Why Isn’t Factory-Built Housing Gaining Market Share?

Factory Built Housing
Factory Built Housing

Photo courtesy of Kintner Modular Homes, Inc.

Published July 14, 2021
Reading Time: 5 minutes
Published July 14, 2021
Reading Time: 5 minutes

Housing Market Niche

Factory-built housing includes modular homes, mobile homes, and panelized or pre-assembled homes that are delivered to a prepared building site. The U.S. Census Bureau reports that the 8.5 million manufactured homes in the U.S. make up 7 percent of all owner-occupied housing in the U.S. More than 20 million people already reside in manufactured homes. That number should grow as a portion of the housing as America looks for ways to address its housing shortage.

According to the Manufactured Housing Institute, since 2014, this industry consistently produced 9% or 10% of new single-family home starts. These numbers suggest that factory-built housing has a stable niche in the housing market. However, in these times of a severe housing shortage, why isn't this more efficient process gaining more market share?

The Scope of the Issue Is Beyond Silicon Valley and Big Money

In 2016 Silicon Valley entrepreneurs thought they had the answer with a well-funded startup, Katerra, that aimed to revolutionize the construction industry by mastering every element of the trade at once – end-to-end. Investors injected over $3 billion into Katerra's strategy of saving time and money by bringing every step of the construction process in-house. They expected a hyper-growth strategy of the Silicon Valley mindset. They believed that the old-fashioned construction industry was ripe for disruption, promoting a technological transformation of every product and every process to lower costs and speed up building completion times. 

Would Katerra discover the holy grail for an industry that has remained largely stuck with mid-20th century era production methods? The buzz at the time Katerra hit the housing scene was that modular housing would start gaining market share in the United States and begin to solve labor and cost issues.

The answer is no. The buzz did not resonate. Its filing of Chapter 11 bankruptcy in June of this year made it clear just how difficult it is for Silicon Valley to disrupt this complex, slower-moving industry. Its bankruptcy also highlights the difficulty of modernizing construction, which accounts for around 4% of the U.S. Gross Domestic Product (GDP). Katerra lists six Front Range projects. It appears only two apartment buildings and a hotel in Denver remain unfinished. The epitaph for this massive effort will be debated in the best MBA programs in years to come: was Katerra's bold operational model wrong, or was its execution faulty?

The Giant Home Builders Don't Focus on Factory-Built Homes

I would also observe that most home builders today have no interest in revolutionizing the process like Katerra. This may be typical of publicly listed national home builders to nibble around the edges. However, Lennar, through its subsidiary LENx invests in a portfolio of companies leveraging this leading home builder's investment and operational expertise. This has enabled LENx to deliver transformational guidance to the companies Lennar works with to introduce new innovations.

Clayton Homes' Long-Term Strategy Includes Site-Built and Factory-Built

Then there is Clayton Homes. This Berkshire-Hathaway company became the largest manufacturer of factory-built homes decades earlier then turned to acquire prominent regional home builders after 2014, including Denver-based Oakwood Homes. Their numbers are impressive: in 2020, nearly 47,000 off-site homes were built, with the site-built divisions delivering an additional 9,474 homes.

CEO Kevin Clayton states that "Mr. Buffett is thinking 100 years out. He could not care less if a downturn happens in the next quarter or in the next five years. He is challenging us to come up with a plan for the longer haul." Oakwood CEO Pat Hamill has a 200,000 square foot factory in Denver that is now manufacturing components for houses. After a modest $2.2 million equipment update, Clayton's CFO encouraged Hamill to consider putting another $20 million into the facility for future growth and market advantage. 

Clayton has one end of the process with 40 factories. It has jumped to the other end of the process with its acquisition of nine home builders over the last seven years. Mr. Buffett would like to see the ends meet with a significant competitive advantage for Clayton.

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The Whiton Wisdom Conclusions

  • As with the Katerra experience, big money and a Silicon Valley business model is not enough to fundamentally master the complex issues involved in real estate development.
  • Publicly traded home builders with their short-term horizons are not in a position to invest in plants and equipment to ramp up off-site production. Currently, the public is busy trying to fill the housing shortage with their own site-built processes.
  • Several small builders are playing on the fringes throughout the United States. Some may have breakthrough success, but it won't be of significant scale.
  • Clayton Homes' business model and longer-term horizon may lead to increased modular market share in the future.

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Jeff Whiton Housing Tides Research Team Member

About Jeff Whiton

Jeff formerly headed operations for Lennar and KB Home in Colorado building nearly two per cent of the state’s total single-family housing stock. He was honored as Colorado’s Home Builder of the Year in 2001. Whiton also served as the CEO of the Home Builders Association of Metro Denver for eight years reviving the association from near bankruptcy after the Great Recession.

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