Memo from the Manager
It’s hard to believe that it’s the Holiday Season again. It seems like we just put away the decorations from last year! You can definitely see a difference in the decorations this year in the communities we own. In many cases, we have brought the desire to celebrate back to the residents by bringing them an attractive, safe, clean, affordable place to live. And with that new sense of respect, they are heavily decorating their homes and showing pride in their property. And we have also been decorating the offices, entries and common areas of each community to lead the way.
Affordable Housing Through History
Up until the start of the twentieth century, the majority of Americans lived on farms. Effectively, all housing was affordable back when the U.S. was a collection of small dwellings built on land that also produced the resident’s food stock and entertainment. But even in the early days, there were those who could not afford conventional housing. This is a history of affordable housing from early times right up to the present.
Government-subsidized affordable housing
Up until the term of FDR following the Great Depression, the housing for those who could not afford normal housing stock was the “poorhouse”. Often the poorhouse was situated on the grounds of a poor farm on which able-bodied residents were required to work; such farms were common in the United States until the early 20th century. Residents were required to provide labor to the extent that their health would allow, both in the fields and in providing housekeeping and care for other residents. Rules were strict and creature comforts minimal. Poor farms were operated by city or county government, and low income individuals (mainly elderly and disabled people) were supported at public expense. The farms declined in use after the Social Security Act took effect in 1935 – a reaction to the Great Depression — with most disappearing completely by about 1950.
The programs and agencies that led to the government agency now known as HUD began in the early 1930s with construction and finance programs meant to alleviate some of the housing hardships caused by the Great Depression. An act of Congress in 1934 created the Federal Housing Administration, which made home ownership affordable for a broader segment of the public with the establishment of mortgage insurance programs. These programs made possible the low down payments and long term mortgages that are commonplace today but were almost unheard of at that time. In 1937, the U.S. Housing Act sought to address the housing needs of low income people through public housing. The nation’s housing stock at this time was of very poor quality in many parts of the country. Inadequate housing conditions, such as the lack of hot or running water, was commonplace for poor families. Public housing was a significant improvement for those who had access to it. At the same time, the post-World War II migration from urban areas to the suburbs meant declining cities. Federal programs were developed to improve urban infrastructure and to clear “blight.” In 1965, Congress created HUD, which provided subsidies to public housing agencies that would help make up the difference between revenue from rents and the cost of adequately maintaining the housing. In 1969, Congress passed the “Brooke Amendment,” creating a limitation on the percentage of income a public housing resident could be expected to pay for rent. Beginning in the late 1950s and continuing into the 1960s, Congress created a number of programs that leveraged private investment to create new affordable rental housing. In general, these programs provided low interest rates and other subsidies to private owners who would purchase or rehabilitate housing to be rented at affordable rates. The growth in these private ownership programs resulted in a boom in affordable housing construction through the 1970s. However, once the contracts forged by HUD and private owners expired, or owners decided to pay their subsidized mortgages off early, those affordable units could be lost from the stock. In January 1973, President Richard Nixon created a moratorium on the construction of new rental and homeownership housing by the major HUD programs. The following year, the Housing and Community Development Act of 1974 made significant changes to housing programs, marked by a focus on block grants and an increase in the authority granted to local jurisdictions (often referred to as “devolution of authority”). This act was the origin of the tenant- and project-based Section 8 rental assistance programs. Waves of private affordable housing owners deciding to “opt out” of the project-based Section 8 program occurred in the 1980s and 1990s. Housing advocates – including PHAs, nonprofit affordable housing developers, local government officials, nonprofit advocacy organizations and low income renters – organized to preserve this disappearing stock of affordable housing using whatever funding and financing was available to them. The Department of the Treasury’s Internal Revenue Service was given a role in affordable housing development in the Tax Reform Act of 1986 with the creation of the Low Income Housing Tax Credit, which provides tax credits to those investing in the development of affordable rental housing. That same act created the use of private activity bonds for housing finance, authorizing the use of such bonds for the development of housing for homeownership, as well as the development of multifamily rental housing. Since the creation of the Section 8 programs in the early 1970s, no new federal program has the deep pockets necessary to meet the needs of people with the greatest housing affordability demand.
Non-subsidized affordable housing
In the early days, all housing was affordable. America was a nation of farmers where housing was available communally on the family farm for all generations of that household. From log cabins to finer frame and brick dwellings, there was a sense of security in housing that there was always a safe, clean place to live on the farm. And that extended to a steady supply of food, as well, since almost all Americans ate the food that they grew or hunted on those farms.
