Cutting Deals: Trends in the Manufactured Home Dealers IndustryDespite a recession-induced setback, this industry continues to adapt to a more competitive housing market
By IBISWorld Industry Analyst Deonta Smith
Despite a recession-induced setback, the Manufactured Home Dealers industry continues to adapt to a more competitive housing market. To effectively compete against traditional homes, marketing strategies and the ability to conduct lending activities have been manufactured-home dealers’ best assets. Manufactured-home retailers develop and coordinate marketing strategies to provide potential homebuyers with product information and induce sales. They also provide loans to potential homeowners in order to facilitate these sales. However, many loans issued by dealerships became toxic when the subprime mortgage crisis developed and the housing bubble burst. The crisis was due in part to banks and other institutions lowering lending standards to boost lending activity; banks also diversified risk through secondary market transactions, including the packaging and sale of mortgage-backed securities (MBS). IBISWorld estimates that, prior to the downturn, the number of MBSs nearly quadrupled to $8.9 trillion from 1996 to 2007. The industry did not contribute to the housing bubble because retail manufactured home prices did not rise at the rate of traditional homes. However, due to consumers’ reliance on loans to purchase industry products, demand severely contracted when lending conditions tightened. As a result of the subprime mortgage crisis, banks and dealerships alike have curbed lending and increased standards, restricting some low-income individuals from purchasing manufactured homes. Consequently, revenue fell at an annualized rate of 11.6% in the three years to 2010.
Economic contraction leads to demand slump
There are two key drivers that influence growth for the Manufactured Home Dealers industry : retail sales volume and inventory size. Decisions to make home purchases are often attributed to affordability and home values over the long run (e.g. disposable income levels, consumer preferences, prevailing home prices, appreciation levels and location popularity); such advantages make manufactured homes a viable option for potential buyers. When home purchases peaked in 2007, manufactured homes were overproduced in order to keep up with demand. During these periods, many dealerships thrived because they could provide consumers with financing.
Initially, providing loans to consumers allowed participants to increase retail sales and decrease inventory. However, manufactured home dealers’ capacity to hold debt declined during the Great Recession. Several dealerships had to foreclose on toxic assets, thus stacking up their manufactured home inventory, most of which carried decreasing values. Moreover, many dealerships were undercut by manufactured home wholesalers during the past five years, which contributed to a decrease in industry revenue. Because manufacturers were able to offer lower prices on the same products, dealerships tried to compete by using the direct-sales method, which further pressured manufactured home prices. As consumers increasingly purchased homes directly from manufacturers, demand weakened for most independent dealers, who represent most of the industry. During the past decade, manufactured home wholesalers eliminated independent dealers by developing their own distribution networks. This trend has enabled manufacturers to increase profit margins, but it has also intensified competition for the independent dealerships in this industry.
In light of the strong decline in demand, dealers reduced the prices of their products to encourage sales. Additionally, firms benefited from government incentives provided to promote home purchases. Nonetheless, these incentives contributed to the decline in profit by encouraging frugal buyers to maximize the tax credit by purchasing lower-cost, lower-margin inventory. Dealerships continued to have problems offloading the higher priced inventory. As a result of weak demand since 2007, the industry's revenue is expected to decrease at an average annual rate of 2.5% to 2012.
Industry Risk Assessment
IBISWorld uses a nine-point scale to assess industry risk, with a score of 1 indicating very low risk and a score of 9 indicating very high risk. Overall, the Manufactured Home Dealers industry is considered to have a high level of risk, with a score of 6.16 in 2012. The industry’s high turnover projected in the coming years is the primary reason for this high risk.
Throughout the trough period of the recession, manufactured housing prices were particularly low, resulting in lower revenue. These decreases became a concern for many participants, which resulted in bankruptcy for some and takeovers for others. The number of firms in the industry is anticipated to decrease at an average annual rate of 7.1% to 1,975 in the five years to 2012. Contrarily, the increased consolidation did not necessarily lead to greater gains for the industry. From 2013 to 2014, revenue for the Manufactured Home Dealers industry is forecast to rise 5.7% from a low base of $7.5 million in 2012. As the economy rebounds, dealers are likely to benefit from lower rental vacancy rates and an increased home price index. Vacancy rates are an important indicator of industry demand because the need for new property rises as vacancy rates fall. This factor's contribution to risk is expected to decrease in the coming years. Larger, multi-dimensional manufactured homes are set to drive profitability, as they provide participants with stable revenue due to their popularity. However, these homes are more expensive because they are more difficult to build.
Acquisitions have led to profit increases among larger dealerships, primarily as a result of decreased inventory cost. Conversely, many smaller firms that were not acquired brought down the profit levels for the industry. These firms constantly lowered their product prices to compete with larger retailers. While acquisition activity might have increased profit margins for larger firms, these companies do not command significant market share. The four largest firms account for less than 15.0% of the industry’s total revenue.
Housing market bouncing back
While demand for manufactured homes will strengthen, fierce competition and tight lending will slow revenue growth over the next five years. From 2008 to 2012, quantitative easing measurements have assisted the industry’s rebound; interest rates have remained extremely low to encourage lending in the weak economy, as mandated by the Federal Reserve. The Federal Reserve is expected to boost interest rates in the coming years to 2017 as the economy recovers. With higher interest rates, mortgage payments will rise, making it more expensive for consumers to purchase homes. IBISWorld forecasts that the 30-year conventional mortgage rate will increase an average 1.2% annually from 2012 to 2017. Higher mortgage rates will result in more consumers looking to cheaper housing options, such as manufactured homes. However, lending to low-income applicants (the largest target market) will remain strict, making it difficult for dealers to sell homes at prerecessionary rates.
The five years to 2017 are set to be relatively brighter for the industry. The industry's projected growth is attributed to rising conventional home prices, the increasing rate of household formation and lower rental vacancy rates. However, this growth will be initially hindered by fierce competition from conventional homes still on the market and low interest rates that make them affordable. Consolidation will likely continue in the next five years as growing companies seek to add more retail centers to their portfolios to grow their customer base and, ultimately, profit potential. Additionally, consumers will increasingly purchase manufactured homes as they experience rises in disposable income and savings. Continued government incentives for homebuyers will benefit the industry by making manufactured homes cheaper at no cost to the dealers. This trend is expected to boost the overall market for mobile homes and help stabilize revenue volatility. In the five years to 2017, revenue is forecast to grow at an average rate of 1.9% per year to $7.8 billion.
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