Sunday, May 07, 2006

Berkshire on Manufactured Housing

One of the questions that was posed today at the Berkshire meeting related to the outlook for the manufactured housing industry. The question related to Berkshire’s holdings in Clayton Homes, the leader in manufactured housing.

His response was that one would have to go back 40 years to find the volume of manufactured homes as low as they have been recently (outside of FEMA demand.) Historically, the total production of manufactured homes has represented as much as 20% of housing starts versus the current pace of about 6%.

Lending to manufactured home buyers has increased in a meaningful way. Buffett feels that houses are of much higher quality than just 10 years ago.He described the abuses of credit that had occurred 4 to 5 years ago and that it has taken some time to get over that “hangover.” He also added that the number of manufacturing plants had dropped significantly as well as the number of retailers.

He anticipates that ex-FEMA, manufactured housing demand could reach 150,000 units soon. In Charlie Munger’s  view, the efficiency of stick-builders (conventional construction) had improved dramatically over the years and had become more formidable competitors to the manufactured homes industry.

Buffett responded that manufactured housing industry conditions are much improved, that selling prices of $45 per square foot compared favorably with those of stick builders, and that he anticipated that Clayton could well become the largest homebuilder in the US.

Munger then commented that the “ridiculous” financing that characterized manufactured housing conditions five years ago had shifted to stick-built. The poor lending practices of some banks have been facilitated by “contemptible accounting.”

In an interview that TWST recently conducted with Joseph Stegmayer of Cavco Industries( CVCO  the 7th largest manufacturer) about manufactured housing conditions, he replied:

“Our industry has been somewhat counter-cyclical to the traditional housing business. While housing has had an extremely strong run through the past eight years, manufactured housing has had a tougher time. Because interest rates are very low, people have been able to buy bigger homes for the same monthly payment, so price points tend to get pushed up and buyers can afford more expensive site-built homes. The low interest rates in combination with widespread use of special financing incentives and programs by site builders, which have not generally been available to our industry, have had an adverse effect on the manufactured home market in recent years. However, as rates move up, we do tend to attract many home buyers back as we become the much more affordable housing option.”

The May 1st edition of TWST includes interviews with five different manufactured home industry executives as well as an analyst from Sidoti & Company.

I have commented on this industry previously with a post on Nobility Homes (NOBH) Please note the comment from David Phillips, the 10-Q detective. He provides a highly useful and entertaining blog on accounting issues and has some concerns about Nobility’s slowing inventory turns that you should consider. Inventory turns have slowed recently, but accounts receivables turnover has improved as has days payable outstanding. Overall cash conversion cycle appears to have deteriorated slightly to 92 days versus an average in the last three years of about 80 days.

Disclaimer: Neither I, my family, or clients have a current position in Nobility Homes or Cavco.


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