However, at the end of the 19th Century, there began a shift from rural living to city living, brought about by the advancement of manufacturing and the arrival of millions of immigrants who had no such home on the farm. The percentage of Americans who lived on a farm declined from 64% in 1850 to only 30% by 1920. As cities swelled, so did the need for affordable housing, as prices began to rise based on supply and demand – and at a much faster pace than wages.
Single-family housing prices remained stable in most cities for a relatively long period of time. Even by 1940 the median home price was $30,600 in today’s dollars. But in the 1970s, fueled by inflation, prices began to skyrocket. Market forces, coupled with inflation, made stick-built housing fairly unaffordable for most Americans with the median home rising to $93,400 by 1980, and then on to $185,800 today.
Apartments followed a similar pattern, with rents mushrooming from $284 per month in 1940 to $481 per month in 1980, with a huge push over the last few decades to a new average of $1,379 per month.
The only true non-subsidized affordable housing in the U.S. can be found in Class-B & C apartments and mobile home parks. And since new mobile home parks have not been allowed to be built since the 1980s throughout the U.S., and since it takes decades for a Class A apartment to decline to Class B & C, there is not nearly enough supply to meet the demand for affordable housing. The current stat is that there are only 30 affordable housing units available for every 100 households that need them. This ratio is expected to worsen going forward.
While affordable housing has been a focus of the U.S. government for nearly a century, there has been little success in conquering the problem. Mobile home parks are a huge part of the solution, but the demand is so great that no housing sector can practically solve this issue. We are solving the problem of affordable housing one park at a time, but we can’t event dent the macro demand.
Frank Delivers Two Speeches On Enhancing Resident Value To The Iowa And Wisconsin Manufactured Housing Associations
Frank is a fairly popular industry speaker, but this year he beat all previous records by speaking at two different state manufactured housing associations in the same week. The first was in Iowa, where he serves on the Board of Directors, and the second in Wisconsin. Both speeches were on the same general topic: how to deliver greater value to residents and, in turn, increase lot rents significantly while maintaining resident retention and satisfaction. The Iowa speech was enormous at over 2 ½ hours in length, while the Wisconsin speech was a much more manageable hour. Here is a link to the powerpoint to the Wisconsin speech, so you can see the main points of the lecture.
Frank serves on the Board of Directors of two state associations: Iowa and Illinois. We are happy to participate in such groups, as they make significant legal strides in favor of the industry, and build awareness of the product in a positive manner.
Our Theory On Success
This is a letter that Frank bought at an antique store many years ago, and has hung on the wall in his office for the last 30 years. It was a letter from a company to its employees and shareholders in 1930, describing how they were going to make it through the Great Depression in the form of a fable. The lessons learned from this letter are as true today as they were 85 years ago – basically that hard work and creativity can overcome any obstacle. We try to instill these same lessons in our employees, so that they understand that failure is never an option. While we have been very lucky in our timing over the past decade – in which the demand for the affordable housing has grown to insane levels – it is nevertheless important to understand that you can always try harder and more creatively, whether it’s selling a mobile home or getting permission to add a few lots to an existing park.
Why We Do Not Believe In Holding Assets Forever
This is a photo of the historic Broadview Hotel building in East St. Louis, Illinois, directly across the river from the arch. While East St. Louis is now one of the most impoverished neighborhoods in the U.S., in its heyday this hotel had a vibrant, successful business, and was constructed in 1927 as a 260-room powerhouse of lodging, with a ballroom on the top floor and one of the earliest hotels with air-conditioning. Today it stands in complete ruin, abandoned for over a half century. And it stands as a lesson learned to those who want to own assets generationally.
Nobody can predict out more than ten years accurately
We consider WalMart to have the finest market due diligence group in the U.S. That’s why we like our mobile home parks to be nearby WalMart Supercenters. Walmart has an algorithm of population trends, future road projects, utility line expansions, retail data, and 1,000 other bits of information that has allowed it to properly project successful store locations far better than any other U.S. retailer. However, even WalMart acknowledges that locations can change in quality over a long period of time. That’s why you will quietly see them shutting certain stores and replacing them with new stores in different cities and towns from time to time. If WalMart can’t project markets out more than a decade or so, how can you? We use all available data from Bestplaces.net and other sources while performing our due diligence, but what happens when the data shifts on a macro level over a decade or more? Since we acknowledge that we simply can’t predict the future beyond the medium term, we are always unwilling commit to holding a property “forever”. That hotel in East St. Louis looked like a winner in 1927, but a whole lot less of a winner in 1960 and a disaster by 1980. The owner should have sold it back in the 1940’s, when East St. Louis was booming and military travel made hotels golden. I’m sure they regret that these days.
