It doesn’t take a genius to see that all phases of the construction business are in trouble. Everybody from the multi-state tract builder to the lawn care professional is feeling the pinch.
So how are the modular home factories making out in this turmoil?
Not very well. A quick look around the country sees the top 100 “stick builders” filing for bankruptcy, mothballing entire states or simply closing their doors. Small “1-10 a year” home builders are laying off their workers and doing remodeling either alone or with one other person. The recession has already claimed these companies and is eager to devour more.
Before the recession, modular housing accounted for about 6% of the total new houses built. The last estimate I recall is that there are about 200 modular home factories in the US.
Quick math test: Pre-recession. 1,000,000 times 6% is 60,000 homes. Mid-recession. 400,000 times 6% is 24,000 homes, a difference of 36,000 homes!
Now for some more math. 60,000 homes divided by 200 factories is 300 homes each. A very respectable total. Now take the 24,000 homes currently being built and the total per factory drops to 120 homes a year. Now this is terrible.
So what can the factories that are still open do to combat this situation? Right now they are cutting costs and offering lower prices to any builder that stills has a pulse. I’ve heard from several sources over the past few months that many factory owners are operating on a break-even basis, just hoping to keep the lights on until the recession goes away.
While they may have little or no choice but to do this, the real problem will occur when the recession is over. These low-balling factories are going to find that the builders they have kept during the recession will not tolerate any price increases after it’s over. The builder’s thinking is that they stuck with the factory when times were lean and now they don’t want any price increases until they get their business back to pre-recession times.
So what are the consequences? I believe some of the current factories will be caught in a “Catch 22” of having increased costs and not being able to pass them on to their builders.
So if you are buying from a factory that has been selling you homes at unbelievably low prices, you may find yourself without a factory when the recession ends, either from them going out of business or your choosing to go with another factory that seems to have better pricing.
With millions of foreclosed homes on the market at ever decreasing prices, buyers are finding the best bargains in existing homes while you and your factory are struggling to lure them with lower and lower prices.
The spiral will not end when the recession is over. It will stay at the bottom for a couple of years until the economy catches up.
What can builders do right now? Keep yourself motivated and keep moving forward, one foxhole at a time. If you need to buy the lowest priced home from factories that are just hanging on by their fingertips, then go for it! Damn the specifications and factory service, “FULL STEAM AHEAD".”
But just remember that they may not be there when the light shines on our industry again.
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3 comments:
Gary, Lete me offe this perspective on princing and why some of us may have lowered ours. The industry most likely reached the top end of their pricing in 2006. Some, not seeing the slow down coming continued to raise pricing thru the year. In 2006, demand was high, outstripping supply and most plants had backlogs like never seen before. We also experienced material costs that were litteraly thru the roof. Lke us the suppliers were seeing supply/demand/pricing situaiton.
Then in 2008, reality set in for most of us. Backlogs started evaporating, order intake started to slow down for a variety of reasons that we all thought was unheard of just a mere 2 years ago and we all started scrambling. Admit it or not, most of us had the same problems in this area. With the slow down/decrease in deamnd came lower material prices. Just look at 2 x 10's which sold for as high as 650 per/mbf started selling for 310 p/mbf in late 2008 and early 2009. Now take a look at the anount of board feetof 2 x 10 in a typical 2 story modular home and you get some prety big costs. Maybe, just maybe some of us said that it was better to pass on our cost savings in materials and help builders sell to the smaller numbers of buyers, as opposed to sititng there and making more money should one of our builders be able to seel houses, using 2006 material pricines. Somethign to think about!
Vic
I agree that the plants are charging low prices. A builder has the choice to pass along the reduction of cost or take the opportunity to convert the lower cost into increased profit dollars.
Believe it or not I have advised the factory to charge more. I do not know how they are making any money.
Everyone should realize that price increases are coming. We should welcome the price increases because it translate into a stronger market.
Vic,
You make a great point and one that most successful factories are trying to follow. The factories I'm concerned about are the ones that are just hanging on and don't know the party is just about over for them.
Their only alternative is to keep cutting prices, specifications and factory service to the breaking point, hoping the recession will end soon and they will be able to recoup some of their losses.
I just don't see that happening but my crystal ball is getting older and less reliable...
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