Sector Watch: Modular homes

While the overall housing market is cooling, this is not necessarily the case for the modular home market. Modular homes, which are homes built in sections at a factory and then transported and assembled on-site, are a relatively new concept. They differ from traditional site-built homes and from manufactured homes, also known as mobile homes. Modular homes sales were particularly brisk after Hurricane Katrina, when the government paid nearly $900 million for mobile and modular homes to shelter dislocated residents. While Katrina-related demand fueled huge sales gains for modular home builders in 2006, growth is not entirely disaster-related. Their affordability compared to site-built homes is driving demand as well; the cost of modular homes typically averages 10% to 25% less than site-built homes.

Housing starts and modular home sales have moved in different cycles since the 1970s. One reason for this is the interest rate impact. When interest rates go up, demand for modular homes rises as well as new home buyers seek more affordable alternatives. Also, rising interest rates squeeze family budgets and some homeowners seek relief by trading down to a modular home.

Demographics are favoring long-term growth for the modular home industry. Retiring baby boomers on fixed budgets are expected to drive demand for modular homes in the Sunbelt states. In addition, while down from 2005 peak levels, demand in the New Orleans market is expected to remain strong for years to come.

Modular home starts in the United States totaled approximately 38,300 last year, representing about 2% of total 2006 housing starts. In the Northeast, Atlantic and Midwest, modular presently accounts for approximately 5% of all housing starts. In the West and South, areas primed for growth due to retiring baby boomers, penetration is less than 1%. Modular structures are also used in the construction of prisons, military housing, hotels and multi-story apartments.  Demand is fueled by modular housing’s advantages versus off-site construction, which include dramatically reduced construction time, lower costs and minimal site disruption.

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