Every time that you refuse an offer you are basically buying that asset at that price
Warren Buffett wrote in his annual shareholder’s letter a couple years ago about the strip shopping center he owns across from New York University. In it, he explains that he frequently gets offers for the center, and that every time he turns one down, he is effectively buying the center anew at that price. This should serve as a sobering thought to those who hold assets “forever” as there is always a certain point in time in which you would not buy that asset yourself at the price offered. While Buffett still holds that property at NYU, he suggests that the value is nearing the point where he would not buy it, and therefore will become a seller. If the owners of that hotel in St. Louis had only used this method, they would have surely sold before 1950, as they would have seen hints of the areas deterioration, as well as signs of new, nicer hotels being built in better neighborhoods.
Besides the Broadview Hotel, how many assets can you name that have had a similar fate? The Hilton hotel in Mineral Wells, Texas that has sat vacant for decades? Or that mall down the highway that is at 20% occupancy? As markets and consumer tastes change over time, all property owners must be vigilant to find the right time to sell. For every Plaza Hotel in New York (built in 1907 and where a Japanese consortium recently purchased it for roughly $1 million per room) there are a thousand Broadview Hotels. To hedge market forces that cannot be predicted, we believe that no asset should be held “forever”, regardless of how strong it appears on the front end.
We are very proud of every mobile home park we have purchased. But we are also realists to know that every market will not stay strong and every location will not always be desirable. That’s why we are fluid sellers when the right price comes our way.
Everything Old Is New Again
We live in an age of recycling. Some call it the “green” revolution, but in the mobile home park business this “recycling” has been going around long before there was a catchy name for it. Just as those on limited incomes make the best of what they have, park owners have been a fairly thrifty group that has been more prone to “recycle” than to start from scratch.
Water and sewer lines
In over 300 mobile home parks purchased, we have only replaced the water lines a couple times. The reason is that most park water systems are a hodgepodge of new and old lines. When old galvanized pipe corrodes and springs a leak, it is quickly replaced with a section of new PVC. Sewer lines in most parks are no different. When the old clay-tile line caves in, it is seamlessly replaced with a new PVC version. Just like Johnny Cash’s old song “One Piece at a Time”, most parks are, over time, recycled into new plumbing systems.
Electrical systems and roads
The same is true on electrical systems and roads. A constant stream of patching and repair typically leads to a virtually new operating system over time. If you re-pave 10% of a park’s roads each year (typically the worst sections first) you will have completely new roads in a decade (although it will be time by then to start all over again).
This is one area that most people find most interesting. Mobile homes are titled as vehicles, and most people would never think of keeping a vehicle for more than a couple decades (unless they are a classic car collector). But the truth is that a mobile home does not have an engine or transmission to wear out, so it does not have to stay road-worthy (98% of all mobile homes do not move from the spot where the factory originally delivers them). So there is no reason that a mobile home has a “shelf life”. Mobile home dealers used to try to misguide their customers into believing that they should “trade in” their mobile homes every decade for a new model. That’s nonsense, and no customer believes that today. Instead, these mobile homes are ultimately remodeled into new-looking homes from time to time – typically when the old resident is replaced with a new one (and completely similar to single-family home renovations).
Even our community residents are often “recycled”. You would be shocked at how many of our customers are friends and family of existing residents. When senior residents move on to assisted living, their spot is often taken by a younger member of the household, or a new household formation that is ready to live on their own. It is not uncommon to have several generations of one family living in a mobile home park. This is an affirmation of the product, as it’s such a good value that it has proven itself to be attractive for decades.
Mobile home parks are continually evolving and recycling from old to new. Each generation has its own strengths and weaknesses, and the personality of mobile home parks clearly changes over long periods of time. Old homes become new again with sweat equity and a moderate amount of capital. Utility lines morph into new PVC with every leak repair. This is a strength of the industry, as mobile home parks do not require sudden significant capital investment. Unlike apartments that require huge investment in roofs, walls, balconies and infrastructure to become fresh and new again, mobile home parks age gracefully and naturally recycle over time.
MHC America Fund
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