Buffett happy with Manufactured Housing

In his annual letter to shareholders, released today, Warren Buffett talks up one or two bright spots in the Berkshire Hathaway portfolio.  Geico, he says, has some buying opportunities in the insurance industry.  “Like mosquitoes in a nudist camp!” quips the Sage.

And, Buffett points out that loans made within Clayton Homes, the Tennessee manufactured housing company that he acquired several years ago on the urging of a group of MBA students, is actually performing very well.  In spite of all the factors that could lead to it having difficulty, less than four percent of its homes are in foreclosure.

This is an ineresting statement.  On the one hand, four percent in foreclosure is actually pretty high.  Yet, for someone with as much information at Buffett, maybe there are plenty of other elements in the housing market that are performing even more poorly.  That is a scary thought.

So his optimism is relative.  It tells us that in a down market, that manufactured housing is doing less poorly than some other products.  This is a type of “better.”  And the next question is “why?”

Buffett doesn’t have an answer.  A few possibilities could be:

• lower sticker prices on manufactured housing (price per square foot) mean that buyers are getting loans at more affordable rates, even after accounting for the shorter terms of many personal property mortgages.
• Elements of the rural economy are outperforming the more urban and suburban areas where higher barriers to entry, mainly in zoning, keep manufactured housing out. In other words, if you had a job in a rural town, you might still have it now, but that is not necessarily a statement you could make with the same certainty in the MSAs.
• Underwriting has been more judicious. If that is the case, it might owe to the lower appetite for mh on the securitzation market.  These loans did not have the same luminousity of mortgage-backed securities.  Perhaps Clayton and other manufacturers kept more of the loans on their balance sheets.

In any event, it is a very interesting finding for advocates of further expansion into institutional (housing finance agencies, non-profits, governments) use of manufactured housing for their affordable housing elements.