Monday, April 27, 2015

Can the Modular Housing Industry Really Afford to Grow?

The market share modular home construction has enjoyed for the past decade remains in the same 3-5% and this year looks like it will be the same. So what is stopping it from reaching 20% market share as many experts predict?

Before we answer that question, let’s look at single family housing. For new single family/multifamily housing to fully recover its pre-2008 pace of 1.4 M new homes, it will have to add about 600,000 new homes to its current pace.

If the current level of construction is 800,000 units that means at most the modular housing industry is building about 40,000 residential units a year. We all know that isn’t happening. Right now we are building 24,000 units or 3%.

Many people have weighed in on solutions to improving modular’s market share including coming up a new name for modular construction and a nationwide media marketing campaign sponsored by the modular home industry. Sorry to tell you that neither of these will work.

Every time we try to come up with a new handle for what we build, the mobile home, double wide folks adopt it and plaster it on everything they sell and market. How many times have you seen “Modular” posted on the front sign of a mobile home dealer’s street lot. Some even have  it in flashing neon lights!

Having factories take up the cause won’t happen, at least for some time. Most barely survived the housing crash and many have already sold to other factories or closed up shop completely.

For the sake of argument, let’s use 24,000 living units as our current production. If we were to increase this to the 40,000 units we could be building, it would take every last drop of factory capacity to achieve. This should be our first goal.

Now take a look at what the housing gurus say we should be building; 20% or 160,000 living units. This will never happen without some intervention by the modular housing gods.

Here are just a few reasons:

  • Lack of Capacity. For a 40,000 home year, that would mean an average of 30 floors a week, every week be produced by the 77 modular home factories the US. Don’t include the ‘modular’ factories in the Southwest as they produce On Frame Steel homes and are almost always a double box house. Also don’t include the trendy factories that are found mostly on the West Coast as it hurries some of them to produce more than 3 homes a month. Now you are out of capacity to build those additional 120,000 homes.
  • Cost to Build a Factory. Building a new modular home factory consists of three parts. The land, the building and the equipment. Oh, if only it were as simple as putting up a 100,000 sq ft building at $35 a sq ft. But that necessary evil of land is always there and that can run into the millions with excavation, utilities, paving, etc. Now add about $2,000,000 for the production floor equipment, offices, showrooms and maybe a couple of model homes and the total quickly escalates to $7,000,000. Now multiply that by the additional 230 factories needed and you need an investment of $1.5 billion.
  • Lack of Builders. Not only would we need an additional 230 factories, we would need 10,000 new home builders each building 12 homes a year to meet the need for this 120,000 increase in new modular housing. With little or no training available to new builders, finding that many and making them productive will never happen. On top of that, young people are not entering the retail trades like they did just 10 years ago. Few want to risk everything they have just to get into a business that forces them to work as hard as a new home builder. Many of today’s modular home factories are ramping up production of tract homes and high rise condos and as well as commercial buildings such as hotels. This switch to a much larger pool of potential business than working with the retail new home builder means that the small builder may soon be seeing themselves pushed out by many factories that embrace a more commercial clientele.
  • Lack of Workers. Modular home factories are rarely built next to major cities and urban areas that need the affordable housing that modular can bring them. The factories are located a hundred miles and sometimes hundreds of miles from their product’s final destination. The extra labor needed for all these additional factories will have to come from somewhere but the displaced worker that lives in the city where the stick building is replaced with modular cannot and will not move hundreds of miles away to work for half what they made in the city. The local labor pool found near most factories is quickly drying up as easier service jobs are taking a toll on the factory’s production floor. Factories are seeing many more of the of the new applicants fail the drug screening test. What good are 230 new factories without enough labor to build the homes.
  • Lack of Transportation. I can’t even imagine how many more carriers, trucks and drivers will be needed if we increase our market share to 20%. There are already lotteries by some states allowing only a few modulars into their states every day.

For all those experts that say modular should have a 20% share and are the best way to build all future homes, I have to ask, “Where are all the builders, the employees and the money going to come from?”

I think we should be happy if we just got our industry back to the 5% we can build for now.


bradley comly said...

Coach, did you write this article?

You are usually the guy waving the flag and charging into the line of fire. This is more like you are saying that achieving more than 5% is impossible.

Even though I agree with what you posted, I don't like it. This is such a dreary assessment of modular's future.

Anonymous said...

I think Gary makes some good points. What would happen if the economy did take off and more buyers learned about the advantages of modular housing?
Would the manufacturers be able to handle the volume?

Anonymous said...


Unfortunately I agree with your assessment and analysis. The Modular growth curve will never pass the 3-5% ceiling for the smaller independent home builder. The independent home builder does not effectively market the concept and the factories are not united in the drive to expand the base as they continue to cannibalize each other for the existing market share much like the major tract builders buy the mid market and regional builders in their markets

The overall modular market dollar share may increase as factories focus on attached multi-unit commercial segments or existing or shuttered factories are integrated into the production of regional or national tract builders where transport does not exceed the costs for local labor and supply.

Regional difference in economies will also limit modular expansion while the manufactured share increases in the entry or first time buyers market where modular and site built pricing outstrips the buying power of the purhasers