Democratic debates and candidate grandstanding. A torrent of headlines on the 2020 election and primary predictions. It’s the advent of the political season in the U.S. – and that’s a big deal to any business as nobody wants to be on the wrong side of the political process. So where do mobile home parks fit into the national election and what is the impact of the proposed platforms? We’re starting off a four-part series titled “Politically Correct Parks” with an introduction as to where the mobile home park industry stands on a variety of political topics.
Politics is in the air. It's everywhere you go. Debates on television, headlines in the news, Democrats, red states, blue states. All around us, it's time for another political season as a presidential election approaches. This is Frank Rolfe of the Mobile Home Park Mastery podcast series. We're going to do a four part series on politically correct parks, and talk how the American political spectrum plays into the mobile home park industry.
Now, the first thing I'd like to note is that mobile home parks are unique. We're very contrarian. We do best when times are terrible. Now why is that? Why do we do better when most every other industry fails? A couple of reasons.
First, we serve the market of affordable housing, and when the economy declines, that creates more demand for what we do. There's always more demand for affordable housing when people are having a harder time finding and paying for more expensive housing, so that makes logical sense.
The other one though is a little more hidden, and that's the fact that the way the government has set up with the Federal Reserve, the way we battle recessions and depressions is to lower interest rates. It's a process called quantitative easing. It was used very effectively in the 2007 Great Recession and brought about the lowest interest rates in American history. When you add those two together, low interest rates on our loans and higher demand for what we do, the result is a much stronger mobile home park industry. In fact, many people will tell you that the strongest the industry has ever been is how it's been following the 2007 Great Recession.
So with that in mind, what does the current political climate spell out as far as the future of America and the economy, and the bad news is it's unlikely that anyone can really cure our problems. You hear a lot of chatter on the news on all kinds of topics, but nothing about the things that really would impact us as far as a nation being a little more higher income and higher net worth for most people. Why is that?
Well, first off, we've got 20 trillion in debt. We have the highest debt load of any nation in the world, and on top of that, we're making no attempts to balance it. Our budget is still imbalanced and will always be as far as I can see into the future. That's because nobody wants to live within their means and no one wants to bring in new programs and at the same time cutting old programs down enough that we break even. It's kind of painful. It's like watching somebody who has a whole bunch of credit cards paying just their monthly amount and spending and spending when their income does not even cover what they spend each month.
Another issue is health care. There appears to be no solution to health care. Our health care costs in America rise constantly. We have the highest, most expensive health care in the world, but once again, we are doing nothing to really rein in costs. And then what about all those pensions? In some states, the amount of pensions you have are a huge percentage of the total state revenue. How will we ever address these pension issues? I don't know. There's all these big macro things that never get talked about. They always get washed aside for more micro diversions. But let's talk about two items I think will have some impact on the mobile home park business and are worthy of discussion.
The first one is higher minimum wage. You're seeing right now the House just passed a resolution that minimum wage should go up to $15 per hour. Right now, the U.S. minimum wage I believe is $7.25 per hour, so that's nearly a doubling of our current minimum wage. Now, I don't think we'll go up to 15, but I think the pressure is there. There's enough grassroots movement to see that $7.25 escalate. But how high will it go? Well, I don't think it'll go to 15. That's kind of illogical. Why would you double the minimum wage? That's never been done before in American history, but at the same time I think you can see it higher. I know that I see signs all the time in businesses such as McDonald's saying that their opening wage is $11 per hour. I know a lot of people are offering 10, so I'm going to kind of bet the minimum wage will increase, but not to 15. I think 15 is probably far, far, too far to one direction or the other, but I think I can see it going up more towards the $9 or $10 per hour rage.
I also think that if the minimum wage goes up that much, you won't see a lot of people being laid off. I know there's been a lot of news stories where people are saying, "Well, if you raise the minimum wage, we'll just go ahead and cut enough workers to pay for that," but let's be honest. In most businesses there's already been a very big focus on cutting employees, so there's no question right now that if you could run a McDonald's with fewer people, they'd already run it with fewer people. The same is true of Walmart, Dairy Queen, anywhere you go. I don't know of a single business I've been in recently where I said, "Wow, they're overstaffed." All I know is I walk into Home Depot or Lowe's, and I go scrambling to find anybody who even works there to try and give you some information on a light bulb or a plumbing part. So I don't think you can really cut a lot of more people out. I think all that's been done.
I think what will happen instead is you'll just see a very gradual rise in the income of that lowest grouping as far as income level in the U.S. Of course, that's terrific for mobile home park owners, namely because as I pointed out now for years, our rents are ridiculously low, insanely low, make no sense kind of low. Charles Becker, an economist at Duke University, studied our rents in the industry a year or two ago, and he came to the same conclusion, that our rents are roughly 50% or more too low.
Let's put that in economic terms. Our average rent in America is right around $300 a month in lot rent, so if you were to increase that 50%, it would get you up to about $450 to $500, and that is in fact exactly where they should be. Why do I know this with any certainty? Well, if you look at when these parks were built back in the '60s, the common lot rent was $50 or $60 a month. If you inflation adjust that to current, that would give you a lot rent of $500 a month, so that's really about where things should be.
