Law Clears Way for More Factory Units : Zoning Issues Set, But Good Financing Remains Hard to Find

A new California law makes it easier to put manufactured homes in residential neighborhoods, clearing a roadblock that has prevented many people from purchasing low-cost, factory-made houses.

However, some industry experts complain that financing the purchase of a manufactured home generally remains more expensive than financing a conventionally built house--a problem that keeps many consumers from benefitting from the factory-made homes’ lower price tags.

“The new law has pushed the zoning problems out of the way,” says David J. Leichey, president of Meetings+Plus, a consulting firm to the manufactured home industry.

“Now, if we can solve the financing problems, sales could really take off.”

Thanks to technical advances and new designs, most manufactured homes produced today look exactly like conventionally built houses and the quality is just as good, industry officials say.

The primary difference between manufactured homes and traditional houses is that most of the components of a manufactured home--from the walls to completed bathrooms--are built in a factory instead of on the lot where it will sit. The home is then trucked to the site in two or three pieces, minimizing the need for on-site construction.

The savings that result from factory production can be dramatic: Manufactured homes can cost as much as 30% less than conventionally built houses of comparable quality.

Producers say wider use of manufactured homes could help solve affordability problems in California and other high-cost housing states. But they have long complained that many cities “discriminate” against factory-built homes through prohibitive zoning and planning laws, such as ordinances that require the homes to be placed in run-down mobile-home parks or other undesireable areas.

The new California law, which became effective Jan. 1, prohibits cities from dictating where manufactured homes must be placed. Instead, cities must now allow installation of factory-built homes on all residential lots, as long as the units meet the same standards as conventionally built homes and are in architectural harmony with surrounding houses.

However, cities will be able to turn down a request to install a manufactured home if the house is more than 10 years old, or if it doesn’t meet certain requirements for roof overhang, roofing material or siding.

Cities can use the provision to reject the placement of old-fashioned mobile-homes in residential neighborhoods, but won’t be able to use it to reject modern, manufactured houses.

The new law “bascially puts manufactured homes on an even-footing with conventional houses,” says Jess Maxcy, president of the California Manufactured Housing Institute, a trade group that played a key role in the legislation’s passage.

“If a manufactured home is compatible with other houses in the neighborhood, a city won’t be able to turn it down.”

Maxcy thinks that the legislation could boost the popularity of manufactured homes, in part because buyers will have more freedom to place their houses where they wish.

According to Leichey at Palm Springs-based Meetings+Plus, about 10,500 new manufactured homes were sold in California last year. That’s equal to about 5% of all the houses, condominiums and apartments that were constructed in the state in 1988.

Still, no one is predicting that the new law will send sales of manufactured homes skyrocketing--in part because financing the purchase of a manufactured home is still expensive.

Leichey says interest rates on manufactured-home loans now stand at about 14%, roughly three percentage points higher than rates on loans for conventional homes.

He says lenders charge higher rates on manufactured homes “under the mistaken assumption that the loans are riskier. The foreclosure rate on manufactured homes is actually quite a bit lower than the foreclosure rate on conventional houses.”

Compounding problems, many lenders require that the loans be paid off in 10, 15 or 20 years, compared to the typical 30-year term for loans on conventionally built houses.

Ironically, the higher rate and shorter repayment term sometimes combine to push the monthly payment on a manufactured home higher than the monthly payment on a more expensive, conventionally built house.

For example, a borrower who purchased a manufactured home with a $60,000, 10-year loan at 14% would have to pay about $932 each month toward principal and interest.

But if the borrower instead took out a loan for $30,000 more--a total of $90,000--to buy a conventional house with a 30-year loan term at the current 11% rate for a typical mortgage, the monthly payment would be just $858.

“The manufactured home would cost you a lot less, but the financing would cost you a lot more on a monthly basis,” says Leichey.

Some lending institutions have been working with manufactured-home producers and retailers to bring the cost of the loans down, Leichey says. As a result of those efforts, a small but growing number of lenders are now charging the same rate on manufactured-home loans that they do on conventional mortgages.