Thursday, February 10, 2011

MODULAR FACTORIES AND BUILDERS HIT HARD BY MARKET

When I was active on the sales side of modular housing for several factories, I had builders asking me if I could do any better on the price.  Since I gave them what I considered a good price up front, it was hard for me to discount the price except when I worked for a factory that offered volume discounts to all builders. 

Usually it's the new home buyer that starts the haggling process by asking for either a lower price or something added to the house at no charge.  Almost all the builders I worked with knew this was coming and had built about 2-3% wiggle room into their quote.  As times get tougher for both the builder and the factory, this wiggle room moves closer to 3% and sometimes a lot more, depending on how bad things are for either of them.

But now there are some factors that haven't been part of the home buying costs before and that wiggle room is drying up completely.  The first is the Sprinkler requirement.  I've seen costs from the factory ranging from $2 a sq ft to as high as $4 in some of the more complicated commercial projects.  Then there is the builder's field cost to finish the system which might cost as high as another $2 a sq ft.  Factories won't or can't discount their costs as they are running thin on profit for this mandated "standard" option.

And have you checked the cost of diesel fuel lately?  The price per mile to deliver each module has tripled to where it pays to be a builder that has a factory next door.  I've had builders that lived 400 miles from my factory and I'll bet that few of them are still with my old factory because of the shipping costs.

It will be interesting to see how much new home prices are going up for modular home retail builders this year.  Will sprinklers and freight alone be enough to raise their retail price so high that new home buyers are turned off and start looking at used and foreclosed homes?  How will factories continue to offer any kind of discounts as they have been trying to hold their pricing down to keep sales coming into their plant?

Recently I heard the old rumor and let me say again, it's only a rumor and one that's been around for a long time, that factories and site builders will be required to have their plans reviewed and/or designed by Architects.  This could be the final nail in the coffin for the small builder leaving only the big guys selling homes, both in their own developments and on scattered lots.

Modular factories are already aware of these growing problems and that is why you're seeing more and more modular plants turning to multi-family, townhouse and commercial projects.  It used to be unusual for a factory to have a project of more than 10 modules but today we are seeing dormitories, apartment buildings and hotel/motels of 40 or more modules as the norm.  Times are changing and the economy of scale favors the big repetitive type of business these projects allow.

The biggest challenge facing the modular housing industry today is having a solid base of new home builders and the ability to give them affordable, functional, energy efficient and green homes that can compete with the large site builders and the small independent site builder that works from their kitchen table. 

It's a tough challenge but today's modular factories are certainly up to it.

2 comments:

Anonymous said...

Coach:
In some parts of Virginia, they are not only requiring Eng stamped 3rd party plans for the house but also for the foundation and the HVAC layout. This is true whether stick built or modular.

Anonymous said...

I agree with coach about the fuel and delivery costs. They have never hurt me as much as they are now. I am losing more houses to short sales than ever before. Coach forgot one more thing that is hurting us, banks have tightened the requirements so much that the pendulum has swung the other way and getting a mortgage is next to impossible for most people except if they want to buy REO homes from the bank.