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Clayton Homes
🏠 Overview
Clayton Homes is a vertically integrated manufactured housing company, headquartered in Maryville, Tennessee. It was acquired by Berkshire Hathaway in 2003 for approximately $1.7 billion.
🤝 Genesis of the Acquisition
The acquisition is famous for its unconventional origin. A group of finance students from the University of Tennessee visiting Omaha gifted Warren Buffett a copy of Jim Clayton's autobiography, "First a Dream". After reading the book, Buffett was impressed by the company's discipline and phoned Kevin Clayton (Jim's son and the CEO) to propose an acquisition.
🏗️ Business Model
Clayton Homes operates across the entire manufactured housing value chain:
- Manufacturing: Building high-quality, affordable homes in factory settings.
- Retail: Selling homes through a network of company-owned and independent centers.
- Finance: Providing mortgages to homebuyers—a critical and historically volatile part of the industry.
- Insurance: Offering related insurance products.
🏜️ 2000–2003: The Manufactured Housing Crisis
At the time of its acquisition, the manufactured housing industry was in a state of collapse. Competitors like Conseco and Oakwood Homes had aggressively expanded using loose credit standards, leading to a wave of repossessions and bankruptcies.
The Clayton "Ark" Advantage
In the 2003 Letter, Buffett framed Clayton Homes as a prime example of the Noah Rule.
- The Problem: The industry was built on a foundation of shifting sand—relying on the external "securitization" market to fund home loans. When the market crashed, liquidity vanished.
- The Solution: Berkshire provided the necessary financial "fortress" (The Ark). Since Berkshire funds its own investments, Clayton no longer needed a functional bond market to lend to qualified buyers.
- Invincibility: Buffett noted that Berkshire's capital transformed Clayton from a strong player into an "invincible" one, allowing it to capture massive market share while its competitors were incapacitated by the credit freeze.
👥 Leadership
- Jim Clayton: Founder and author of First a Dream.
- Kevin Clayton: CEO under Berkshire ownership, praised for maintaining a "last man standing" discipline.
🔗 Links
- Entities: Warren Buffett, Berkshire Hathaway, McLane Company
- Concepts: Noah Rule, Managerial Non-Intervention, Cost of Capital
- Sources: 2003 Letter, 2003 Meeting
📅 2015: The Predatory Lending Defense
- Scale: 34,397 homes sold in 2015 — approximately 45% of all U.S. manufactured homes. $12.8B mortgage portfolio on ~300,000 homes. Originated approximately 35% of all manufactured home mortgages.
- The Seattle Times Allegation: A Seattle Times investigative story alleged a 20% profit margin on home sales. Buffett demolished this at the 2015 Annual Meeting: the 20% figure was gross margin (raw markup), not net margin. Actual net profit margin: ~3%. The same as Macy's relationship between gross margin (40%) and net margin (5.4%).
- The Originator-Holder Model: Clayton retains ~100% of mortgages originated — the same alignment that Dodd-Frank was trying to mandate at 1-5%. "We have no interest in selling anybody a house and having that mortgage default, because it is a net loss to us. It is a net loss to the customer."
- Regulatory Record: 91 state/federal regulatory examinations over three prior years. Total fines: $38,200. Total refunds: $704,678. Zero complaints received at headquarters in three years despite 300,000 active loans.
- The FICO Constraint: Most Clayton borrowers have credit scores below 620 and would not qualify for government-guaranteed loans. Clayton provides access to homeownership that would otherwise be unavailable. "Ninety-seven percent won't default, and most would not be in homes without the financing Clayton makes available."
- The 2008 Contrast: During the financial crisis, Clayton's manufactured home default rates were a fraction of the securitized conventional mortgage default rates despite serving a lower-income demographic. 2015 Letter, 2015 Meeting
📅 2017: Expanding into Site-Built Homes
- Scale: Clayton accounted for 49% of the manufactured-home market in 2017.
- Bolt-on Acquisitions: Acquired Oakwood Homes and Harris Doyle, effectively doubling its presence in site-built homes.
- Source: 2017 Letter
📚 Historical Mentions & Citations (13)
Click a reference document below to expand and read the exact paragraph(s) containing this concept in the archive.
📜2003 LetterExcerpt Available▼
2003 LetterExcerpt Available
As regular readers know, our acquisitions have often come about in strange ways. None, however, had a more unusual genesis than our purchase last year of Clayton Homes.
This past February, the group opted for a book — which, luckily for me, was the recently-published autobiography of Jim Clayton, founder of Clayton Homes. I already knew the company to be the class act of the manufactured housing industry, knowledge I acquired after earlier making the mistake of buying some distressed junk debt of Oakwood Homes, one of the industry’s largest companies. At the time of that purchase, I did not understand how atrocious consumer-financing practices had become throughout most of the manufactured housing industry. But I learned: Oakwood rather promptly went bankrupt.
