Can The Tiny House Movement Derail Mortgage Banking?

Last month, I spied a syndicated news article that heralded the expansion of the tiny house movement. If you are not familiar with this movement, you may want to pay extra attention: this could be responsible for erasing a nice chunk of your bottom line.

The tiny house movement, sometimes known as the small house or tiny home movements, is the antithesis of the McMansions that dominated the housing market for the past dozen-plus years. As its name suggests, the domicile in question is on the smaller side, usually between 400 and 600 square feet; some homes can be as small as 200 square feet.

This movement has been around since the 1990s, and for years it attracted a miniscule following among people that were not caught up in the bigger-is-better philosophy that warped consumer spending for too many years; a lot of the original interest was spurred by D.I.Y. types that were eager to live off the grid. A wider interested in tiny houses was generated in the aftermath of the 2008 crash, when people found themselves without the financial ability to maintain large houses and without viable options for decent rental properties.

I first realized the potential of this market niche in November 2012 when I conducted an interview with Kent Griswold, the publisher of the Tiny House Blog and Tiny House Magazine. I didn’t know what to expect from the interview, which was published on MortgageOrb.com, but I certainly didn’t expect the reader feedback: in terms of web traffic, the Griswold interview was overwhelmingly the single most popular interview to run on MortgageOrb.com during my years there, bringing in four times as many readers as my other interviews – and this was during a time when I was interviewing presidential candidates and financial industry leaders. Clearly, this was a subject that people wanted to read about – even on a B2B real estate finance site!

There is no industry data on the number of tiny houses on the market today. The most recent figures are in a 2011 survey by the National Association of Realtors, which claimed that only one percent of homebuyers purchased a home measuring 1,000 square feet or less. But I suspect that the level of activity is now probably higher – more homebuilders are active in this market, and many are creating smaller properties that can be used as rentals or purchase properties.

So what does this mean for the real estate finance world? In my November 2012 interview with Kent Griswold, he noted that the average cost for a tiny house was $36,000, but that many lenders did not know how to handle this type of property.

“At this time, it is difficult to find lenders who are willing to provide funding for a tiny house,” Griswold explained. “It is a new category of homes and lenders who are not familiar with this category and are sometimes wary when approached for a loan.”

But over in that syndicated new article I mentioned earlier, Dan Louche, owner of Tiny Home Builders of DeLand, Fla., claimed that buyers of these properties can do without mortgage bankers.

“They can save up to live in a house for free after just two years,” he stated.

Indeed, a leisurely Google search of the subject finds that many people are turning to tiny houses simply because they are able to acquire one without the need for a home loan. When headline after headline trumpets the joy of “mortgage-free living,” you have to wonder what kind of an impact this could have on originators if the movement gets larger.

There is one thing that may dampen the alleged mortgage-free appeal: not many people can save $36,000 in one-to-two years. Indeed, the surplus of low-paying, part-time jobs being created now and the rising level of consumer debt add up to a population that is finding it harder to accumulate serious money, let alone save it.

I believe there might be an untapped niche market here for lenders. Yes, this product may lack the cash cow appeal of a jumbo mortgage – but in view of the projected steep decline in loan originations for 2014, can you really afford to scoff at these smaller loans? And while most loan officers would prefer a cash cow, what’s wrong with having a cash calf?

My advice is simple: spend some time looking into the tiny house movement, and make the acquaintance of the homebuilders that are creating these new little homes. I believe there is a potential here to cultivate a moderate-sized product line; for depositories, this could even lead to a nice bit of cross-marketing for other products and services.

And if that doesn’t work, then at least you will be able to keep an eye on a growing groundswell that is rejecting the tenets of traditional homeownership – including the 30-year fixed mortgage and the lenders that originate them!

About The Author

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Phil Hall has been (among other things) a United Nations-based radio journalist, the president of a public relations and marketing agency, a financial magazine editor, the author of six books and a horror movie actor. Also, as you will discover, he is not shy about stating his views.