Why Aren't Modular Homes More Popular?

When you first started looking at building a new home, you may have looked into a class of new construction houses called 'modular homes' (or manufactured homes). For those who aren't familiar, modular housing is a type of construction where houses are built as a series of modules in factories and the shipped to the final site and assembled. They can be configured in a variety of different architectural designs and placed on any kind of foundation, even including a finished basement. This is in contrast 'stick building', the more traditional method of constructing homes on site.

Home construction is a very complicated endeavor, often involving dozens of subcontractors, truckloads of materials and a complex list of assembly activities that have to take place in a carefully choreographed dance. The raw wholesale material costs tend to be about $50-60/sf but the contract price for new finished construction homes averaged $151 last year. That price premium broadly represents the exorbitant cost of assembling the materials. For this reason, it's easy to see how a more efficient assembly process can be appealing to home builders. 

Imagine for a moment, that cars were 'stick built' like homes. Instead of going to the dealership and picking up a complete new car, you'd have a series of contractors show up at your garage with parts and gradually assemble the car over a 6 month period. As you can imagine, that would be very inconvenient and very expensive. Instead, they've been built in an assembly line which allows laborers to be much more efficient and maintain a higher standard of quality, while delivering the product the moment that the buyers desires it without delay. 

Since the dawn of the assembly line, many developers and builders have looked to apply the same principles to home construction to try to get the same kind of efficiency and quality gains, but why hasn't it been as transformative?

History of Modular Home Manufacturing:

Historically, manufactured housing gradually gained popularity in the US post-WWII and went through three peaks of popularity, where modular homes represented as much as 34% of all home construction, culminating at the turn of the century where the popularity of manufactured housing flatlined and never regained market share. 

US Percent of New Manufactured Homes

Theories on the Decline of Modular Housing:

  1. Financing: The early manufactured housing booms were driven, in part, by low lending standards. But after getting burned during various recessions, construction mortgage lenders started to shy away from offering traditional 30-yr real estate mortgages for manufactured housing. As a result, owners tend to finance these homes through a combination of cash and riskier personal loans. This induces pressure to buy smaller square footage, lower quality manufactured homes which don't hold their value as well as a traditionally financed stick-built home. Read more about home construction financing here

  2. Stigma: Even though, modern modular housing can replicate a wide variety of finish qualities, it has always been associated with mobile homes and low end housing. The financing pressure shown above self perpetuates this negative feedback cycle to continuously associate manufactured housing with being 'cheap'. 

  3. Building Code: In 1976 HUD published the current building code specific to manufactured housing which was stricter than the existing code and tightened safety and construction standards for manufactured house plans. For this reason, many claim that the increased regulation severely concentrated the industry and led towards monopolization of manufactured housing and resultantly drove up prices to uncompetitive levels. 

  4. Manufacturing Scale: Because of large capital costs of equipment and facilities, factory-built housing is only profitable for a builder when the assembly line is kept running continuously. Since home construction demand tends to come in waves many housing manufacturers have gone bankrupt when the contraction happens. Then when demand rebuilds, it takes time to scale a new factory. 

  5. Limited Design Customization: Many people choose to build new homes because they want to be able to build a variety of house plan styles and customize the floor plans, materials and specifications to their family's specific needs. The HUD code, transportation logistics, manufacturing constraints and expensive design costs all severely limit the practicality of customizing manufactured housing. 

The Future of Factory-Built Home Designs:

Manufactured housing may not be entirely dead but for the time being it certainly lacks appeal for many buyers starting their home building journey. Some newer companies are trying to overcome the stigma by selling expensive, high-end modern house plans as modular homes to high income buyers with traditional real estate financing. But the limitations set above result in limited customization offerings. Most of these builders only offer a handful of house models with a small stock of finish options which is a tough sell at $250-600/SF when you can stick built a custom floor plan for significantly less. If these companies can be successful at overcoming the social stigma and improving the lending profile of modular house buyers then it may crack open the market to increase competition and drive down prices. Until then, I expect that stick built housing will continue to dominate the middle and upper end of the market for new homes and manufactured housing will continue to be associated with the low end.

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