Mobile Home Park Mastery: Episode 325

The Impact Of The Pending Recession

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The odds are that 2024 will be remembered as the first recession in seventeen years and the impact will be far-ranging for American households. But what will the impact be on the mobile home park sector? In this Mobile Home Park Mastery podcast we’re going to break down the granular impact of the pending recession and unlock the key reasons why mobile home park owners are actually rooting for the same event that most investors dread.

Episode 325: The Impact Of The Pending Recession Transcript

These were the headlines of October 28, 1929. Madam Curie has a cold. Commodity average goes to lower, Walker pays tribute to Jesse, ticket sale on today for the AL Dartmouth game. Now, what happened the very next day, it was October 29, 1929, Black Tuesday, the start of The Great Depression. This is Frank Rolfe for The Mobile Home Park Mastery Podcast. We're talking about the imminent pending recession that will more than likely occur next year, and what the impact will be on that on the Mobile Home Park business.

Now, let's start off first with the impact on residents, because that's the bread and butter of the industry, if we don't have any residents, we have no revenue, without any revenue, we can't pay the bills, so we've gotta have residents who can pay rent. So what happens to them? Do they dry up and blow away? What happens when the recession hits? Well, the first thing you have to know about Mobile Home Park residents is they are very much insulated from recessions and depression, and that's because probably about a half of all of the Mobile Home Park residents in the United States are retired, so the only way that sub-group gets injured, and it's a very, very large group, is if the government stops paying benefits.

So if Social Security, and if Medicare, if they run dry, then yeah that's a big impact. However, I don't know anyone forecasting that the Great Recession that's upcoming is gonna deprive them of getting their regular monthly stipend. So I think in that way, probably about a half of all of your residents roughly, and it varies on the park obviously, but more than likely about a half could care less if the economy completely tanked because they don't rely on that to pay the lot rent.

But what about the other half? What about that half that does hold a job, what will happen to them? Well, again, they're somewhat insulated. They are in the occupations that we now decry after COVID as being essential. Food delivery, food production, shipping, all kinds of jobs where you work with your hands, and if you don't show up and get those jobs done, society stops functioning. You have no water, you have no sewer, you have no food, you have no heat, you have no air conditioning. These are all jobs that have to be done, whether the times are good or bad. And people aren't going to cut back on buying food regardless of how bad things are.

There was a slogan in St. Louis, during The Great Depression, first in shoes, and first in booze, and what that proudly meant is that they were number one in shoes, which was an essential item, and the number one in booze, which was a vice. Mobile Home Parks are not about the vice, they're about the essential part, and our residents are the ones who have the jobs that you really cannot cut off much. And then also remember that they're back stopped. You can't just go to people during a recession who work at Arby's and say, "Hey guys, times are tough at Arby's, we're not selling many Arby's sandwiches so here's the story, we're gonna lower your pay down to only two bucks an hour." But you can't because the US backstops how much people can earn in the typical kind of jobs, and many Mobile home park residents have by a little thing known as minimum wage.

So if you can't go lower than minimum wage and they are guaranteed to earn a certain amount. In most states, and every state is different on their minimum wage laws, but I would say the average now is probably about $10 an hour. And there's about 2,000 working hours in the year, which means anyone who actually holds a job has to make at least $20,000 a year or a two income Household would have to make at least $40,000 a year assuming they work full-time. Now, if you take that $20,000 per year that someone is guaranteed to earn, if they simply work a 40-hour week under minimum wage laws, what does that equate to as far as the math he can afford on housing? Well, if you take a third of the $20,000, then you divide that by 12 it means they can spend somewhere between five and $600 a month and be fine.

And guess what, that's exactly what most Mobile Home Park lot rents are even on the high side. The average lot rate is about $300 a month. On minimum wage, you live like a king in a Mobile Home Park with just that. And even though we've had some wage inflation in certain industries and certain skill sets, nevertheless the worst case is, you're back to working at Taco Bell with making minimum wage, which in a Mobile Home Park is completely affordable. Now, what about Mobile Home Park residents and paying the bills when time gets tough. Let's say their income falls from $35,000 a year down to $20,000 back down to minimum wage, will they still pay a lot rent?

