Mobile Home Park Mastery: Episode 124

New Year’s Predictions

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The New Year is upon us. In only a few days we will cast aside 2019 and embrace 2020. This year will feature a presidential election, the roller coaster ride of the stock market, natural disasters, and all of the typical features of modern life. But what will the mobile home park industry be doing in 2020? In this week’s Mobile Home Park Mastery podcast series we are going to predict the key issues of affordable housing in this very important year. We hope you enjoy this episode and would like to take this opportunity to you a Happy New Year!

Episode 124: New Year’s Predictions Transcript

The new year is nearly upon us. In only a few days, we will wish 2019 goodbye. It's an exciting moment. This is Frank Rolfe from the Mobile Home Park Mastery Podcast series. Wanted to give you some predictions for the new year of 2020.

The first one is that interest rates will remain low and stable. We've already seen the cycle of rates, and we know that even the high side is not going to be that bad. You see, prior to the advent of the Great Recession and the new rule of quantitative easing, I had seen interest rates in my own lifetime go as high as 17% under Ronald Reagan, and I just assumed that rates could always go in these vicious cycles, because that's what I had seen early in my career. The US average interest rate was running about 7% in 1776, and I just assumed that rates would always be roughly 7% to 17%, but then things changed.

What happened? Well, we became a nation of borrowers. In fact, we're the largest debtor in the world. We have nearly $20 trillion of debt. When Reagan made his bold moves to raise rates back in his presidential term, we only had less than $1 trillion dollars of debt. Today, the federal government could not afford rates too high. We would all go bankrupt. So, if you watch the current cycle... and it's a long cycle in the making. 2007 was the Great Recession. We're now 13 years later. What's the highest we saw in interest rates during that cycle for mobile home parks? About 6%. So, I think it's been established now that 6% is the high and probably the low is probably around 3% or 4%. I think that's a pretty safe bet for 2020, and as far into the future as we can see.

I think you'll also see, in 2020, that our industry will continue to be either the lowest or next-to-lowest default rate of any form of real estate. Personally, I'm pretty sure we will soon be the lowest default rate of all. You see, self storage had, for the longest time, challenged us in default. One year they would be first, we would be second. The next year we would be first, they would be second. But they kind of ruined themselves recently. In the last two years they built about $10 billion of new construction, or should we call it over-construction, so it's unlikely that those self storage loans are going to do that well, going forward. So, I'm pretty sure we will now take the number one spot and hold that for a long time.

Why is that important? Well, when you are the lowest form of default, banks love you, and that means we will continue to be very, very desirable by banks of all sizes.

Next, CAP rates will remain in a range of about 6% to 8%, with buyers counting on raising rents and filling vacant lots for upside. I think that very comfortable one- to three-point spread will remain common throughout 2020 and even beyond. We're the only form of real estate that has spreads that large, and as we all know, a three-point spread leads to a 20% cash-on-cash return. So, it's a very important feature of our industry that we are able to produce returns like that, and I don't really see that ending in any possible way in 2020.

Next, lot rents will continue to advance based on market forces, and with the elimination of what we call mom-and-pop quantitative easing. As new investors move into the market and buy out moms and pops, they tend to set their rents based on economics, no other factor. Many mom-and-pops don't. They either didn't raise their rents at all, or they only raised them slightly because they didn't consider being a good landlord an important virtue. They mainly were trying to keep rents low for the sake of residents, not realizing it was getting ridiculous in what they were doing. So today, rents right now are roughly 50% lower than they're supposed to be. That's not just me saying that. It's Charles Becker of Duke University, who's an economist, who said those very items.

Next, there will continue to be a huge number of mobile home parks redeveloped into other uses as low rents, failing infrastructure, and city and media hostility makes more mom-and-pop owners simply throw up their hands and say, "Screw it. I'm just going to clear the land. I don't want to take the hassle anymore. Don't want to take the heat." Now, you can thank the media for some part of this, but you can also thank the simple fact of economics. Rents have remained ridiculously low. Other industries have not. Apartment rents are now over $1200 a month, and in fact, apartments are the number one purchaser and demolisher of mobile home parks, then paving the way to build new apartment complexes at $1,000 a month rent, higher than most mobile home parks.

Also, the federal government will continue to search for ways to work with the industry to aid affordable housing. Now, they have succeeded in one important area, and that is with Fannie Mae and Freddie Mac agency debt. In fact, agency debt now accounts for more than 50% dollar volume of every loan made in the mobile home park industry, but what we really need them to do is to promote home mortgages for mobile home buyers. That's the missing piece we really need them to get going on.

