In this episode of The REconomy Podcast™ from First American, Chief Economist Mark Fleming and Deputy Chief Economist Odeta Kushi discuss the chronic supply shortage and ongoing affordability crisis facing the U.S. housing market, and examine an overlooked potential solution to increasing the supply of affordable housing – manufactured housing.
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“The average estimate is about 3 million units of housing undersupply. Now, currently, there are about 1.7 million housing units under construction. That's apartments and homes. So, if all those units came to market tomorrow, ready to sell or lease, and there was no new household formation, second home sales or destruction of homes, then that's still only a bit more than half of what's needed to meet the consensus shortage.” – Odeta Kushi, deputy chief economist at First American
Odeta Kushi - Hello and welcome to episode 88 of The REconomy Podcast, where we discuss economic issues that impact real estate, housing and affordability. I am Odeta Kushi, deputy chief economist at First American and here with me is Mark Fleming, chief economist at First American. Hey Mark. Housing economists, us very much included, talk a lot about the housing supply shortage.
Mark Fleming - Hi, Odeta. Indeed, we do. And we've been talking about it for about a decade. Now, one might say we sound like broken records at this point.
Odeta Kushi - I think we do. And, while there are many different ways to measure the shortage and the total number of units we are short can vary based on methodology and assumptions, the industry is an agreement that the shortage is real, and the imbalance of supply relative to demand has contributed to higher house prices.
Mark Fleming - Rare as this is, economists actually do agree sometimes. And, this time, if we had to put a number to it, what would you say is the industry consensus regarding the size of the shortage.
Odeta Kushi - So, we look at many different industry estimates. And it seems the average estimate is about 3 million units of housing undersupply. Now, currently, there are about 1.7 million housing units under construction. That's apartments and homes. So, if all those units came to market tomorrow, ready to sell or lease, and there was no new household formation, second home sales or destruction of homes, then that's still only a bit more than half of what's needed to meet the consensus shortage.
Mark Fleming - But the undersupply isn't static. We have to also take into account household growth. And, according to an analysis from the Harvard Joint Center for Housing Studies, annual household growth between 2019 and 2021 averaged 2.0 to 2.4 million per year, right. So, a lot more. That's elevated compared to the household growth average in 2017 to 2019 of 1.4 to 1.5 million per year. But let's just say that we have 1 million new households next year. That means we need to build at least 1 million more units in a year just to keep up with the new demand for shelter, let alone whittle down that undersupply.
Odeta Kushi - Now you're just being a dismal scientist. But, of course, we know that all real estate is local. So this shortfall varies considerably by market. But I guess the bigger question is, what can we do about it?
Mark Fleming - Well, there are a lot of suggestions having to do with zoning regulations, and generally making it less costly and easier to build. Sort of doing away with the NIMBYism and more of the YIMBYism. But there is no silver-bullet solution, nor actually probably just one solution for America's housing supply shortage.
Odeta Kushi - So, that's why in today's episode, we'll cover one potential solution to building more affordable housing and that is manufactured housing.
Mark Fleming - Yes, manufactured housing is a type of prefabricated housing that is largely assembled in factories and transported to sites of use. And, while often called mobile homes, I don't think that's a fair characterization, but we will get to that in a minute.
Odeta Kushi - You know, my mind immediately goes to the kit homes from Sears Roebuck and Company that were popular in the 1920s. Actually, some of these homes still exist in my neighborhood in D.C.
Mark Fleming - I would imagine in other neighborhoods and old cities, like Chicago and Philadelphia, and others as well. I suppose we could think of this as the OG of manufactured housing, I guess. Okay, that one didn't go well. The manufactured housing of today is a lot more impressive. It's also an affordable solution to the housing shortage. A Fannie Mae study found that the median all-in monthly housing costs of $925 per month for manufactured homeowners was $675 per month less than that paid by owners of site-built homes. That's a savings of 43%.
Odeta Kushi - Yeah, that's pretty massive. And yet another study found that there's a quote, "When structure transport, installation, land and site development costs are included, the total purchase price of a manufactured home might be as much as 75% less than the cost of a traditional home of comparable size and quality." End quote.
Mark Fleming - Voila, affordability. Problem solved. Then, we must be building lots of these, right?
Odeta Kushi - Well, not so much. When we compare new manufactured homes and new single-family, site-built homes, we find that, in 2023, site-built homes made up 91% of the market, with manufactured housing making up 9%.
Mark Fleming - Okay, so not that much, and, unfortunately, even less than before, since we love going back in time. From 1975 to the late 1990s, the manufactured housing share of new single-family production averaged about 20%. And, we were building more new homes in general then too, so a larger share of a larger total in the days of old.
Odeta Kushi - And, if we look at data from 2022, we find that the average price per square foot for a new manufactured home was about $88. Well, for site-built homes, it was $160. This is excluding land. And, if you're wondering if perhaps the quality of manufactured home isn't the same, a study found that the life expectancy of factory-built housing is increasingly comparable to that of a site-built or on-site housing. But, what about the look of it? I mean, you said mobile homes earlier.
Mark Fleming - Mobile homes, well, I sort of have a mobile home picture in my mind's eye here, but I suspect that I am falling prey to a bias or two.
Odeta Kushi - Indeed, you are. The manufactured Housing Institute recently conducted a consumer survey to capture consumer sentiment about manufactured housing. And, I'm just going to go over some of the highlights. Overall, 81% of manufactured home owners report a very positive or positive overall feeling about their home. 71% report that they're extremely or very satisfied with their home, and a strong majority of manufactured home owners, about 72%, said that they're likely to recommend manufactured homes to others. And, when they looked at demographics, because they did this similar study in 2018, they found that resident demographics are now younger with kids, and more upscale, so higher income, more educated, more employed, and less rural.
