The Effect of Litigation on the Mobile Home Park Business
One of the biggest news stories emerging from the embattled mobile home manufacturing and sales side of the industry is the current and proposed litigation concerning formaldehyde contamination in mobile homes. As you may or may not be aware, formaldehyde is used in the creation of the products that are used to build a mobile home, such as wood products, I believe. Recently, there have been some studies that may suggest the level of formaldehyde in some homes may exceed the safe level. But my question is what the worst-case scenario might be from litigation regarding formaldehyde, as it affects mobile home park ownership and operations.
The worst case scenario, of course, would be a virtual standstill of mobile home construction and sales at dealerships while the problem is studied and addressed. If litigation is successful, it might lead to judgments that could theoretically damage the ability of manufacturers to build new homes. And it may also cause a huge backlash against the product due to safety and health concerns by potential buyers. So what would the worst-case scenario do to your mobile home park? Well, it looks to me like it might have favorable near term consequences for park ownership. And I'm not sure the long term impact is that large, either.
If the formaldehyde issue causes many of the victims of Hurricane Katrina and other natural disasters, who live in FEMA provided mobile homes, to be forced to move to alternative housing, clearly that bodes well for vacant units inside mobile homes parks--both for sale and for rent. It also will fill up a substantial amount of apartment vacancies, thereby leading to supply and demand inspired higher rents, which again makes homes and lot rents seem more affordable (and lead to more lot rent increases). It will also potentially cripple the land/home business, which relies on new homes and has been a thorn in the side of community ownership for years now. Reducing the supply of land/home communities can only help the mobile home park owner.
In most of the studies that I have read, it appears that formaldehyde is reduced over time, which means that older mobile homes will be more attractive until the issue is resolved. Again, this will benefit existing park owners who have older inventory. For the neat term, the competition from new homes may be abated, and the age of a home will be looked upon as a plus and not a minus.
As for the long-term effects, the sales of mobile homes have been horrible for almost seven years. Barely over 100,000 units per year have been produced (about 25% of 1999 levels), and a large number of those are multi-section which normally don't end up in mobile home parks anyway. These days, it is a rare call indeed when someone inquires as to a vacant lot for a new home. I'm not sure that a complete halt to the construction of homes would even be felt in the park business; it already seems like that now!
The formaldehyde issue is a terrible problem for both the customers involved and the manufacturers and dealers. But before you throw the baby out with the bathwater, I think it is worth taking a minute to examine the real impact on the mobile home park business model. It appears that this problem may just be isolated to the manufacturing and sales side of the industry. And the terrible decline in sales over the past seven years may have been a blessing, preparing us for a potential even greater and overnight slow down in sales of new homes.