The economy hinges on supply and demand, which is crucial to assessing the state of its health.
No economic report would ever be complete without jobs or housing reports. And when it comes to employment, everyone wants to know the unemployment rate. A declining unemployment rate is typically a sign that the supply of available jobs grew, therefore, reducing the number of people that are out of work. What about housing prices? A dip in prices usually means one of several things – an increase in supply, a dip in demand, or both.
Recently, in the housing market, there have been more and more reports of dropping home prices in major markets across the country.
Take Seattle, for example. According to a May 2019 report by real estate website Redfin.com, Seattle was one of five major cities in the nation where home prices are lower now than they were at the same time last year.
The study found that median Seattle home prices dropped by 1.3 percent between April 2018 and April 2019. The report also found that the number of homes on the market in Seattle rose by 57 percent over the same time last year – the second-highest rate in the nation. This glut of homes, along with a dip in demand explains the price drop.
The oversupply of homes in mid to high-end markets like Seattle that have seen recent price drops is not unusual since one of the common issues with most middle-class real estate, like new condos or new home construction, is builders creating an overabundance of homes.
When this happens, like in Seattle where there is an oversupply of homes along with shrinking demand, prices drop. A drop in home prices usually results in a corresponding reduction in rental rates since landlords start to charge lower rents due to competitive pressures from new landlords who are buying homes for less than existing landlords and can afford to charge lower rents to attract tenants.
From an investor and landlord perspective, this is not an ideal situation where the possibility of oversupply can affect the bottom line due to reductions in rent. The ideal real estate segment would be one in which oversupply – whether from new construction or low demand – is uncommon, where rent reductions don’t occur and where consistent and continually growing income streams can be expected backed by historical data.
Well, there happens to be a real estate asset class that fits this description, but it’s one only a few will openly brag about because of the social stigma associated with it. While it’s often overlooked and not often boasted about in the locker room of your local private country club, it is actually one of the most exclusive and most profitable.
What is this asset class? Mobile home communities (“MHCs”). What? Why? For one, MHCs fall within the affordable housing sector, which has consistently seen undersupply and overdemand since the Financial Crisis.
IN FACT, IN MANY MAJOR MARKETS WHERE PRICES HAVE FALLEN DUE TO OVERSUPPLY AT THE MID TO HIGH LEVELS, THE OPPOSITE HAS BEEN TRUE FOR AFFORDABLE HOUSING ON THE LOW END.
According to a recent CNBC.com article, “There is also a growing bifurcation in the market. High demand and short supply on the low end have kept prices high, while low demand and high supply on the high end has hit prices.” Olick, Diana (May 7, 2019) Home Price Gains Keep Shrinking, but Housing is Still Overpriced. Retrieved from https://www.cnbc.com/2019/05/07/
Another reason for the profitability of MHCs…
While demand has seen an upsurge from baby boomers and millennials seeking to downsize, supply remains stagnant because unlike with middle class and high-end real estate, there is no overbuilding nor much chance of it in the near or distant future. Why? Many local municipalities are not allowing the development of new MHCs because people look down on them. Because of this social stigma, the fear is that the proliferation of MHCs in a municipality would only drag down home values in the mid to high ranges.
With stagnant and even diminishing supply (when MHCs are put out of commission) coupled with increasing demand, what does this mean for the real estate investor interested in MHCs? It means investors can have the security of knowing that the supply vs. demand dynamics of MHCs will ensure high demand, occupancy, and rents for the long-term.
With no relief in sight for the supply constraints plaguing MHCs, MHC investors can be confident in knowing they should be able to reap the significant financial windfalls from this unsexy but highly profitable segment for years and decades to come.