Mark Fleming - And they also profiled potential buyers of manufactured home, which tended to be younger and are not only attracted to the affordability of manufactured housing, but also features such as energy efficiency and natural light. This doesn't sound like the mobile home, in my mind.
Odeta Kushi - No, very different, I think. So, essentially, we have a housing shortage and manufactured housing is a cheaper, durable, aesthetically pleasing option, and people generally seem happy with it. So, the question then is, why don't we have more of it?
Mark Fleming - That is the great question. And there are a few reasons, but let's start with local zoning. A 2018 study by the Urban Institute found that zoning restrictions impede the use of manufactured homes as an affordable housing tool in urban and suburban areas and may help explain why a disproportionate amount of manufactured housing is in rural and unincorporated areas. 49% of units are located outside the Metropolitan Statistical Area versus 22% of all single-family detached housing units. In other words, manufactured housing is in the exurbs and in the rural America, not urban America.
Odeta Kushi - Not to mention that some localities have an outright ban on manufactured homes or require that they be placed on larger lots than site-built homes. And there are other practices, such as imposing site-built construction standards to these manufactured homes, also called HUD-code homes. So, for definition purposes, a HUD-code home refers to manufactured homes that comply with the safety and construction standards set by the U.S. Department of Housing and Urban Development, or HUD.
Mark Fleming - A National Construction standard. That is something that cannot be said for site-built homes, and even setting appraised value requirements that a manufactured home must meet before it can be cited in the locality. This exclusionary list goes on. But the point is that local jurisdictions adopt land-planning ordinances and utilize code enforcement that excludes manufactured housing.
Odeta Kushi - And, unfortunately, that's not the only hurdle. I think we should talk about the chassis requirement. A chassis is a load-bearing framework of a manufactured object. There is a current requirement that a manufactured home be built on a permanent chassis that is a very old requirement and it is reflective of a time when manufactured housing was a trailer home, or at least the chassis under the home was the trailer used to transport it.
Mark Fleming - That's right. But these days, manufactured homes are essentially indistinguishable from site-built homes once placed in the land, the chassis is still required for transportation. But the idea that the home is mobile, I think, is not the case. manufactured homes are rarely moved after they are sited.
Odeta Kushi - So what's the problem with this requirement?
Mark Fleming - Well, first, it certainly doesn't help with the stigma or perception of manufactured housing, you still have this chassis underneath, although you probably can't see it when they're sited properly. But there's an assumption that homes on chassis are lower in quality than site-built homes and this requirement doesn't allow for innovative designs that remove the chassis. So, there are some design limitations, if it's still there.
Odeta Kushi - There's also a financing consideration here. If the land is leased to the manufactured home buyer, then it's classified as personal property or chattel, rather than real property, which is land and manufactured home owned by the buyer. About 77% of new manufactured home are titled as chattel.
Mark Fleming - That's right. Chattel mortgages are harder to obtain due to this type of loan not being offered by many lenders. It's basically not including land and structure, which is more typical for site-built and existing homes. Chattel loans tend to have lower balances, shorter terms, 10, 15, or at most maybe 20 years, higher interest rates and have fewer underwriting requirements than their mortgage counterparts. The borrower may face higher monthly payments due to a shorter loan term.
Odeta Kushi - So, a potential lack of financing is another hurdle. So far, we've got negative perceptions of manufactured housing quality.
Mark Fleming - But I think we busted that myth with some of the survey data responses earlier.
Odeta Kushi - That's right. Then we've got restrictive zoning and land-use regulations and I'm going to point to another study here from the Harvard Johnson Center for Housing Studies that points out that, while state laws preventing the outright exclusion of manufactured housing is helpful in some instances, these laws don't address the design restrictions that are also important barriers, such as lot-size restrictions, which I mentioned earlier.
Mark Fleming - That's right. And then you've got access to mortgage financing, or rather the lack thereof, and the chassis requirement.
Odeta Kushi - So these obstacles are really important to address because that same Joint Center for Housing Studies research found that there are 3.2 million renters earning between 50% and 100% of area median incomes in counties across the country who would have difficulty affording a site-built home, though who could benefit from the lower cost of a manufactured home.
Mark Fleming - Well, it seems to me one thing is for sure, the U.S. housing market faces a housing availability and affordability crisis. And manufactured housing seems to be one good solution among the many.
Odeta Kushi - I think that's a pretty good place to close out the episode.
Mark Fleming - Wait, wait, how can we get through an episode without an '80s music reference? And listeners? You would never imagine what I found? Did you know that there is an '80s Swedish rock band called -- wait for it -- The Mobile Homes? Seriously? How can we pass up that bit of '80s trivia.
Odeta Kushi - Someone get Mark to an '80s trivia night or something? I mean, I think he would do really well. All right, now I think we really need to end this episode. Thank you, everyone for joining us on this episode of The REconomy Podcast. If you have an economics-related question you'd like us to feature in the future, you can email us at economics@firstam.com. And, as always, if you can't wait for the next episode, you can follow us on X. It's @OdetaKushi for me and @MFlemingEcon for Mark. Until next time.
Thank you for listening, and we hope you enjoyed this episode of The REconomy Podcast from First American. We're pleased to offer you even more economic content at firstam.com/economics. This episode is copyright 2024 by First American Financial Corporation. All rights reserved.
This transcript has been edited for clarity.