Millions of investors are obsessed with the direction of interest rates. While that’s a noble pursuit, there’s a huge opportunity created by this distraction as far as mobile home parks are concerned. In this Mobile Home Park Mastery podcast we’re going to discuss why the late Sam Zell quote of “when everyone’s looking left, look right” applies to much of what’s going on right now.
Episode 387: Profiting From Interest Rate Distraction Transcript
A recent survey of all real estate sectors, all commercial sectors, showed that the number one concern of all buyers and owners was interest rates. Except for office. In the world of office, the number one concern was lack of demand. But in the mobile home park business, just as all the others, there's a interest rate distraction going on right now. And that's something that is really an opportunity for many buyers. This is Frank Rolfe, the Mobile Home Park Mastery Podcast. We're going to talk about this interest rate distraction and how you can use that to your advantage. Now, many people right now are sitting out buying real estate of all sectors, particularly mobile home parks, because they're concerned on where interest rates are heading. They watch every day right now, huge ups and downs in the stock market and similar ups and downs in the bond market, particularly on the 10-year treasury yields. And they think, you know what? I don't think I want to buy anything. So I see some stability here. I want to see a firm direction. I don't want to take any gamble. I want to know with complete 100% certainty what interest rates are going to be going forward.
And the problem is it's really hard to nail that down right now because we are seeing such erratic swings in the market. But there are some things we know in general, and that is we have probably topped out on this cycle of interest rates. So clearly, the direction of rates is more down than up. We may have certain days, certain little blips in which the rates do go up a small degree. But in general, I don't know of a single economist projecting right now the rates will be going up further. So it would appear that rates have probably run their course since 2022, Q1 of '22 is when this odyssey began. And it would now appear that rates probably are now going to start dropping. But the problem is if you sit around and wait for interest rates to finally be a 100% certainty, which they never really are, by the time that you make that firm decision and you say, well, okay, now I know where rates are going. Now go back to buying. You've missed out on a lot of time because these interest rate fluctuations may go on for a while longer. And it brings back the quote from Sam Zell, the late Sam Zell, the largest owner of mobile home parks of all time, where he said, when everyone is looking left, look right.
What it means is to me, when everyone is out there distracted by interest rates, waiting for what they feel to be the moment when rates are finally finalized, they're missing out on a lot of opportunities. Now, how would they be missing out on opportunities? You might say, why isn't it smart just to sit back and do nothing and wait for rates to become more clear? Well, the first issue is simply that that's what most people are doing. They're sitting back and they are waiting until they feel that they have a complete handle on where things are going. And in this interim period, there's a lot of opportunity because there's a lot of sellers who need to sell or want to sell. But there's a dearth of buyers because everyone's too concerned with interest rates to actually pull the trigger. As a result, you can get a lot better deals and a lot better deal flow right now because many buyers simply are not in the game. They're still on the sidelines waiting for direction. And because there are fewer buyers, that also makes the sellers more aggressive in price cutting. Because those who do want to sell, they want to retire, they have health33care issues, divorce, whatever the case may be, they can't wait.
They need to get their parks sold. And as a result, they are more willing to deal. Also because of the interest rate uncertainty and because they realize that banking is difficult in times when rates go up and down so fiercely, many of them are also willing to carry paper. And carrying paper has always been one of the most attractive things about the mobile home park industry. Who does not love seller finance? That's why I got in the business to begin with. My very first deal, I was more fascinated with the seller finance than I was the deal itself. So right now, while everyone is very distracted, you can also get lots of good seller financing. Also, while everyone is distracted, you can get more bonding in with brokers. Brokers represent more than half of every park we've ever bought, and they're more accessible right now because there's fewer buyers looking for things. So as a result, you can get them on the phone, you can talk to them, you can give them your elevator speech, you can get their feedback. When they're super active, it's very, very hard to make contact and really hard to bond with them.
It's also important to note that if we just believe the general direction of interest rates to be going down, that is the absolute best time to buy mobile home parks. An example of this is the period of 2006 through 2008. Interest rates in 2006, before the Great Recession averaged about 6.5% to 7%. And we all know what happened. By 2008, those rates started dropping so fiercely. Ultimately, you could get mobile home park loans down in the 2% range. Now, I don't know if history will repeat itself, but for those lucky enough to buy parks prior to 2007, 2008, they saw the spreads grow on those deals for maybe a point or two to as much as five or six points, even if they did nothing, even if they never filled a vacant lot, never raised rent, just the fact they were in the right place at the right time when rates were going down. Now, why do I feel so strong that rates are going down? Pretty simple. Number one is history. America typically has recessions every eight years or so. Right now we're long overdue. We've16 years past when we should have had the last recession.
And a believer in cycles such as myself, I think the next one is due and due very soon. Also, all of the stats right now point to recession. Right now, most every statistic, in fact that is tracked economically shows that we should be going into recession. And most importantly, I am a realist. And with $36 trillion of US debt, we cannot afford high interest rates. So the government itself, for self preservation, is going to kind of want to favor having a recession to drive those rates back down again. Now, this window of opportunity with the distraction on rates is a very short window because as soon as everyone can put their finger on the pulse of where rates are heading and they feel that rates are finally coming down and they're willing to make bets on that, then they'll all jump back into buying parks. So when will that be? Well, let's think about this for a minute. When will that window end? A recession is defined by two consecutive quarters of negative GDP. We don't know what the first quarter is going to be. The Atlanta Fed says they think it will be negative.
They later revised that and said they thought it would be nearly zero, but possibly just slightly positive above zero. So it is possible that in Q1 we will already be negative. But let's assume that we're not. But then you roll into Q2. Q2 looks pretty brutal. I think we would all agree with that. And then Q3 should fall right in line based on all of the stats I've seen. But we report recessions in arrears, so we'll have to go through Q2. We'll have to go through Q3. So they won't officially announce recession probably until October or November of this year if in fact we have Q2 and Q3 negative. And once they officially announce it, then everyone will know that rates are coming down because there's again a very visible cycle between recessions and interest rates. In fact, if you look at all the recessions since 1950, you can see how incredibly similar the curve is on each one. And normally, the rates fall typically around 2 points, 2 to 3 points decline during each recession. And when people feel that we're in the recession and it becomes a self-fulfilling prophecy for those who were adults in the past recessions, as soon as they announced recession, everyone stops spending and then you just plummet.
Then everyone will know that the rates and the lower rates are finally here. They'll all go back to buying parks, it will bid up pricing, it'll make brokers harder to find, and that window of opportunity will officially have shut. The bottom line to it is that it's great to be a pessimist. I'm the eternal pessimist. It's also just smart business to not want to take chances when you don't have to. But we all must acknowledge that during periods of uncertainty, when we don't exactly know which way things are going to go, there is definitely opportunity for those who are bold and brave enough to make some macro decisions and go forward with those. This is Frank Rolfe, the Mobile Home Park Mastery Podcast. Hope you enjoyed this. Talk to you again soon.