Mobile Home Park Mastery: Episode 276

Addressing The Elephant In The Room

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It’s pretty clear that we’re heading for a U.S. recession in 2023. So what will that do to the mobile home park industry, and what are the statistics from the 2000 and 2007 recessions to support these observations? That’s the goal of this Mobile Home Park Mastery podcast: to dissect what the 2023 recession may look like and what the impact might be.

Episode 276: Addressing The Elephant In The Room Transcript

The United States is clearly heading for a major recession in 2023. This is Frank Rolfe with the Mobile Home Park Mastery Podcast. I thought we might talk about the elephant in the room, the item that is so huge that it dwarfs all others. And that's a simple fact that virtually every economist is predicting a major US recession happening just next year. And so to me, if I was facing an impending recession, I would want to reflect back on prior recessions and try and come up with some scientific guess of where this thing is going to go and then also look at what's happened in the past recessions regarding the mobile home park industry.

Let's start off with interest rates because that's a big topic right now. As we all know, Jerome Powell at the Fed has raised rates a ridiculous amount in a very short period of time. The guy is absolutely insane and he's not getting a lot of positive support. If you read all the articles from all the various investment banks and banks throughout the world, everyone thinks the guy has massively overreacted. We had had very low interest rates for the longest time and rather than just kind of feather them back in for adjustment, he instead tries to shoot them through the roof trying to stop inflation, which is resolved of all kinds of supply chain issues and energy shocks and other items.

And all you're doing is you're creating the environment for this big recession, which is about to occur. So what happened with interest rates in the past? Well, let's look first at the dot-com bust back in the roughly in the year 2000. As we went into the dot-com bust, which was the first of the most recent modern recessions, the Fed funds rate was 5.92%. And that occurred at January 15th of 2001. And then by October 27th of 2003, it was down to 1.03%. So it went from 5.92% on January 15th of '01 down to 1.03% by October 27th of 2003. That's a very short period of time. So in roughly a little less than two years, you saw the interest rates plummet by almost five points.

Now let's fast forward on that to the Great Recession. The Fed funds rate on the Great Recession, the peak as we entered the recession was 5.27%. We hit that number on May 7th of 2007. And we ended at 0.17% on May 18th of 2009, almost exactly two years later. So once again, we fell five points. Now based on that, based on the fact that the 2000 recession, the Fed funds rate declined five points and the Great Recession, the Fed funds rate declined five points. Where do you think it's going to be going this time? 

And perhaps, as someone might suggest, is that why he's raising it up so fast, so high? Because he knows he has to drop it five points to restart the economy. Kind of like one of these jet airplanes where they have a flame out on the engine and they got to try and restart it. Maybe we all acknowledge from prior recessions that to restart the engine, known as the American economy, you got to have five points. And clearly when the interest rates were sitting there at about zero and things weren't going that well anyway in America, you wouldn't be able to drop five points starting from zero. So maybe that's why he's flying high. Maybe that's why he's targeting five percent is because for the last two recessions, that's how much you have to drop. Now is that a fact? Can we say, "Yep, that's what's going to happen." No, but we have to assume, considering the fact that's exactly what happened in both of the two prior recessions, it's pretty good likelihood. That may not be five points, might be four points, maybe it's three points, but clearly we will see a decline in interest rates.

And you will also note based on when the decline occurred, it was pretty soon after the recession hit. Now I know Powell is trying to take this position that he's somehow the strong man, the World Wrestling Federation person who's going to rattle inflation to the ground and beat and kill it. But no, he isn't that guy. If you read about his background, who is Jerome Powell? Jerome Powell is a guy that worked at places like the Carlyle Group and part of that in the real estate industry.

So he's not some heavyweight boxer. He's not some altruistic guy. He's a rational guy who understands numbers and he understands that the rates are going to come down when the recession hits. So when he talks about the fact, no, he's never going to bring them down, he's going to take them up to the moon, he's not going to touch them until inflation is at 2% and all these other various items and unemployment or whatever in the world that would might be, he's not going to stick with that any more than his predecessors did.

When we finally hit the recession and things are bleak and everyone is crying the blues and everyone's unhappy, the government's going to want to try and restart the economy because here's the problem. The American government is a business. It collects in $2.5 trillion a year of tax revenue. You start jacking with that ability to collect that because in recessions that falls. Well, I have a message, we're already broke. The country is $35 trillion roughly in debt, growing daily. We can't possibly cover our obligations. And by raising the interest rates up as much as he has, he's added almost $0.5 trillion more burden on the interest payments that the government has to give out.

