THE CURSE OF LOW INTEREST rates continues. That may sound like crazy talk to a conventional on-site builder, but the people who make HUD-code homes in factories know exactly what it means. The market for these homes has been shattered in recent years, because low interest rates and financing have stolen some of the manufactured home advantage.

Fleetwood Enterprises of Riverside, Calif., one of the top three manufactured home sellers, could be the poster child for what's happening in the industry at large.

What many people don't realize, notes Lyle Larkin, vice president and treasurer of Fleetwood, is that manufactured homes still cost about half as much as conventional homes. That advantage, however, may not show up on paper, because conventional mortgages trump HUD lenders.

“When interest rates are as low as they've been,” Larkin says, “you get to an intersection point where people can afford a conventional home—but they can't afford a HUD home.”

That tough scenario helps explain why Fleetwood has just replaced its CEO for the second time since 2002. According to the Los Angeles Times, Fleetwood's sales of manufactured homes dropped by 66 percent between 2000 and 2004.

Things may be leveling off, (or perhaps more accurately, bottoming out) for both Fleetwood and the industry at large. Fleetwood posted a gain of 18 percent in its manufactured housing sales in the most recent quarter. And Clayton Homes, now the industry leader, shipped almost 10,000 more homes in 2004 than it did in 2003. Clayton has the enormous advantage of vertical integration. The company has its own lending services and can compete with conventional mortgage lenders.

Going Modular But the real success story in the factory-built category is the growth of modular sales. Gary Ames, marketing director for Ritz-Craft Corp. in Mifflinburg, Pa., says the same forces driving conventional construction have helped his company.

“Low interest rates increase our sales, the same way they do for Toll Brothers,” Ames says. “All of our stuff goes through the typical mortgage process.

“Most of our growth has come from builders,” he adds. “A lot of small builders build between five and 50 homes a year, and they're finding they can't compete with the big production builders. But they can turn to us. Our ability to purchase materials is a lot better than theirs. Our houses are no less expensive than a site-built house, but we can save them on labor and control our material costs.”

Some of the HUD-code housing manufacturers have added or increased modular housing sales, as the struggle with interest rates continues. Others, such as Champion Enterprises of Auburn Hills, Mich., seem committed to riding out the downturn in manufactured homes and keeping modular as a sideline. Champion sold 3,274 modular homes in 2004, down from 3,515 in 2003.