- Condos were picked as an affordability favorite early on in the pandemic, with more availability at competitively lower prices (versus urban single family homes), and competition might be higher still for condos with affordability pressures mounting.
- Manufactured homes, with far lower prices and more available inventory, offer an opportunity for affordability, until financing gets involved.
- Vacant lots might give buyers more time to make a decision, and the opportunity now with falling lumber prices to build exactly what buyers are looking for.
It comes as no surprise to many that the housing market has been largely driven by affordability constraints in recent months, as volatile mortgage rates clash with high home values, and household incomes lag far behind prices. While single family homes dominate much of the available inventory on the market and are how most people imagine the typical ‘home’, there are many other alternative property types. Most offer some reprieve when it comes to affordability.
High density urban living has its (affordability) perks
In the early days of the pandemic, when job centers and urban cores hit the pause button, condos became a widely available and affordable alternative. But with more and more COVID-19 restrictions behind us, accommodation and food service employment on the rise, and homeowners and renters alike drawing back to the urban core, condo inventory dropped off a cliff similar to all other property types during the low mortgage rates of the pandemic, just roughly a year delayed.
As mortgage rates started their climb, condos saw a steep rise in the share of listings with a price cut. But compared to pre-pandemic norms, price cuts on condos haven’t jumped quite as much as for single family homes. Competition for condos, while certainly slowing, is not receding at quite the same cadence as for single family homes. Despite the typical value of a condo matching that of the typical single family home and the pricey addition of a monthly HOA payment, condos may still be an attractive affordable alternative to single family homes for urban dwellers. Condos are concentrated in urban areas where price per square foot is much higher, so the affordability comparison to urban single family homes still puts condos on top (the typical value of urban condos in March was $405,857 compared to $610,583 for urban single family homes).
Manufactured homes might be the answer we have all been looking for
A corner of the market even more known for affordability is manufactured homes. Using the efficiencies of a factory production line, manufactured homes come with a much smaller price tag than site-built (condos and single family) units, giving more opportunities for ownership for lower and middle income households. But the ability to make a structure or structure components affordable at scale is only part of the story.
Still impacted by the price of land and the imbalance of housing supply and demand, the price of manufactured housing has risen significantly over the past three years. Median list prices for manufactured homes reached almost 30% annual growth right before the rate hikes entered the market in early 2022. Despite this the median list price for manufactured homes is still far below that of site-built homes. The tricky side of affordability for manufactured homes comes with financing the purchase.
Many lenders don’t necessarily classify manufactured homes as “real property” in the same way they classify a site-built home. This can lead to higher rates and more challenges with being approved for a mortgage. According to preliminary data from the 2022 Home Mortgage Disclosure Act, [1] the median interest rate on an approved mortgage for a manufactured home purchase was 6.25% – over one full point above the 2022 median rate of 5% for site-built home mortgages. And not all manufactured home mortgages are made equal. From the preliminary 2022 HMDA data, the difference between rates on approved mortgages for manufactured homes where the borrower directly owned the land the home was on and approved mortgages where the borrower was in a paid lease for the land was 5.75% to 8%. With more potential buyers on the edge of qualifying, manufactured home mortgage denial rates topped 41.7% (that is, over 4 out of 10 applicants for manufactured homes are denied) compared to just 7.8% (or about 1 in 14) for site-built mortgage applicants. And for those who are approved for a mortgage on these prefabricated homes – loan limits and loan terms can be another hurdle. The HUD guidelines for manufactured home loans sets a limit of just under $70,000 for the max value for a loan, and the term limit is 20 years, compared to the typical 30 year loan for a site-built home. So while prices of manufactured homes went up so far in the last few years, that $70,000 loan limit doesn’t cover quite as much, requiring higher down payments to keep the loan limit in check.
With these pre-existing premiums on mortgage rates (and stricter mortgages overall) for manufactured homes and lower median incomes among buyers ($64,000 vs $105,000 for site built buyers), the manufactured homes market responded similarly to the single-family market, despite its more affordable price point, as mortgage rates started to rise in early 2022. As the market shifted, sellers for manufactured homes had to adjust their expectations from the rapid acceleration in prices that proceeded early 2022, with manufactured home prices now decelerating fast. As such, the share of listings with a price cut climbed way up from pre-pandemic norms as demand was shut out.
With many prospective buyers likely blocked from the market due to incredibly high rates, manufactured home inventory rose sharply and manufactured homes sat on the market for longer waiting for buyers to be able to break through the affordability barrier.
Vacant lots can provide a world of possibility
Finally, vacant lots are a possible alternative to buying an already built home. These offer the option to build something custom that’s exactly to your liking, which may entice more buyers in today’s market given the low flow of new inventory leaving few existing options to pick over. One benefit in shopping for vacant lots is the slower pace at which these listings move. The typical lot listing went pending after more than two months on the market, giving buyers who are pursuing a build-it-from-the-ground-up plenty of time to critically evaluate all of their options. But much like manufactured homes, lots come with tricky financing. Often requiring a hard money loan which carries a really hefty price tag in a normal market, and even more so now with rates hovering around 6.5%. While the vacant lot market is also slowing down dramatically now that rates have departed their pandemic lows, lumber prices have thankfully come down from an acute pandemic-era price surge, easing the price burden for breaking ground on a new home on these lots.
Even once mortgage rates ease and housing has returned to a more stable market, affordability will remain a challenge. Traditionally constructed units too often do not pencil for builders without luxury features and large sticker prices. Reaching inventory levels able to sustain the current and future flow of demand from strong demographic dynamics (think: a lot of millennials buying their first home at the same time as baby boomers are looking to retire and downsize) will require more creative means of construction and a mortgage market friendlier to manufactured, or other exciting new alternatives like 3D printing and modular construction. With a historically high number of manufactured homes shipping out across the country, perhaps momentum behind affordable inventory is on its way.
[1] From data pulled April 3rd, 2023. The 2022 HMDA data is not officially finalized and is still accepting revisions from lenders.
Source: zillow.com