Mobile Home Parks And Recessions: A Primer
Many economists predict a national recession will occur in the next few years – some think as soon as 2020. As a result, any investor should consider the implications of this economic event and the impact on their funds as a result. We have been through the most major recession in modern U.S. history (the Great Recession of 2007) as a park owner, and here are our observations on what to expect.
Higher demand for affordable housing
This is a no-brainer: when people feel poorer, they have greater need for less expensive housing. And there is nothing that is lower cost in the U.S. than mobile home parks. As a result, recessions make the phone ring more frequently, and vacant mobile homes don’t sit empty long. This has always been – and will always be – the strong suit of mobile home parks.
A run-up in rents as apartment and single-family home owners take advantage of a “renter nation.” Nobody saw this coming during the Great Recession. But when you have a recession many people either lose their homes or refuse to commit to a mortgage, and the U.S. becomes a “renter nation”. As a result, the demand for apartments and single-family homes increases and they raise their rents accordingly. The Great Recession resulted in the highest run-up in rents in American history. This also impacts the mobile home park industry, as it allows owners to follow suit.
Lower interest rates
The Great Recession brought out the concept of “Quantitative Easing.” Which was basically the Fed deliberately lowering interest rates to incredibly low levels by buying its own debt. This allows borrowers to benefit enormously, and that includes those who obtain mobile home park mortgages.
The economic impact of 3% interest rates vs. 6% is astounding on park cash flow, as most buyers leverage mobile home parks at roughly 70% to 80%. There is speculation that the Fed worked aggressively to increase interest rates over the last few years with the sole intention of dropping them again when the next recession begins.
When times are unstable, many real estate buyers shut down their buying efforts. This is equally true with mobile home parks. The absence of buyers creates less demand and that means there is a greater likelihood of finding deals at attractive cap rates.
The “spread” is the difference between the interest rate and the cap rate. A 3-point spread equates to roughly a 20% cash-on-cash yield. Between the lower competition and the lower interest rates set by the Fed, the spreads grows in recessions to much higher levels than normal. Spreads grew to as much as 7 points during the Great Recession, which is an industry record.
The sudden absence of some institutional debt products
One of the negative effects of recessions is that some debt products are withdrawn during times of economic instability. Typically, this has focused on Commercial Mortgage Backed Security (CMBS) “conduit” debt – which is reserved for loans of $1.5 million or more. However, what will possibly make the next recession different may be the introduction of greater Fannie Mae and Freddie Mac “agency” debt, which was not in full stride at the time of the 2007 Great Recession.
Currently, agency debt represents over 50% of all mobile home park new loans (in total dollars). These loans may continue unabated in the next recession, and that would mitigate the impact of CMBS reduction.
More government focus on affordable housing
The 2007 Great Recession brought a greater focus on the U.S. affordable housing crisis, leading to greater discussion in Congress. It also resulted in greater Fannie Mae and Freddie Mac financing of parks as well as new test concepts on home financing. Additionally, it brought more government intervention in cases where cities tried to stop park owners from using all of their vacant lots. Two states banned cities from blocking mobile homes from moving in altogether (Texas and Iowa).
Discrimination suits against cities for trying to diminish park capacities (won by a park owner last year) have created a new environment, where the government respects those that create affordable housing.
Migration to the “fly-over” states
Loss of employment often leads Americans to move to new areas. Lower wages promote movement to less expensive cost-of-living markets. The combination of these two is a surge in the economies of “fly-over” states, which are between the east and west coasts. Since the bulk of mobile home parks are located in these areas, this makes the mobile home park industry even more healthy.
Mobile home parks perform exceedingly well in times of recession, as they are essentially contrarian by nature – they prosper when all else fails. This makes it not only a strong yielding investment for your portfolio. But also one that offsets other investments that decline during economic hard times (including your day job).
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