You see, the industry used to have much, much higher sales than it does today, and the reason was that people could go to a mobile home park manufacturer and retailer and buy the new home of their choice with the colors they want, the color of carpet, color of walls, color of the exterior, exactly what they wanted. They could get a loan, buy the mobile home, and move it into a mobile home park, the same as you do when you go out and buy a car. However, unlike the car industry, which still gives away very, very easy-to-obtain credit, park owners can get credit through Fannie Mae, Freddie Mac, but right now homeowners cannot. We're hoping in 2020 that tends to subside.

There was supposed to be a test done this year, although I haven't seen any report if it actually happened or not, where Fannie Mae and Freddie Mac were going to test issuing loans or at least backing the loans of buyers for mobile homes. We're hoping it goes well and we're hoping that they see that it's a very critical piece of the plan to eliminate or reduce the need for affordable housing. But customers need to have that ability. They need to be empowered where they can do that. So, we're hoping in 2020 we see advances in that. We're already very thankful, in 2020, for Fannie Mae and Freddie Mac agency debt.

We also think, in 2020, the industry will continue to fracture more between the needs and the wants of park owners and those of the manufacturers. You see, when I got in the industry, the sales were about 400,000 units per year. That's how many mobile homes were produced in factories, and if you look at the charts of the past, it was typically always a range of 200, 300 400,000 units per year, and then what had happened, well, then we had the Great Recession and what's also known as the great chattel crisis, and lenders just stopped making loans on mobile homes. Now, the industry, the manufacturing part of the industry, is pushing for new thing called CrossMod. Now, what CrossMod did, it would be a new style of modular/manufactured home, which they would then try and sell to the single family market.

I don't think it's going to work, to be honest with you. You're still talking a very high price point, and I'm not really sure that customers are willing to buy a CrossMod over traditional stick-built home. There may be some degree of stigma to it. I'm just not sure customers are going to do it. However, I know the customers would love to buy mobile homes from dealers and bring them into lots... that's what they've been doing for the prior half century... but only if they can get the credit. So, hopefully what we'll all find out here soon is the government will provide the credit, and we can go back to the olden days of a lot more units produced. But there's no question the manufacturers are getting a little tired right now of this 100,000 units a year scenario. You can't make any money at 100,000 units a year, and there's a lot of idle factory space.

Bear in mind that during the boom, these factories operated in three shifts, 24 hours a day. That's where things need to be when you have a big factory to really make sense of your capital expenditure. Hopefully we can get back to the industry doing those kind of production numbers, but I don't think you're going to see it, necessarily, in 2020, but perhaps the groundwork can be laid by more Fannie Mae, Freddie Mac financing of homeowners.

Next, you're going to see community owners continue, in 2020, to push for a maximization of appearance and functionality of every inch of the property out of their own selfish push for the highest resident retention and completely to the gain of the residents. There's no question in my mind we are entering a new golden age of the mobile home park to the benefit of residents, owners, city hall, and surrounding communities. We had a prior golden age back in the '50s and the '60s. There were three movies with high-profile actors and actresses based in mobile home parks during that era, The Long, Long Trailer, starring Lucy and Ricky. Lucille Ball, huge star at the time, and her husband, Desi Arnaz, in the movie, move out of a Manhattan penthouse to live in a mobile home park because they felt the mobile home park was a cooler, more hip way of living, and then you saw it in two more movies with Elvis Presley himself, it Happened at the World's Fair in 1963 and Speedway in 1968.

That was the first golden age of the mobile home park, but I think it's coming back. I think we're entering a new age where mobile home parks are once again thought of favorably, and they definitely are much more impressive, as far as the quality of the product.

We also think that you're going to see, in 2020, continually more possibilities thrown out, more toes put into the water of new ways to take what we have and advance it further. I think that one day, mobile home parks, in fact may be called high density subdivisions, or HD subdivisions, and that perhaps a hundred years from now, the mobile homes as we know them today won't exist. They will have been replaced with tiny homes or 3D printed homes or some other form of housing, some kind of housing that finds our permits valuable, but our product archaic.

We would love to be able to go into the future and see what a mobile home park will look like a hundred years from now, and I'm sure we would be as shocked as those who owned the parks back in the '40s and '50s would think if they saw them today themselves. We're just fascinated by the rich tapestry of the industry and we really want to know where this narrative leads. Where does all this hard work that everyone is putting in today, bringing these old mobile home parks back to life, where does that ultimately go? I would like to know as much as anybody.

The bottom line is that we believe 2020 will be another great year for the industry, and it will be great for residents and homeowners alike. We really feel like the golden age is upon us, that we're onto something big. We are the last vestige of the attempt to solve affordable housing in America. We think that it will be more greatly respected in 2020 that in prior years, and there'll be a lot more advancements made.

This is Frank Rolfe, the Mobile Home Park Mastery Podcast series. Hope you enjoy this and talk to you in the new year. Thank you. See you soon.