Memo from the Manager
As you are probably aware, we are only weeks away from the U.S. Presidential Election. That’s a milestone that happens every four years, and helps to shape the nation’s economy. While this is one of the most unusual elections in history, the good news is that the mobile home park industry – and the customer base it serves – are fairly insulated from whether it turns out to be a Clinton or Trump administration. The need for affordable housing is based on four basic events: 1) low wages (typically minimum wage to $15 per hour) 2) high single-family home prices (current U.S. average is $170,100) 3) high apartment rental rates (current U.S. average is $1,289 per month on a 3-bedroom) and 4) declining Class B and Class C apartment quality (Harvard Business Review estimates that it would take 40% of annual revenue to put the capital repairs back into them, yet current owners are spending maybe a quarter of that). Regardless of who wins, we don’t see any change to any of these four components, as they are well beyond the power of Congress at this point. While tax rates may go up or down, and foreign policy may change over time, the impact on affordable housing is essentially zero.
Four Of Our Major Markets Score In The Top 20 On U.S. Population Growth
A recent report from the U.S. Census Bureau showed that four of our major markets are in the top 20 in population growth for the period 2010 to 2014. The winners were:
- Austin, Texas which ranked as #2
- Charleston, South Carolina which ranked as #4
- Dallas/Ft. Worth, Texas which ranked as #17
- Des Moines, Iowa which ranked as #19
While we do not need positive population growth to maintain high occupancy – as the demand for affordable housing is high nationwide and our typical resident is a “move over” from Class B and Class C apartments – high population growth typically ties to an explosion in housing prices, which allows us to raise rents significantly.
Iowa Appears To Strike Down The Safe Act Regarding Mobile Homes
The SAFE Act – the U.S. Government’s attempt to regulate mortgage companies — has been extremely unpopular with park owners since its inception in 2008. At issue was the definition of what constituted a “mortgage” as opposed to an “installment sale”. Wikipedia defines a mortgage as “A mortgage loan, also referred to as a mortgage, is used by purchasers of real property to raise funds to buy real estate; by existing property owners to raise funds for any purpose while putting a lien on the property being mortgaged.” The problem here, as was pointed out by private attorneys when the SAFE Act came out, is the fact that a typical mobile home sold on a “rent-to-own” agreement never includes the all-important concept of “raising funds” – instead, it is nothing more than an installment sale and does not meet the required mortgage definition. Under the SAFE Act definition, a refrigerator sold on monthly payments would qualify as a mortgage loan.
However, the government refused to ever listen to these arguments and simply said “well, if you want to take that to the Supreme Court, go ahead, because you can’t change our minds”. Obama even vowed to veto any attempts to amend the SAFE Act. However, it would appear that others inside of state government had their doubts. And that grassroots movement is now striking back at this misuse of federal authority.
It would appear that the Davis Brown law firm in Des Moines, Iowa has gained official approval from the Iowa Banking Superintendent for use of “Lease with Option to Purchase” contracts for the sale of mobile homes. A few states are quietly already using this method, so long as the contracts are drafted by attorneys. At this point, however, only the State of Iowa (where we have large holdings) has had the guts to grant this in writing by the state regulator. In Iowa, if you use the approved contract, you can sell without the need of a mortgage loan originator’s license. But we expect this return to sanity to spread to the other states in the near future, particularly as Obama leaves office. This was an injustice that is finally being cured, and will result in the ability of thousands of mobile home renters to now go back to being homeowners. It’s sad to believe that the U.S. consumer was held hostage for the past 8 years, and was unable to obtain credit or the American dream of homeownership, because some bureaucrats refused to listen to reason.
Elvis Presley Lives In A Mobile Home In The 1968 Film “Speedway”
About a half-century ago, mobile home parks were considered chic. Such as the case in the 1968 film about race drivers called “Speedway” starring Elvis Presley. Here’s a photo of Elvis inside his mobile
home, having a chat with Nancy Sinatra. That’s not, however, the only movie featuring Elvis living inside a mobile home park. He also lives in one in the film “It Happened at the World’s Fair” in 1963.
The Lack Of U.S. Savings Is Astounding – And Demonstrates The Magnitude Of The Affordable Housing Crisis
A recent study by GoBankingRates.com shows just how disastrous the U.S. savings rate is. As you will see, nationwide the number of households that do not have at least $1,000 in savings is 62%, with a full 30% having no savings whatsoever. Here is the breakdown by state of what percent of their respective population has less than $1,000 in savings:
- Wyoming 73%
- Vermont 51%
- District of Columbia 63%
- Alaska 61%
- North Dakota 54%
- South Dakota 59%
- Delaware 69%
- Montana 69%
- Rhode Island 64%
- New Hampshire 66%
- Maine 70%
- Hawaii 61%
- Idaho 59%
- West Virginia 68%
- Nebraska 71%
- New Mexico 66%
- Nevada 68%
- Kansas 73%
- Mississippi 82%
- Arkansas 68%
- Iowa 67%
- Connecticut 70%
- Oklahoma 74%
- Oregon 75%
- Kentucky 70%
- Louisiana 73%
- South Carolina 70%
- Alabama 72%
- Colorado 66%
- Minnesota 71%
- Wisconsin 67%
- Maryland 71%
- Missouri 76%
- Tennessee 65%
- Indiana 72%
- Arizona 63%
- Massachusetts 59%
- Washington 70%
- Virginia 59%
- New Jersey 70%
- Michigan 70%
- North Carolina 79%
- Georgia 75%
- Ohio 74%
- Pennsylvania 72%
- Illinois 71%
- New York 67%
- Florida 71%
- Texas 71%
- California 69%
This data suggests several hard realities.