If you look at the typical mobile home park and run the budgets on it, you will also see that at a $500 lot rent level, you have ample cash flow to put in the capital repairs you need to keep the roads, water and sewer, and everything maintained properly. It also keeps a lot of other uses at bay. A lot of mobile home parks are being torn down right now to make way for apartments, but at a $500 rent at roughly 50% increase, you see a lot less reconstruction.
So if we're going to say that the future rents of America are 500, and let's be brutally honest, in some markets in America, the rents are already far higher. Denver lot rents are already at 750 a month. Most of California is well over a thousand. Most of the east coast around New York City is well over a thousand. Even in Dallas-Fort Worth, the rents are often 600 to 700 in the really good properties.
So how will people pay for that? Well, a natural step would be to have minimum wage go up. You're talking a huge increase if you were to even go to 10, almost a 50% increase in people's incomes. That's great because they need the money. They need the money for higher lot rents. They need the money for higher car payments. They need the money because everything in America keeps going up, up, up.
It's not just a future of mobile home park lot rents. It's the future of just about everything, and certainly people who are trying to make ends meet at 7.25 have a tough time. That only gives them $1,200 per month. However, if they can get minimum wage to $10, that's a different picture. That will increase them up by several hundred dollars a month, and that alone will make a huge difference in their lives.
So we're all in favor of higher minimum wage. We think it will do nothing but good things for our customer, give them more discretionary money, allow mobile home park lot rents to rise to levels where they can provide the best product imaginable and stay clear from redevelopment. So we think a higher minimum wage is both going to be a political reality and also a good thing for the industry.
But now there's another thing that we don't think would be good for the industry, yet may still pay some dividends for park owners, and that is all the discussion about changing capital gains tax rates. It's not a popular platform. I don't think it will necessarily pass. There's been a lot of discussion, but some of the people who are pushing for that are some of the more radical members of those running for president.
Capital gains is a very important item in America, and that's why it's been around for so very long because it encourages long-term investment, and most real estate investors do just that. They invest long-term. They're not looking at short-term holds. They're looking at long-term holds, and capital gains is part of that.
But by having even a discussion about lowering or... I'm sorry, not lowering, increasing capital gains tax rates, it has one feature, and that is it frightens people and it makes people want to go ahead and sell now who might sell a year or two years from now. So if you're buying parks, then that's a positive. If that little news announcement spurs someone who was going to sell ultimately anyway but couldn't decide when, to say, "Okay, well, I better sell now before the election," that's actually going to help people get good deals. It's going to help free up a lot of product. Remember, there's 44,000 parks in the United States, but only 4,000 of those roughly are institutionally owned, so there's 40,000 mom and pops out there who've got parks and they know they need to sell at some point. They just don't know when, and this may spur them on to action. So the mere discussion of capital gains taxes is in many ways positive for the industry.
Now the enactment of capital gains tax changes would be another issue. If they truly were to increase capital gains tax, it would have a negative reaction on the real estate industry, no question about that. So we're hoping the capital gains tax changes are merely discussed and not enacted. Now I don't see enough grassroots movement out there to think that they will be enacted. Mostly the discussion of capital gains changes has simply been people trying to explain how they would pay for various new projects they want to do. I don't think you'll find anywhere near enough support in Congress to make that happen, but nevertheless, that's another issue that we all need to watch.
A final political issue out there, and it's not really something that will be addressed in the presidential election, but it's the concept of rent control. New York recently passed some of the most stringent rent control acts I've ever seen. They're giving you absolutely no way to keep or maintain your property, and I can't really believe they did that in light of all the economists that say it's the dumbest thing you can humanly do. I'm not really sure what narrative took hold of the New York State Assembly, but whatever it was, they really screwed up. Now I imagine when they see the impact of the terrible thing they've done, it will ultimately be repealed, but you always have to be mindful of watching for folks trying to do that good old rent control action. You know, it was not adopted by many states following World War I, which is when they all came into being, and it's pretty much uniformly understood that every state that did it made a terrible, terrible error.
When you have rent control, here's what happens. The landlord has absolutely no desire to put a penny back in the property, and it also stops anyone from developing new housing. So what you're trying to do when you do rent control is basically send a message, "Hey, we don't want any new construction. Hey, we don't want anything to be remodeled. We want to let everything stay at the status quo and just fall into absolute wreck and ruin," not to mention the fact there will be no more affordable housing coming in the future because no one will build housing in a state with rent control. So effectively that's a narrative we don't see really going anywhere.
The good news is most state mobile home associations are fighting that pretty effectively. There's been a lot of introductions on it in states such as Colorado, but they never went anywhere, and I think that's continuing to be where things will head simply because there are so much economic data showing that rent control is probably one of the dumbest ideas of all time.
But again, the political stage is here. We're excited to give you this four part series, Politically Correct Parks. This is Frank Rolfe, Mobile Home Park Mastery podcast series. Hope you enjoyed this. Back again next week.