The housing industry has officially entered a recession. To be clear, the single-family, site-built housing market has entered a recession. Niches of the industry, such as multifamily homes, appear to be in a very different situation. The same may be true for a low-end segment of the market known as modular or manufactured homes.

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The stocks of manufactured homebuilders rallied from mid-June to mid-August, along with other industries banking on a short rate tightening cycle from the Federal Reserve. Charts for stocks including Cavco Industries (CVCO), Skyline Champion (SKY) and LCI Industries (LCII) shaped valid bases.

Then, hawkish signals from the Fed sent anything investors considered a rate-sensitive industry into retreat. Caught up in that selling, Cavco, Skyline, LCI and others saw their chart patterns collapse below key levels of technical support.

Those charts reflected a number of industry data points. Builders confidence swooned in August. Sales of both new and existing homes dropped in July vs. June and year-ago levels. Single family housing starts dropped 10% in August, vs. July.

Multifamily Demand Steady

Multifamily homes, meanwhile, were a different story. The number of buildings with five or more units under construction is up almost 25% over year-ago levels, according to the National Association of Home Builders. Shipments of new manufactured homes during the second quarter swung more than 37% above the year-ago period, with 11,400 units delivered.

In July, Pew Research reported a nationwide shortage of 3.8 million housing units. Much of that need is among low income or poverty-level consumers. But existing housing stock is increasingly under pressure from real estate investors, which accounted for 24% of all the single family homes purchased in 2021. That leaves supply tight and pickings pricey for fixed-income retirees looking to downsize and cut costs, or first-time homebuyers struggling to save up a down payment.

As rising interest rates place increased pressure on those already stressed home shoppers, analysts and investors are watching to see whether much-lower-priced manufactured homes garner more attention.

Economic Trends That Make Manufactured Home Stocks Shine

The industry got its start building mobile homes, the kind with wheels that packed into trailer park communities — most of them low income settings — across the U.S.

But trailer parks have come a long way since Sammy Kershaw hit the top 10 of the Billboard charts with his 1993 country hit “Queen of My Double Wide Trailer.” And maybe even since Toby Keith’s “Trailerhood” hit in 2010. Trailer parks are no longer seen as lower-income havens. Sure, some trailer parks still are, but increasingly there has been a shift to more upscale park model modular homes.

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The difference between manufactured homes and modular homes is slight. The main difference is that manufactured homes are built to the national HUD code, while modular homes are built to applicable state and local building codes. But they essentially look the same. although modular homes can be more easily transportable.

Allied Market Research estimates the size of the manufactured homes industry will grow from $31 billion today to $39 billion by 2027, at an annual rate of 6.5%. Some 22 million people in the United States live in manufactured or modular homes.

Buffett’s Heavyweight: Clayton Homes

A big piece of that market is the turf of Clayton Homes, a division of Warren Buffett’s Berkshire Hathaway (BRKA) and America’s largest manufactured homebuilder. Clayton has reportedly done well as demand for manufactured homes escalates.

But a number of economic trends suggest makers of manufactured homes are broadly poised to benefit. Those trends include:

• The ongoing downsizing trend as baby boomers enter retirement age and look to cut costs.
• Rebranding the names from “trailer parks” and “mobile homes” to park sites that allow “modular homes.”
• People, both young and old, who have been forced out of the housing market by sky-high property values.
• Millennials who see manufactured and modular homes as the next wave of the housing market, where you can take your home with you.

Growth In Revenue Expected to Climb

“Revenue for the manufactured home wholesaling industry is expected to be sustained over the five years to 2027 in light of expected increases in construction activity,” a recent IBIS report stated. “However, projected increases in interest rates, as the economy recovers from the Covid-19 (coronavirus) pandemic, may limit industry growth. Continued downstream demand from construction will likely underpin revenue for the wholesaling of industry products. Despite the cost of raw materials rising.”

Mobile-manufactured homes and recreational vehicles are combined into a single industry group. The group currently ranks No. 134 out of 197 industry groups that IBD tracks.

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RVs experienced a record-setting sales rush as pandemic shutdowns launched the vanlife and glamping crazes in 2020. Thor Industries (THO) and Winnebago (WGO) both shot up in 2020. Then the RV industry underwent a downturn, due to supply chain issues and to a lack of demand once the pandemic subsided.

