Buffett wants to tilt the market towards manufactured housing

On Friday Warren Buffett released his annual letter to shareholders of Berkshire Hathaway.  Berkshire Hathaway owns Clayton Homes, a major manufactured home manufacturer.  In the letter, Mr. Buffett laments that “very few factory-built homes qualify for agency-insured mortgages”

Mr. Buffett compares the market rates of 9% on manufactured housing loans to the current rate of 5.25% and states “If qualifications [on conforming loans] aren’t broadened, so as to open low-cost financing to all who meet down-payment and income standards, the manufactured-home industry seems destined to struggle and dwindle.” In doing so, he implies that the 375 basis points (bp) (3.75%) differential between manufactured home loans and conforming loans is due to market intervention by the “all powerful” FHA, Fannie Mae, and Freddie Mac.

Mr. Buffett is being disingenuous.  The current market rate on “non-conforming” site built housing is about 80 bp (0.8%) higher than conforming loans.  This 80 bp is the interest rate subsidy provided to loans purchasable by Fannie Mae. The other 295 bp is the market discount for manufactured housing.

Why does the market discount manufactured housing?

Research by Consumers Union, the publisher of Consumer Reports, shows that prices of manufactured homes over time have more volatility than conventional homes.  (Full disclosure, I was the leader researcher on Consumers Union’s Manufactured Housing Research Project and author of the linked report.) This means that a greater percentage of manufactured home buyers are under water at some point in the life of a loan.  Homes worth less than the loan balance have a higher risk to the lender.  Ergo, they demand a higher interest rate.

But Mr. Buffett must know this, because he also owns Vanderbilt Mortgage, a manufactured home lender.  And with $30.5 Billion in cash on hand, if he wanted to make cheaper manufactured home loans, he would do it.  If the subsidy was the only difference, he could be making loans at 6.05% on all manufactured homes and profiting tidily.

But he’s not.

We should note that manufactured homes can be eligible for conforming loans.  They generally have to have a permanent foundation and meet other guidelines.  Even more subsidy is available through the USDA 502 loan program, which accepts new manufactured homes on permanent foundations, and offers highly subsidized interest rates for very-low, low, and moderate income borrowers.  However, this program is almost never used: in 2008, USDA made or guaranteed just 9 loans in Texas.

The reality is most dealers and consumers don’t structure their purchase transactions to meet the lending requirements of these programs. For example, they may place the home on a short-term foundation and lease in a park rather than on a permanent foundation on owned land.  Such homes are generally not eligible for subsidy.

Whether or not the government should provide an 80 bp subsidy to all manufactured homes would need to be the subject of a much longer blog post.  (The short version: the answer depends on whether the purpose of the lending subsidy is to put roofs over peoples’ heads or to promote access to the asset building opportunity of homeownership. (see this report))  But what Mr. Buffett says the industry needs to stay alive is not an *equal* 80 bp subsidy, but a much larger 375 bp subsidy.

In short, he wants a 468% higher loan subsidy for manufactured housing than conventional housing.  And that’s not leveling the playing field, that’s tilting the table.


  1. John,

    I like the article but have a few questions. We can talk about this at the Grow Home project meetings, as I think this is related.

    Another factor that isn’t considered are the limitations placed on manufactured or modular homes by local building codes. I’m not up to speed on this issue, but I have seen cases in the past where modular and manufactured homes were denied permits because local building codes and zoning prohibited them.

    Austin has a case like this with a factory built Habitat home several years ago and I know there are other such limitations built into homeowners associations deed restrictions.

    I agree that we can’t advocate or expect that FHA, Fannie or Freddie insure high cost mortgages, but if manufactured homes were permitted in more areas then the supply of home sites, in stead of rental lots would be greater and the cost of manufactured home loans would be significantly less for low and very-low income buyers.

    Let’s bring this up at the Grow Home project meetings to see if others think that building codes and zoning is a limitation on modular and manufactured housing placement.

    See you tomorrow,


  2. I see the zoning-against-MH-issue as more of a NIMBY attack on affordable housing in general, and think the response to that could be more comprehensive than “allow MH everywhere.” Zoning shouldn’t prevent the creation of suitable housing accessible to a range of incomes in a neighborhood, regardless of whether it is factory built or not.

    It’s the sometimes-fabricated tension between “suitable” and “affordable” that means the conversation on NIMBY zoning is much bigger than MH.

    But I agree that larger conversation is suitable for Texas Grow Home. (http://texasgrowhome.wordpress.com/)

  3. If you click through MHI’s link to Texas, you’ll find that Texas has no such state law. (Despite, I have no doubt, TMHA’s best efforts)

    In fact, TDHCA’s promulgated
    consumer disclosure
    for purchasers of manufactured homes makes this clear:
    LOCAL RESTRICTIONS AND REQUIREMENTS (ZONING): Depending on where a home is to be located it may be subject to special local requirements, including zoning and deed restrictions. These local requirements may affect where the home can be placed and may also involve other related requirements (and expenses) such as size requirements, construction requirements. Contact the local municipality, county, and subdivision manager to find out what, if any, requirements of this sort may apply to any site where you are going to place a manufactured home.

    So I think Dave’s point stands.

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