Tuesday, April 10, 2018

The Death of the Modular Starter Home

A little over 30 years ago along Rt 15 in Selinsgrove, PA a modular home builder had two model homes on his lot. They were both ranch style homes, 2 or 3 bedrooms, 1 bath models. One was 28’ x 44’ and the other was 28’ x 48’ if memory serves me. The sign said he would put either home on your lot with excavation, foundation and finish the house for less than $40,000.

He only offered these two models but you could choose your siding color and flooring. He sold a ton of them every year.

Those types of starter homes are basically disappearing. They aren’t being built anymore in most parts of the country. In 1950, the average price was $11,000. For perspective, median income, in real dollars, was about $3,300. The average home was 963 square feet. A majority of homes had two bedrooms and one bathroom.

By 1972, prices had jumped to $30,000 while family income was nearly $10,000. Homes, which typically had three bedrooms and at least a bath and a half, now averaged 1,600 square feet. That kind of house can pretty comfortably shelter a family with 2.3 children.

Today, families are smaller — from 1970 to 2014, family size shrunk by about half a person but the average new home is about 2,300 sq ft. More space, fewer people.

Now homes have central air and finished basements and man caves and spa tubs and yes, granite countertops. But all those things are useless to young families who have no idea where to find the $500,000 they have to pay to live in a place with decent schools that’s within 50 miles of their workplace.

Today if a modular home builder could build a home like the one mentioned above that included the excavation, foundation and finish work for 4 times median income of say $50,000 bringing the completed house in at $200,000, he/she could sell hundreds of them.

Making a $200,000 home work as a homebuilder is junior-high-level arithmetic. Solving for profit — say, 20 percent — land and building direct costs can not exceed $160,000. Problem is, a 20 percent margin on a sub-$200,000 house has become frighteningly elusive in the past decade.

Under $200,000 is now low end and reserved for only the bravest of modular home builders. Do you really think Walmart would be successful if people had the income to support their desired lifestyles? Would the dollar menu at McDonald’s be the best selling products if people had enough money to buy Big Macs?

The under $200,000 detached single family home is about dead. And if low margins aren’t doing enough to discourage its sales, adding in fee after fee from state and local inspectors and building departments, out of site utility hookups and taxes will probably be the hammers that drive the stake into the starter home’s heart.

There are still areas of the country where people can buy a starter modular home, buy the land and put in the utilities for under $200,000 but let’s be honest about it, these are probably areas with fewer jobs and lots of family farms. Commuting from these areas to an area that has high paying jobs would almost take an all day drive.

And to add to the problem even more, who are the ones that need starter homes? It certainly isn’t the Millennials. They really don’t want the work or upkeep of owning their own detached single family home. Apartments, townhouses and even tiny houses near major cities where the good jobs can be found are perfect for them.

Retiring Boomers really don’t want to step back into the under 1,000 sq ft home they grew up in. Gen X folks are moving into the new home market in a big way and are demanding bigger and better single family homes.

Soon we will see the least expensive new home breaking $300,000 in most parts of the country and they will not be called starter homes any longer but rather ‘affordable housing’.

Related Articlehttp://www.modularhomecoach.com/2016/08/when-will-millennials-start-buying-new.html


Ldameron said...

Coach, what exactly do you mean when you say a 20% profit has become frightenly elusive on a sub $200,000 home? Are you saying it can’t be done or that Builders aren’t interested in building homes for that amount of profit? I would build in that price range all day long if there were affordable lots available to build them on. Problem is lot prices are too high, which means you have to build a more expensive house in order to keep your land % of total cost from being too high. Hence the death of affordable or entry level housing.

NYBuilder said...

This site is really funny anymore. One week it's "innovation, automation, etc" and the next week it's nostalgia and complaining that the "modular starter home" is a thing of the past. Do we want to move forward as an industry and do the things that are inherently stronger with our type of building or do we want to cling to the past, avoid change, and then complain that our market share stinks? This is not a difficult question. It shouldn't be at least.

Coach said...

I must agree with both Ldameron and NYBuilder and I think I need to get better at making it clear what I am thinking as I write my articles.

First, as for the 20% profit, any builder would love to sell in the $200,000 price range and realize 20%. You also pointed out that finding a lot to put a $200K house on has all but disappeared making that market harder to find. I wrote the article because I still see modular home builders trying to sell on price alone. Builders are now starting to buy more houses from factories with $300K price tags and higher today.

NYBuilder, I write about what I see in newspapers, blogs, seminars and social media from around the world. Sometimes this can be a mixed bag of divergent thoughts. But there is a real theme running through all these articles. We can't cling to doing things the way we have always done them or the housing industry will pass us quickly. By talking about how things used to be and what others in new home building are doing should be a wake up call for the modular housing industry.

Nobody wants to see an improvement in the number of modular homes built in the US more than I do. However when one looks at our industry we see few if any new factories going in, traditional modular home manufacturers turning to hotel construction to keep production lines running, little or no recruiting of new builders into our industry and an almost total lack of training or continuing education for modular home builders.

You correctly mentioned that we do things that are inherently stronger with our type of building and I want to be a resource for showcasing what we can do for our customers BUT it is very discouraging when I ask builders for pictures of their new homes, factories for news about their latest projects and suppliers for technical reports I can share with the industry and nobody responds because they are "Too Busy" or simply don't want anyone else to know what's in their "Secret Sauce".

My blog continues to grow every year with England and Australia becoming a larger part of my viewership. They look to the US as a role model and what we are doing here is essentially the same thing we've been doing for the past 30 years.

NYBuilder, that is my thinking when I write most of my articles. If we don't learn from the past we will continue to repeat what we do year after year. Housing is changing and our customers are changing but what we build, how we sell it and how we set and finish it hasn't changed in decades.

Bill Hart said...

Keep up the good candid work Coach and continue please..to tell it like it is..God know there are more than plenty of blind loyal mono tuned cheerleaders to go around...And.. Your column is enlightening and indeed refreshingly objective. Your diverse background surely qualifies you as a housing expert! ..right up there with national gurus' like Al Gobar, Burns and Jeff Meyers and yes the late Don Carlson! I recommend your column to all my housing cohorts and especially to newbies...of which we seem to have a goodly number hereon..

Chris Osborne (Budget Shipping Containers) said...

Interesting article. I personally believe the industry has certain niches that it can perform in better than other building options. for example of our key customers, a major house builder in the Uk has privately shard they have no interest in modular design and builds, they make good money doing things the same way they always have. However specifically in London they are finding it very cost effective to build on site and install quickly. saving even in the same country on staff and labour costs, but also fewer site restrictions, road closures etc play to their favour.

Personally for the 'industry' i can see smaller home providers may struggle but some big players are entering the market, CIMC the worlds largest shipping container builder is busy building and shipping hotels and similar from specially built (often wider and bigger) shipping containers and they are the sort of business that can push into a market and make their price point work.

I see it more as a point of evolution perhaps? we need ot find the area where we can compete and work best. starter homes and cheaper houses may not be the solution perhaps?

Josh Margulies said...

If you do the math, a man could make a handsome living building starter homes. But if you are a small custom home builder and NOT a merchant builder, NOT A site and stick builder, NOT a buyer and developer of your own land, you must market in areas where there is starter ground for a custom home? Wait? Oh yeah! THATS WHY no starter custom modular homes!