Mobile Home Park Mastery: Episode 272

What If Interest Rates Never Come Down?

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Interest rates have skyrocketed around 4 points in 2022 – the largest jump in 40 years. While interest rates typically run in cycles, what if they never return to earlier levels and these new rates are not a fad but the new norm? In this Mobile Home Park Mastery podcast, we’re going o discuss the ramifications of these higher rates and project the impact if they never go down again.

Episode 272: What If Interest Rates Never Come Down? Transcript

Jerome Powell this year, the head of the Fed, decided to raise rates to battle inflation. And he did so with a gust that we've never really seen in the last 40 years. So interest rates have gone up roughly four points from where they started off the year. And who knows, it might even go a bit more up in 2023. This is Frank Rolfe with the Mobile Home Park Mastery Podcast. We're going to talk for a moment about some of the issues related to raising the rates and what happens if those rates don't actually come back down as most economists figure, but in fact stay at these new lofty levels. The first byproduct of having high interest rates is the cost to the US Treasury. Because you see our country holds more debt than any group in the entire world.

We have over $30 trillion of federal debt. So when you start raising rates, a component of that is how much the Treasury has to pay on all of these securities that fund the government and its drastic continual shortfalls. Now for those who think back to Ronald Reagan, when he raised the rates up like you're seeing now, which is what that 40th year was when we had ever seen this before, at that moment in time the federal deficit was only $800 billion, which is a lot of money. But when he raised those rates, the pain and suffering fell upon businesses and individuals who had borrowed debt. The government was perfectly fine with raising the rates to ultimately as high as 16% to 18%, which is what Reagan did. Because at the end of the day, what did it mean to the US government when you do that? 

So if you raise the rates up, and you've got $800 billion of debt, you raise them up 10 points, what's that get you? 

Well, it gets you an extra $80 billion annually of cost. But the government can easily and handily take that on, pay those bills, and there's no issue. But now let's overlay what happens now with Jerome Powell's actions. When you have $30 trillion of debt and you raise the rates up four points, that would suggest you're going to have about $1.2 trillion in extra annual interest cost. Now let's have a reality check. The United States only brings in roughly $2 trillion a year of total revenue from all sources. That's federal income tax and all the various taxes. How in the world, when you're at $2 trillion of money coming in the door, can you afford to pay out $1.2 trillion of additional interest? Right now, the additional interest cost of what he's already done is going to make all of the government programs, Social Security and Medicare, all go insolvent in a much faster clip. Someone just wrote an article that if he doesn't drop the rates soon, they're on a trajectory at the federal government to hit $45 trillion of debt. Think how crushing that is for future generations. Think how impossible it is to service right now.

So the first issue is if these rates don't come down, this isn't Reagan. Reagan could make that bold claim. That's why he was able to stomp out Jimmy Carter's ridiculous inflationary policies, because people were afraid that he would stick with it. Because he could easily afford the rates to stay at 18%. Heck, go up to 20%, 25%, 30%, he was limitless. The government could still cover its bills. Now poor old business person, poor old individual with the debt, well, you were going to get trampled to death, but the government didn't care. It was fine. Now you have the roles reversed. With higher rates, probably the weakest person, the one who's most impossibly ineligible to make payments is the federal government. So if rates don't come down, if this is the new norm, I don't know where the nation goes. We have never had rates this high with this much debt. That's never been seen before. We have had rates higher for sure. Back in 1776, interest rates were roughly about 6%. I bought a textbook here not too long ago, printed in 1908. It was a real estate textbook. I like to buy old weird things in antique stores and read them to learn about the past, because there's a lot of good lessons to be learned.

But on the glossary section of interest rates in the amortization table they have in the book, because there was no Google obviously back then, it only showed five different interest rate levels for any note. Five, six, seven, eight, nine, and ten. That's it. That's all they had. So the problem is if you look back historically, our nation has had rates like these, and that's fine. The US norm, the average is roughly 7%. But we've never had this much debt before. Back when that book was written, I don't know if the government had any debt at all a century ago. And I remember even in the days of Bill Clinton, of all people, we were almost working our way down to zero as far as debt. We were actually at a surplus for years. So the test now is, can a nation survive being so debt-ridden with higher rates? I don't think it's possible. If someone can explain to me how we can pay the bills at these higher rates, then I would love to know how that's achievable. I've looked at everything that you can find online and all the graphs and all the charts.