Yes, because it's a necessity to them. They have to have basic shelter. Food and shelter is what all humans must crave because that's what you need to live. We learned years ago, 30 years ago, the concept that Mobile Home Park residents will often fight adversity to keep a roof over their heads, and we call that the Fight co score, not FICO, F-I-C-O but Fight co F-I-G-H-T-C-O. And it means that people will find hard to keep that roof over their heads, hold that family unit together even in bad times.

So don't underestimate Mobile Home Park residents, even if they had a transition of their job, even if there was a massive layoff or they could not immediately find a similar job or even one with a lower wage, they'll keep fighting and they'll keep looking, they'll do the jobs that no one would want to do, they'll work the night cashier at the Rhodes 101 truck stop. So their Fightco score is very, very high. Now, what about the industry itself though, if the residents are somewhat insulated and back stopped, what about the parks? Well, Mobile Home Parks are affordable housing that's the focus. So when America gets on tough times, what happens, people need even more affordable places to live. It's the people in our job, those white collar jobs, those are the ones that are most jeopardy with the coming recession.

That's gonna get be who really gets hit hard, because those jobs are not back-stopped. If you're an engineer at Boeing, all you're guaranteed is minimum wage. You could drop from $100 grand a year to $20, that's your whole safety net. And that may make some people who have more expensive housing options drop down to Mobile Home Parks. We see that right now with homes on a $400,000 on average across the nation, people cannot afford those homes in certain school districts or suburbs they wanna live in, and often people who would never imagine live in Mobile Home Parks based on their income and their jobs suddenly are moving in.

You will only see that accelerate when the recession hits. The demand for affordable housing will go through the roof yet the supply is fixed. You can't build any new Mobile Home Parks. So when the demand goes up and the supply can't go up, you end up with higher prices. Nationwide, you're seeing the occupancy of Mobile Home Parks at probably the highest levels it's ever been, as all kinds of new investors bring these old parks back to life and start getting them reoccupied. But despite new homes being brought in to fill vacant lots lots, most Mobile Home Parks in America are already at a 80% plus occupancy now. So there really isn't even any room for not much new supply, even at park owners who have a few vacant lots.

What about the macro industry? What happened to that? Well, we all know that recession brings a lowering of interest rates. If you take all the recessions since 1950, and you look at the interest rate when they went into the recession when they came out, the average drop since 1950 is about two and a half points. So if you apply that to this coming recession and assuming that the interest rates on Mobile Home Park loans are somewhere around 7% or so, and you take off 2.5%, that's not too bad, I guess you're down to maybe a 4.5-5%. I would personally conjecture that's probably where it rates will remain for the longest time. If you look at the chart of historical interest rates, you'll see we had never gotten down to 0.25% Fed funds rate in American history. Even back to 1776 interest rates were around 5-6%. That seems to be kind of the flat line with the average.

So while I don't see interest rates ever going insanely low ever again, I do think we can all live in a world where interest rates are roughly at 5%. That would equate to cap rate some of our Home Parks that are still significantly lower than they are right now, and that's heralded and brought into play by the recession. Now, the final question is, are we really gonna have a recession? Does that really... Does it have to happen? Can we maybe have the soft landing, this Hollywood ending that people keep talking about? Well, I would urge you just to apply science to the situation.

Right now, America is the closest it's ever been into the era of Jimmy Carter, that had a very, very, very bad ending. Our nation has always had recessions roughly every seven years or so, it has been twice that, 14 years since we had the last one, the Great Recession, 2007, 2008. Ask yourself, are our current leaders really that good? We've had some good leaders historically who did their best to try and keep us out of recession, but I don't think anyone would try and claim that right now the crew running the country is the best we've ever had. And if much more qualified and competent leaders were unable to stave off recessions, to me it's completely unrealistic to assume that the current team can win.

On top of that, you have such a long period since the last recession that the odds are overwhelming that the next one will occur. If you look at the raw material of what's going on in the nation right now, everything from freight delivery to M2 money, supply would point certainly to a recession and relatively soon. The only question to me at this point is when it occurs and how long it lasts. The bottom line is that Mobile Home Parks are in excellent position for the coming recession. We are well positioned on everything from tenants to the business model itself to be contrarian by nature and to be ready for whatever bad thing the economy will unleash. This is Frank Rolfe, from Mobile Home Park Mastery podcast. I hope you enjoyed this. Talk to you again soon.