🎙️2003 MeetingExcerpt Available▼
2003 MeetingExcerpt Available
WARREN BUFFETT: The other acquisition that is in the works is Clayton Homes. Clayton is the class of the manufactured home industry, and the acquisition came about in kind of an interesting way. Every year for the last five years, a group of about 40 finance students from the University of Tennessee in Knoxville would come up to Omaha, and they would have a lot of fun in Omaha. They’d go to the Furniture Mart. And then in the afternoon they’d come to Kiewit Plaza and the 40 students or so, with their professor, Al Auxier, would have a session with me. We’d just have a classroom session for a couple of hours, and wonderful group of students. And generally at the end of the session they would give me a football, or a basketball, they’ve got a great women’s basketball team at the University of Tennessee, and so we’d have a good time together. And, matter of fact, a year ago, when they came up, Bill Gates, by chance, was in town. So I presented him as a substitute teacher, which is a post he’s always wanted.
(Laughter) And students got quite a surprise. This year when they came, 40 or so students, we had a good session together, a couple of hours at Kiewit Plaza. And when they got through, they gave me a book. And it was the autobiography of Jim Clayton, who started and ran Clayton Homes, and built it into a huge success. And he’d written a nice inscription inside, and I mentioned to the students and the professor that the — that I was an admirer of Clayton. I’d followed the manufactured home industry in other ways, not always so successfully, and I’d seen what Clayton had done. And so I said I look forward to reading the book, which I did. And then I called Kevin Clayton, Jim Clayton’s son, and Kevin is the CEO of the company. And I told him how I’d enjoyed his dad’s book. And I said we still had a little money left in Omaha — (laughter) — and, if they ever decided to do anything, you know, we would be interested. And I suggested at what price we might be interested in.
📜2004 LetterExcerpt Available▼
2004 LetterExcerpt Available
• After 40 years, we’ve finally generated a little synergy at Berkshire: Clayton Homes is doing well and that’s in part due to its association with Berkshire. The manufactured home industry continues to reside in the intensive care unit of Corporate America, having sold less than 135,000 new homes last year, about the same as in 2003. Volume in these years was the lowest since 1962, and it was also only about 40% of annual sales during the years 1995-99. That era, characterized by irresponsible financing and naïve funders, was a fool’s paradise for the industry. Because one major lender after another has fled the field, financing continues to bedevil manufacturers, retailers and purchasers of manufactured homes. Here Berkshire’s support has proven valuable to Clayton. We stand ready to fund whatever makes sense, and last year Clayton’s management found much that qualified.
• Last year I told you about a group of University of Tennessee finance students who played a key role in our $1.7 billion acquisition of Clayton Homes. Earlier, they had been brought to Omaha by their professor, Al Auxier — he brings a class every year — to tour Nebraska Furniture Mart and Borsheim’s, eat at Gorat’s and have a Q&A session with me at Kiewit Plaza. These visitors, like those who come for our annual meeting, leave impressed by both the city and its friendly residents.
📜2005 LetterExcerpt Available▼
2005 LetterExcerpt Available
In addition to buying these new operations, we continue to make “bolt-on” acquisitions. Some aren’t so small: Shaw, our carpet operation, spent about $550 million last year on two purchases that furthered its vertical integration and should improve its profit margin in the future. XTRA and Clayton Homes also made value-enhancing acquisitions.
The star of our finance sector is Clayton Homes, masterfully run by Kevin Clayton. He does not owe his brilliant record to a rising tide: The manufactured-housing business has been disappointing since Berkshire purchased Clayton in 2003. Industry sales have stagnated at 40-year lows, and the recent uptick from Katrina-related demand will almost certainly be short-lived. In recent years, many industry participants have suffered losses, and only Clayton has earned significant money.
🎙️2005 MeetingReference Only▼
2005 MeetingReference Only
Mentioned in this document.
📜2006 LetterExcerpt Available▼
2006 LetterExcerpt Available
Clayton Homes remains an anomaly in the manufactured-housing industry, which last year recorded its lowest unit sales since 1962. Indeed, the industry’s volume last year was only about one-third that of 1999. Outside of Clayton, I doubt if the industry, overall, made any money in 2006.
🎙️2006 MeetingExcerpt Available▼
2006 MeetingExcerpt Available
There’s a lot of resistance, through local zoning laws and that sort of thing by the local builders, to the influx of manufactured housing. We’ve made progress on that in some areas. We’re actually developing subdivisions in that business. The houses were mis-sold four or five years ago in huge quantity because you had manufactured housing retailers selling the properties, getting any kind of a down payment, taking the loans — selling to people that shouldn’t be buying them — taking the loans, securitizing them, so somebody in some insurance company someplace lost significant sums of money. So you had, really, an abuse of credit in the field. And there’s a hangover from that, and it’s taken a long time for that hangover to work its way through. I think Clayton Homes, which we own, has done a terrific job in both the financing — they should be financed on shorter terms, incidentally. I’m — if you put them on owned land, that’s one thing, but financing them for 30 years, in my view, was a mistake.
