Monday, February 14, 2011

SITE HOME BUILDERS STARTING TO FEEL THE VISE TIGHTEN

Back in the good old days before the housing bust, new home builders were making an average of 12.9% profit on their homes.  Lately that figure has dropped to 8.9% and is continuing to fall. Even with the cost of materials rising over the past year, builders were able to absorb some of it because interest rates were down and home mortgage dollar amounts had fallen because of lower land costs and on-site labor.  The current labor pool will work for almost anything in order to put food on the table.

Today, however, it's a different story.  Interest rates are starting to climb and with the Obama administration taking a hard look at curtailing Freddie Mac and Fannie Mae's involvement in the mortgage business, banks will be asked to take a more proactive part in the financing of new homes.  Since they don't want another mortgage fiasco on their hands, they are going to tighten their lending policies again.

Where does this leave the new home builder?  Let's take a quick look at what they are facing.  First, the factories they buy from will start raising their prices to reflect higher raw material goods.  Next land is starting to appreciate again making each lot cost the home buyer more.  Mortgage rates are starting to go over 5%.

Now add the million foreclosed homes that are predicted to hit the market this year and you have modular home builders squeezed in a vice that keeps tightening them to the point of breaking.  

But there are a couple of things that modular home builders have that site builders don't.  First they have speed on their side.  The time from a signed and financed contract to move in by the home owner is about 3 months quicker than site built homes.  Next, all the factories have stepped up their involvement with Energy Star and it is a rare modular home factory that doesn't have an Energy Star package.  And lastly, when new home buyers want a home that is eco-friendly, there is no better home than the green production systems that are inherent with modular homes.

Modular home being set in Michigan

So even though most site builders will have to keep their pricing at last year's level just to sell a new home, modular builders will continue to enjoy both a production lead time advantage and a cost that is still about 10% lower than site built homes.

This could be a good year to be a modular home builder!

2 comments:

Anonymous said...

This article is a little confusing. Are you saying that site builders are in a tougher situation than modular builders? I am a site builder and even though things are tough right now, it's no harder than it was last year at this time.

alex said...

Yes, modular type of homes are built stronger than traditional stick built homes but they also experience a lot more initial wear and tear.