A December 11, 2012 article in the Wall Street Journal titled “Tide Changes for Manufactured Housing” suggests that “the falling fortunes of manufactured housing appear closely tied to the rising fortunes of traditionally built homes.” Of the approximately 50,000 mobile home parks in the U.S., this description might be valid on 5,000 of them. But for the other 45,000, this contention could not be further from the truth. Indeed, those parks that focus on “affordable housing” have never had stronger operating numbers. Here’s how the Journal got it wrong, and what the true story is.
The industry is fragmented
Mobile home parks have fragmented into two main areas of concentration: 1) lifestyle choice (in which the customer can afford other options, but chooses mobile home park living as better meeting their goals) and 2) affordable housing (in which the customer has essentially no other alternatives that they can afford other than mobile home parks). These two sectors focus on different types of customers, and have entirely different performances in terms of cap rates, occupancy and risk.
The Wall Street Journal was right about the challenges facing “lifestyle choice”
The “lifestyle choice” business model is based on factors that are not necessarily going in favor of the mobile home park. Back when single-family and condo prices were stratospheric, it made a whole lot more sense to buy a mobile home versus the alternatives. But with the collapse in pricing of the other housing options, it’s hard to imagine the average consumer choosing a mobile home over a brick house or condo with a nice view. The “lifestyle choice” model is based on combined lot rent and home mortgage costs of over $1,000 per month. There are many options today at that price point. And when faced with competition from the more socially acceptable forms of shelter, mobile homes tend to lose every time.
But they left out the “affordable housing” segment
What was not addressed in the article was the “affordable housing” niche. In this business model, the combined lot rent and home mortgage are around $500 per month, and the only competition is class-B and class-C apartments. In this battle, mobile homes tend to win every time. In addition, the customer base for “affordable housing” is the fastest growing demographic segment of the U.S. population – those families earning $20,000 per year or less. This has grown into roughly 30% of the U.S. population, and that does not even count the 10,000 baby boomers per day that are retiring into social security checks that average only $1,200 per month.
It doesn’t help that all of the public companies in the mobile home park niche are “lifestyle choice”
The three public mobile home park REITs are ELS, SUI and UMH – which are all “lifestyle choice” business models. This tends to influence analysts and the media to assume that this is the standard business model of all mobile home parks. While there are additionally a good many private REITs with this same business model, it is definitely in the minority and not majority. There are estimated to be 50,000 mobile home parks in the U.S., but only maybe 5,000 are “lifestyle choice” business models. That means that 90% of the mobile home parks in the U.S. are focused on the “affordable housing” segment.
What the “affordable housing” segment looks like today, and going forward
As long as roughly a third of the U.S. population has an annual household income under $20,000, and the baby boomers continue to retire at the rate of 10,000 per day into $14,400 average annual incomes, there is no shortage of customers for “affordable housing.” Additionally, with apartment rents averaging over $1,000 per month in the U.S., only the bottom tier of apartments can meet the affordable housing household budget of $500 per month. And there are very few tenants who would choose the appalling conditions of poorly under-capitalized and poorly managed multi-family. The average person prefers no neighbors banging on their walls and ceilings, a yard for their kids, a pet, and the community feel of a mobile home park. The only way this business model can go bad is if the average U.S. family starts becoming significantly more prosperous. And that’s a bet that every park owner in the U.S. will take (as will every sane economist).
The Wall Street Journal is an excellent publication. They write a lot of great articles. However, they missed the mark concerning mobile home parks. The real mobile home park industry is strong and getting stronger. Every negative trend in the American economy, without exception, is a plus for the affordable housing sector of mobile home parks.