With less than $1,000 in savings, single-family home ownership is not possible
Regardless of what price home you are looking at buying, you can’t even cover the closing costs on $1,000. Single-family home ownership is beyond reach for these households (although many of them already own homes stemming from the last zero-down, no income documentation era pre-2008). When people say “millennials just have no interest in buying a house” perhaps the truth is that they don’t have the ability to buy a house. And millennials are only the tip of the iceberg.
With less than $1,000 in savings, Class-A apartment rental is not possible
The average three-bedroom apartment in the U.S. rents for nearly $1,300 per month. Most apartments require a deposit and first month’s rent to move in. But, as you can see, over half of the U.S. population does not even have the first month’s rent in savings. So all those Class A apartments you see being built really have a very limited audience – certainly not the majority of Americans. Even Class B apartment typically require over $1,000 in move-in costs. So the system is being pushed beyond its limits.
With less than $1,000 in savings, aggressive collections is essential
Of course, another takeaway from the lack of U.S. savings is the necessity to not let people get behind on their bills – there’s no way they can ever catch up! That’s why we use a rent collections system called “no pay/no stay” which means that the resident has no choice but to pay their rent or fact immediate eviction. We do not do this to be cruel. We have found that if you let people with no money get behind, you are actually enabling them to become homeless. Even at minimum wage, our rents are more than affordable, but it’s all about the priority of what gets paid in the typical household. We don’t care if car payments or big-screen TV rent-a-center bills get paid, all we care about is that the rent gets paid first.
The lack of U.S. savings is alarming if not terrifying. These numbers far exceed most economists worst predictions. And they make us even more thankful that we’re in the affordable housing sector.
What Makes For A Great Collection?
Collecting mobile home parks is like art collecting. There are certain requirements when you amass your collection that make it either museum quality or unworthy of much attention. Here are the qualities that all great collections share, and how we are trying to hold to this plan.
A great collection has high-quality assets. We try to do this with mobile home parks by only selecting properties that have strong infrastructure, appropriate density, strong locations and favorable economics. We try to stay completely away from deals that fall short or are not compelling.
Most great collections are based on one specific type of art, and the mastery of understanding that niche. We have chosen the affordable housing model in the Great Plains and Midwest. We’ve been working that one area for two decades and feel that we know it better than anyone else.
All great collections are based on scarcity – the fact that items are extremely rare and therefore worthy of inclusion We do this by only buying in areas that do not allow any new mobile home parks to be constructed, as well as being located in attractive school districts and markets. The number of parks in the U.S. is effectively fixed – so all mobile home parks have some degree of scarcity – but we focus on subsets that are extremely hard to find and purchase.
Any great collection should allow for upgrading by having the ability to liquidate items that can be better. To that end, any great collections should have inherent liquidity. We achieve that by always thinking through the exit strategy before buying any park. And we’ve proven that with periodic sales.
While there are few museums of mobile home parks (outside of the one in Elkhart, Indiana), a good collection of properties is no different than those of a major art museum.
Why So Many Successful Markets Are Located On A Major U.S. River
A huge number of our markets front onto major U.S. Rivers. On the Mississippi, for example, we own parks in Minneapolis-St. Paul, St. Louis, Quad Cities of Iowa, La Crosse, and Dubuque. Along the Missouri River, we own parks in Kansas City, St. Joseph, Omaha, and Sioux City. So what’s so special about cities fronting a major river?
Solid economy with strong roots
One thing is true about all cities on a major U.S. river: they are old and established. Most were formed in the 1800s, and have very solid foundations. St. Louis, as an example, began in the 1750s and has grown from one log cabin into a metro of nearly 3,000,000 people. Along the way, it has built an extremely recession-resistant base on key industries that are not subject to the whims of the U.S. economy. Through the 1800s and early 1900s it was the U.S. capital of “shoes and booze” with the Brown Shoe Co. and Budweiser both based there. Today it is the healthcare capital of the U.S., as well as hosting more colleges and universities than any other city. We are always staying clear of cities have sprung up overnight to service one private sector employer (such as the man-camps of North Dakota during the shale oil boom), and we like cities that have spent centuries in perfecting their existence – kind of like the difference between the slow growing Oak Tree and the fast-growing Hackberry.
