-home income to $2.1 million in the third quarter, from $1.6 million a year earlier.
Sun Communities allows renters to apply a percentage of their paid rent toward a down payment on a home. The company sold 395 homes in the third quarter, a 7.6% rise from the prior year. Sun didn’t reply to requests for comment.