Inventory Glut Bogs Down Makers of Pre-Built Homes

A glut of manufactured homes is causing havoc for the home builders’ earnings and stock prices, as industry leader Champion Enterprises Inc. confirmed Thursday in announcing that its second-half 1999 profit will plunge about 40% from a year earlier.

Champion’s forecast came only a day after Fleetwood Enterprises Inc. in Riverside posted a 13% drop in earnings for its fiscal first quarter ended July 25, mostly because of the slump in its manufactured-housing business. Fleetwood also makes recreational vehicles.

Other leading producers, including Greensboro, N.C.-based Oakwood Homes Corp., also have reported or forecast earnings and sales growth that’s been much weaker than expected. And investors have responded by punishing the companies’ stocks.

It’s not that consumers’ demand for pre-built houses has nose-dived, according to the companies and industry analysts. Rather, a surge in the number of retailers in the last two years prompted the industry to churn out far more houses than consumers wanted to buy.

“It’s sort of like having a department store open on every corner,” said Barbara Allen, an analyst at investment firm Arnhold & S. Bleichroeder in New York. “The manufacturers are happy to supply each store because they’re ordering, but at some point that gets ahead of consumer demand.”

As a result, the manufacturers are expected to scale back production through the rest of this year, some of the estimated 7,500 to 9,000 retailers nationwide are expected to go out of business, and price-cutting will remain rampant--and will keep eroding profit margins--until the excess stockpile is worked off.

Indeed, Allen is forecasting that industry production this year will drop 3.5%, to 360,000 houses from 373,000 in 1998. Pre-built houses account for roughly 30% of all new single-family houses sold nationwide, according to the Manufactured Housing Institute, a trade group.

And Champion, which is based in Auburn Hills, Mich., said it’s already folded five of its “least productive plants into existing operations” to cut costs while the company rides out the slump.

“While industry sales to consumers are apparently stable, the number of homes in the industry’s channels has ballooned out of balance,” Champion Chairman Walter Young said in announcing the expected 40% drop in earnings, excluding a one-time charge.

All of which has hammered the companies’ stocks. In the last 12 months, Champion’s stock has plunged 67%, Oakwood’s shares have tumbled 64% and Fleetwood’s stock has fallen 36%.

On Thursday, Champion dropped again, by $3 a share, closing at $8.94, while Fleetwood fell $1.06, to $22.19 a share, and Oakwood’s stock was unchanged at $6.13 a share. All trade on the New York Stock Exchange.

Paul Bingham, Fleetwood’s chief financial officer, said “consumer demand is still good” for manufactured housing, owing to the robust economy and strong consumer confidence.

But he said demand “has tapered off a little bit in the last few months,” mostly because finance companies have tightened their lending standards, making it harder for some low-income buyers to qualify for loans.

Manufactured houses mostly sell in the range of $20,000 to $50,000, and typically buyers finance their purchase with loans from consumer-finance companies that specialize in such loans. Those lenders also charge interest rates that are often 3 percentage points or higher than rates on mortgage loans for conventional housing.

Hence, consumers’ demand for “manufactured housing is not as sensitive to swings in interest rates” as demand for conventional housing, whose mortgages involve much more money and have longer maturities, Bingham said.

Ironically, Fleetwood and some other big manufacturers are building up their own retail sales locations. In the last year, the number of Fleetwood stores has soared to 182 from just two, and Champion also is opening more outlets.

But “the fact is, there are a lot of very poor competitors out there, and as we open our stores . . . it’s going to make it very difficult for some of them to compete,” Bingham said.

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Housing Glut

Profits are eroding for builders of manufactured houses because growing production has outpaced consumer demand and created a glut. Manufactured homes shipped, in thousands:

1998: 372,843

Source: Manufactured Housing Institute