Transportation and trade
Rivers are a major transportation hub in the U.S. It is estimated that U.S. Rivers carry around 630 million tons of cargo annually, at a value of nearly $73 billion. The simple fact that a city is on a river gives it an advantage as far as transporting goods. That’s why these cities began in the first place – to take advantage of their access to shipping. Most Americans fail to realize that shipping on American Rivers is still a huge enterprise, and these are very stable employment sources as shipping on rivers is still lower cost than any alternative, such as trucking.
Mills and factories
Many industries require river frontage. Utility providers and mills require the water as the source of power to create their product. Those giant smokestacks you see lining American Rivers are not located there because the land was cheap – it’s because that moving water is essential. Again, there are very stable businesses that you cannot just overnight move to Mexico or 1,000 miles inland.
During the Great Recession post 2008, the U.S. unemployment rate soared to around 10%. But in many agricultural states it remained around 3% to 4%. Nobody writes much about it, but U.S. agriculture is a huge industry. It generates around $400 billion per year of product – among the largest industries in the U.S. And nowhere can you find more agricultural focus than on American Rivers. Not only are the rivers used to amass and store and ship agricultural products, but they are also the source of irrigation that keeps the crops and animals alive.
We have had very good success with metro markets that are located on major American Rivers. These areas have outstanding depth of employment and are backstopped by shipping and agricultural that keeps employment stable and above the U.S. average.
Why Mobile Home Parks Are Not The Total Solution To Affordable Housing In The U.S.
Although mobile home parks are an excellent investment, they are not the savior to the affordable housing crisis in the U.S. – the problem is just too large. Take, for example, the fact that there are as many people living in Section 8 apartments as there are total residents of every mobile home in the U.S. (roughly 24 million people). And, as shown in the above article about the lack of savings in the U.S., the actual demand for affordable housing in the U.S. could easily top 150 million people. So what’s the solution?
Admit there’s a problem
New home construction is a key economic driver in the U.S. With so much at stake, builders and government reports refuse to acknowledge that the party is over when it comes to housing. Just like an alcoholic cannot make progress until they first acknowledge that they have that condition, the U.S. needs to admit that we can no longer prop up the home building sector with easy lending. You can’t squeeze blood out of a turnip, and Americans are maxed out on what they can spend on housing. There needs to be an organized search for a solution.
A return to smaller and less expensive homes
The average size of a stick-built home in the U.S. has roughly doubled over the past half-century. That would be a fine ending except for the fact that incomes didn’t double. In fact, not even close. Instead, Americans have willfully assigned an ever greater proportion of their income to housing, and kept on buying more and more expensive homes on credit. The first solution to the affordable housing crisis is to stop saying “how big can we build?” and instead ask “how small can we build?” If the average American household can only afford a $60,000 home, then square footages maybe need to drop to 600, from their current average of over 2,000 sq. ft.
A return to multi-generational households
Up until the 1950’s, it was very common in the U.S. to have several generations living in the same household. Sure, it may be a little complex doing so, but that may be the future reality. With several generations, you have shared incomes and equity. This is already a big component of American housing, with roughly 30% of every under the age of 30 living with their parents. But we would expect that statistic to rise in the future, as no single generation may be able to truly support housing costs in the new American economy.
A focus on energy efficiency
Energy – particularly electricity – has become very expensive in many markets. In the summer time, in southern states, it’s not uncommon to have the power bill higher than the mortgage. To make housing affordable again, it may require as much thought on energy as it does on overall price. Between better designs and insulation, it may be able to take a big bite out of giant utility costs. Solar energy and other new innovations might also be able to provide relief.
What do you get when you add these factors together?
You guessed it – a mobile home park. Small homes, multi-generational households and energy efficiency are the norm. That’s why we’re the only form of affordable housing in the U.S. However, the demand is huge and our total supply of housing is small on a relative basis. Do we think we’ll see the necessary shift in multi-family and single-family that’s needed to bring affordability back to the millions of Americans that can’t fit into mobile home parks? No. It will take decades of housing misery before people are willing to accept the bitter pill of reality and overcome their ego by living in tiny homes.
Mobile home parks offer the only affordable housing solution in the U.S. Everyone knows that. We can provide a detached dwelling with three-bedroom and two bathrooms, with a nice yard, for around $500 to $700 per month. The housing types cost more than double that. That’s why our phone rings off the wall. While single-family and multi-family developers could do a better job bringing about an affordability revolution, it’s unlikely that they will ever do so, as the end result would be their financial collapse.
MHC America Fund
If you have any questions on the MHC America Fund feel free to contact us at:
Phone: (888) 642-2007
This content in this communication is being sent to members of MHC America Fund, LLC and Prior Funds. As such, any reference to “we”, “our”, “Manager” or “fund”, regardless of capitalization, shall refer to MHC America Fund, LLC, and its Affiliates.