So the bottom line to it all is yes, well, interest rates drop and will they drop pretty rapidly in the coming recession? The answer is clearly yes, based on science. Now, what will the duration be of this next recession? Well, let's look back historically on the others. So the dot-com bust, as it is known, lasted exactly eight months from March to November of 2001. Okay, well, that's interesting. An eight month recession. All right, good.

And then during the great recession, what they call the great recession, it lasted from December 2007 to June 2009. So roughly about one and a half years, but that's pretty consistent, right? So you're almost a year, then you're about a year and a half. So if someone said, well, how long will this next one last? Well, based on prior performance, I'm going to again say probably somewhere about a year to a year and a half. So if it starts up at some point in 2023, it's probably going to end sometime in 2024. Although when it starts, it might even go as much as a little bit in 2025.

So I think that's probably the window. Now am I sure of this? No, I'm not sure of it. I don't know when it will actually start. I don't know exactly how long it will last, but that gives you a pretty good indication based on historical precedent. So then the question is what industries are going to get hurt in this? Well, you know, just look back on the prior recessions. It's pretty clear in the prior recessions, here's what got killed. Construction in the great recession, all home building basically came to a screeching halt as did many other real estate sectors that are constantly building new buildings. Manufacturing got destroyed because consumers weren't buying anything, no reason to build anything, right? So we don't need construction.

And then finally technology. Technologies collapse was the foundation of the dot-com bust. And as you've seen right now, based on layoffs, it's leading the pack. Tech is looking to be the most damaged of all industries statistically going into this 2023 recession. But here's the good news. Almost none of our residents work in this stuff. Those are not big industries for mobile home park residents.

One of our biggest industries of course is retirement. In most mobile home parks, probably almost half the customer base is retired. They could care less about recessions. All they care about is the fact they get that social security check every month, like clockwork. So it doesn't matter to them at all. And for those who aren't retired, our number one industry is fast food. That's right. Majority mobile home park workers are in service industries, food production, transportation, things like that.

People on the manufacturing floor, they earn too much money to typically live in mobile home parks. Those factory workers make a lot of money anymore. Contractors just the same. And of course, no one in the technology space ever really has ever lived in any significant number in mobile home parks. So the good news is we won't have our industries too poorly damaged. How do we know this? Well, we know that even by a big recent reminder, which was COVID. Because almost everyone in mobile home parks was in a deemed an essential business. We found out during COVID, which we didn't know prior. And that was really good information to know.

Now, it's also important to note that parks are contrarian. We go up in demand as everything else goes down the drain. The same is true with Dollar Tree. I was on an airplane recently sitting next to a guy who was an executive at Dollar Tree. And he told me all kinds of things about the Dollar Tree business and how they're loving this idea of the pending recession. Because when you have a recession, what happens? Everyone buys from the Dollar Store. Even people who've never walked in one before suddenly realize they need to save some money. Hey, let's go in the Dollar Tree and see what's going on in there. And they buy a whole lot of stuff. And we are the Dollar Tree of housing, of course.

So if the fact that the Dollar Store is going to do great in the recession, well, we'll do great too. We are the only form of non-subsidized, detached, affordable housing. If you want to have a yard and you don't have a lot of money, you have to go through us. There are no alternatives. So when times get tough in America, typically we do much better. And then finally, based on all historical precedents, one thing we can always say about these recessions, particularly the Great Recession, is it makes rents go up. Because as people get displaced and they can no longer find buying a home attainable, they become renters. And it's just a factor of supply and demand. When you have a greater supply of renters and you have a greater demand for renters and you have a supply of available homes, then the prices go up. And they went up at a staggering pace during the Great Recession.

In fact, people in the mobile home park industry felt the Great Recession was maybe the greatest thing that ever happened to the industry because since we track apartment rents and apartment rents went up at a record pace, we followed suit. The bottom line is, I guess, don't really fear the elephant. Understand the elephant. Understand its nature. Understand how long it will last. Understand how the interest rates will be impacted. Look at the industries that were hit before. Have some degree of faith and happiness, in the fact we're not in those industries. But we are a contrarian in the fact that it typically makes rents go up, which is great for every mobile home park under nationwide. This is Frank Rolfe, the Mobile Home Park, Mastery Podcast. Hope you enjoyed this. Talk to you again soon.