100 THE WARREN BUFFETT WAY
image is disappearing. The homes are becoming more like site-built
homes in size and scope; construction quality has consistently improved;
they are competitive with rentals; they have tax advantages in that own-
ers do not have to own the underlying property; and mortgages are now
supported by other large mortgage companies and government agencies,
such as Fannie Mae.
Still, since they are considerably less expensive than site-built
homes (2002 average prices: $48,800 compared with $164,217), the
primary market remains consumers toward the lower end of the eco-
nomic range. In 2002, over 22 million Americans lived in manufac-
tured homes, with a median family income of $26,900.^19
Many manufacturers were caught in a self-inf licted double bind in
the 1990s, and many of them failed. One arm of this double bind was
the increasing acceptance and popularity of these homes, which rushed
many in the industry toward overexpansion. The other squeeze factor
was simple greed.
The homes are sold through retailers that are either independent
dealers representing several manufacturers or company-owned outlets.
Right there, on the same lot, shoppers usually f ind a f inancing opera-
tion, often a subsidiary of the manufacturer/retailer. In and of itself,
there is nothing wrong with this; it sounds like, and in fact operates
like, a car dealership. The problem is that it has become endemic in the
industry to push sales to anybody who can sign their name to a sales
agreement, regardless of credit history, based on loans that are destined
to default.
Selling scads of units creates immediate prof its for the retailers and
huge commissions for the salespeople. It also creates enormous economic
problems longer range. It is an unfortunate reality that many homes are
sold to people with fragile economic circumstances, and repossession
rates are high, which reduces the demand for new homes. As unemploy-
ment rates rose in the past few years, so did loan delinquencies. Factor in
the oversupply of inventory from the 1990s, and the tight economic
times that diminished spending across the board, and it adds up to a
sorry state of affairs for the industry as a whole.
Much of the problem can be traced to the very weak loans that are
so common in the manufactured home business. Why do they all do it?
Because they all do it, and each company fears losing market share if it
does otherwise. That, in a nutshell, is the curse of the institutional