It looks to me like you have a country which is completely insolvent, really fast, if those rates stick. So that's the first byproduct you have of these higher rates, when people say, well, will they ever bring them down? Well, I don't know. If they don't, I guess we'll be on a hunter-gatherer society. You'll have no social programs. You'll have no funding for really much of anything. All we'll be doing is paying the debt. The only other way out of it would be to go ahead and default all the debt.

Wipe it all out, have the nation declare bankruptcy. I don't know how you'd ever be able to borrow money again would be the issue. And then you have the problem that all of these Americans who invest in all this stuff that's supposed to be stable and income producing, they would all be wiped out. So it'd be a terrible ending. And I think the government doesn't want to go there. So when people say, are these rates permanent? I don't know how they could be permanent. The other issue is what happens to all those properties, whether they are mobile home parks or apartments or anything? 

What do they do if these rates stay at these higher levels? Are they just going to roll over and say, well, that's the way life goes? No, they're going to aggressively raise their rents to get those parks and those apartments and all these things back on track. There was a group recently that raised the lot rent at a mobile home park in North Dakota by $400 a month in one whack. We've never suggested anyone ever do anything like that. Most operators try and hold rent increases even in areas where they're woefully below market, it's roughly $50 a year. But this group said, no, you know what? We're going to raise them up $400. Now $400 is probably what they needed to do to make sense perhaps of buying that property at a lower interest rate environment. Maybe they're trying to get ahead of everybody else, get a jump on everyone.

I don't know if they'll lose any customers because in our industry, the $400 increase probably still only gets you to the most affordable thing in town. But there's lots of others who won't be able to. I don't know if apartments can raise their rents up enough to handle new interest rates. I know office buildings can't. Retail centers, they certainly can't. Industrial, based on the company they serve, might have a shot. Single family people who have bought large numbers of single family rental homes, I don't think they probably can. But mobile home parks stand alone. We're the only game in town when we have the ability to raise rents up significantly and quickly. The average lot rent in the United States is only running about $300 a month. That's against an environment, a backdrop of apartment rents of $2000 a month and up. So if a mobile home park decided to go from $300 to $600, wouldn't impact the one iota. Wouldn't lose a single customer. Even higher rates than that, it's been done. Denver, Colorado is nearly $900 a month with a waiting list. The bottom line is we are the best position of any asset class if in fact we must start raising rates to balance the net effect of those higher interest rates.

It's just a fact of life. There's not much that can be done about it. It's simple economics. So if someone bought a mobile home park with the expectation of a spread level between interest rate of X and you raise interest rates up and you don't back them back down, they'll raise the rates to make that possible, to get right back to where they were to be healthy. And what happens is even those who don't have a whole lot of debt or don't have any exposure to the higher interest rates, their rates will follow suit. If you have only one operator in any market who raises the rents up significantly, everyone else follows behind saying that they're the market leader and trying to keep up with market. So the net effect of these higher rates which Powell has introduced is you're going to see a lot higher of everything, particularly housing cost and most specifically mobile home park rents. The others would like to raise them too. Believe me, the apartments will do their best, but it's questionable whether they can pull it off. And don't forget that as the apartments try to raise their rents, single family of their rents, as all housing escalates in price, including what you have to pay with a mortgage, that will once again allow park owners to do significant rent increases.

I would imagine if the rates don't come down soon, you will start to see some of the largest mobile home park lot rent increases in American history. Also don't forget that mobile home parks all started out life at a rent of about $500 to $600 a month back when they were built. The standard lot rent back in the '50s and '60s was about $50 a month. If you inflation adjust that today, that's about $500 a month. So really if we have fast significant raises, we'll only be getting back to where we started when you account for inflation. It's perfectly reasonable to think our customers can withstand higher rates because we're still even at large bumps by far the least expensive form of housing in the United States. So we'll have to see what happens with these interest rates. I would imagine they will come down by necessity because I don't think the government can afford to pay higher interest charges on a regular basis. You'll start seeing those articles popping up from economists saying, wait everyone, is Powell aware of the pain and suffering he's bringing on his own government? But if he still wants to take the pain as long as he can handle it, well that's fine because park owners and others and all of the forms of real estate who can do it will raise their rents to readjust for that new environment.

This is Frank Rolfe, the Mobile Home Park Mastery Podcast. Hope you enjoyed this. Talk to you again soon.