WARREN BUFFETT: I don’t — in terms of the carpet industry specifically — you mentioned Clayton Homes. I wouldn’t — I would think the mobile manufactured housing industry — I’d be surprised if there was any unusual number at all of illegal immigrants, but I — the answer is, I don’t know that for sure. But I don’t see any change in those industries.
📜2007 LetterExcerpt Available▼
2007 LetterExcerpt Available
Our major operation in this category is Clayton Homes, the largest U.S. manufacturer and marketer of manufactured homes. Clayton’s market share hit a record 31% last year. But industry volume continues to shrink: Last year, manufactured home sales were 96,000, down from 131,000 in 2003, the year we bought Clayton. (At the time, it should be remembered, some commentators criticized its directors for selling at a cyclical bottom.)
📜2011 LetterExcerpt Available▼
2011 LetterExcerpt Available
Last year, I told you that “a housing recovery will probably begin within a year or so.” I was dead wrong. We have five businesses whose results are significantly influenced by housing activity. The connection is direct at Clayton Homes, which is the largest producer of homes in the country, accounting for about 7% of those constructed during 2011.
This sector, our smallest, includes two rental companies, XTRA (trailers) and CORT (furniture), and Clayton Homes, the country’s leading producer and financer of manufactured homes. Aside from these 100%-owned subsidiaries, we also include in this category a collection of financial assets and our 50% interest in Berkadia Commercial Mortgage.
📜2015 LetterExcerpt Available▼
2015 LetterExcerpt Available
Kevin Clayton has again delivered an industry-leading performance at Clayton Homes, the second-largest home builder in America. Last year, the company sold 34,397 homes, about 45% of the manufactured homes bought by Americans. In contrast, the company was number three in the field, with a 14% share, when Berkshire purchased it in 2003.
🎙️2015 MeetingExcerpt Available▼
2015 MeetingExcerpt Available
CAROIL LOOMIS: So, my first question is from a man in Timpson, Texas, who happens to have a familiar name, Frank Gifford, but wants to make it clear that he isn’t the football Frank Gifford, but rather a travel photographer. And his question is a hard one. He says, “I’ve been a shareholder for 15 years, but I’m now suffering heartburn. Until recently I considered Berkshire an ethical company, benefiting society through” — and here he mentions two Berkshire companies headquartered in his home state — he says, ”— through BNSF and ACME Brick. “Two points call that opinion into question now: One is the Seattle Times story on predatory practices at our Clayton Homes subsidiary. “Clayton mainly responded with platitudes to this article and would not answer questions, so I have to assume the facts in the story are correct. “The other point that I want to mention is our growing partnership with 3G Capital. I sold my Tim Horton stock in disgust before 3G gutted 20 percent of the corporate staff and plunged this well-run company deep into junk territory.
And we help them, with our own money at risk, to move into those homes. And if we make a mistake, it hurts them and it hurts us. And that is a very unusual arrangement in the financial industry. Now, I read that story, and in it, there was an item in it, which, reading through the story, I just knew wasn’t true. I mean, nobody that knew anything about manufactured housing could have put that up. I’d like to put that up on the slide, where it says, “Another Clayton executive said in a 2012 affidavit that the average profit margin on Clayton homes sold in Arkansas between 2006 and 2009 was 11,170 — roughly 1/5 of the average sales price of the homes.” So this fellow is quoting somebody as saying that we’re making a 20 percent profit on home sales. Well, I knew that that was nonsense, so I asked for the affidavit. And I read the affidavit about three times, and nowhere in that affidavit was it — was this statement made. Now, what was said was what I’ll show in the next slide.
📜2016 LetterExcerpt Available▼
2016 LetterExcerpt Available
We also include Clayton Homes in this section. This company receives most of its revenue from the sale of manufactured homes, but derives the bulk of its earnings from its large mortgage portfolio. Last year, Clayton became America’s largest home builder, delivering 42,075 units that accounted for 5% of all new American homes. (In fairness, other large builders do far more dollar volume than Clayton because they sell site-built homes that command much higher prices.)
📜2017 LetterExcerpt Available▼
2017 LetterExcerpt Available
Clayton Homes acquired two builders of conventional homes during 2017, a move that more than doubled our presence in a field we entered only three years ago. With these additions — Oakwood Homes in Colorado and Harris Doyle in Birmingham — I expect our 2018 site built volume will exceed $1 billion.
Both Clayton Homes and PFJ are based in Knoxville, where the Clayton and Haslam families have long been friends. Kevin Clayton’s comments to the Haslams about the advantages of a Berkshire affiliation, and his admiring comments about the Haslam family to me, helped cement the PFJ deal.