The manufactured homes group has been more consistent, tracking the housing market’s longer-term cycles.

Skyline Champion Builds On Earnings

“Our growth and improved profitability levels continue to be driven by the demand for our homes and our team’s ability to increase production levels,” said Skyline CEO Mark Yost in announcing quarterly earnings on Aug. 2. “The ongoing efforts to deliver better homes faster through streamlining product offerings and investments in capacity and people are paying off as we sequentially reduced our backlog and improved delivery times to our customers.”

Skyline Champion offers a wide variety of homes, with prices averaging around $65,000.

Skyline logged six quarters of triple-digit earnings growth through the June quarter. Revenue growth during that period averaged 54%. Skyline earned $2.03 per share on sales of $726 million in the June quarter, easily beating Wall Street estimates on both earnings and revenue.

RBC, Barclays and Craig-Hallum all raised their price targets on the stock and held their ratings at outperform, overweight and buy, respectively, following the earnings report. The target average was 74 — about 35% above where shares traded on Thursday.

Analysts see a 104% EPS gain in the company’s fiscal second quarter, ended in September, according to FactSet. The revenue growth target is 32%. Beyond that, earnings forecasts are flat to lower. Projections for revenue are for declines starting in the fourth quarter. But company management remains optimistic.

“We expect awareness of our housing solutions to continue to increase given the tighter economic environment and challenges within the traditional site-built home market,” Yost said.

Cavco Tries To Build Base

Phoenix-based Cavco sells manufactured and modular homes, park model RVs and even cabins and commercial structures. Three-bedroom homes range roughly from $30,000 to $150,000.

After a brief spike on Aug. 5, the day it easily beat quarterly earnings and sales estimates, Cavco’s stock chart quickly unraveled.

Cavco has booked triple-digit earnings gains in five of the past six quarters. Revenue growth has accelerated for seven quarters, rising 78% in its fiscal first quarter, ended in June.

FactSet analysts expect Cavco to report earnings of $5.88 a share, up 44.8%, in the September quarter, on a 54% sales gain, to $555 million. Further out, quarterly earnings and revenue growth projections jerk up and down — but annual gains continue.

LCII Leverages Strength In Manufactured Homes And RVs

LCI Industries splits its sales between two industries: manufactured homes and RVs. The Elkhart, Ind.-based outfit makes components, furniture, trailer hitches and other items for the RV, boating, manufactured and modular homes industries. LCI’s brands include Taylor Made boat parts and Thomas Payne furniture.

As RV sales and prices shot up in 2020, LCI shifted its focus onto RVs. In the latest quarter, supplies for trailers and fifth-wheel RV sales shot up 49% over the previous year. For 2021, Thor Industries represented 23% of total LCI sales. Berkshire Hathaway’s Forest River and Clayton Homes accounted for a total 20% of sales.

While acknowledging the downturn of demand from RV makers recently, CEO Jason Lippert says he’s confident the company will increase its market share both within the RV industry and in the manufactured homes industry.

“The widespread availability of peer-to-peer rentals, along with increasing costs of airfare and hotel lodging, have made camping, boating, and RVing attractive options for vacationing,” Lippert said. “We believe our diverse portfolio has positioned us for long-term growth as we capture tailwinds related to the ongoing popularity of the outdoor lifestyle.”

LCI earnings sputtered in last year’s third quarter. The numbers quickly picked back up, while sales growth continued at a healthy clip.

FactSet analysts project another Q3 blip this year, due to the lack of demand from RV makers and seasonal trends. They expect earnings of $2.55 a share vs. $6.06 for Q2, but still up from $2.50 a share in the year-ago quarter. The only recent analyst action on the stock was a downgrade, to neutral, by DA Davidson in early August.

Manufactured Home Stocks Are Not The Only Way To Invest

In addition to the builders and suppliers of manufactured/modular homes, investors can also buy real estate investment trusts (REITs). These REITs hold preplanned communities designed to house modular homes. They include Equity Lifestyle Properties (ELS), Sun Communities (SUI) and UMH Properties (UMH).

A quick look at MarketSmith charts tell us that none of these REITs is positioned to create a buying opportunity. And most REITs have followed the real estate market as it enters a recession.

Follow Michael Molinski on Twitter @IMmolinski

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