When you hear real estate mentioned in the News, it’s typically in connection with a discussion of the state of the overall economy and often includes predictions for the next 12 months.
After all, the following leading economic indicators revolve around the individual consumer and housing starts (new construction) is one of them:
- Real GDP
- Consumer Price Index
- Producer Price Index
- Consumer Confidence Survey
- Current Employment Statistics
- Retail Trade Sales And Food Services Sales
- Housing Starts
- Manufacturing and Trade Inventories and Sales
- S&P 500 Stock Index
Housing starts reflect the number of privately owned new houses on which construction has been started in a given period, including the following type of residences: single-family houses, townhouses or small condos, and multifamily apartment buildings with five or more units.
Housing is a big deal because housing market activity (residential investment) contributes about five percent to the U.S. GDP, taking into account investment in the construction of single and multifamily housing together with the remodeling costs, and other associated fees.
The leading economic indicators of the housing market compiled by various government agencies and trade associations include:
- Construction Spending
- Residential Construction
- Home Sales
- New Home Sales
- Pending Sales
- The National Association of Home Builders (NAHB) Housing Market Index
Mixed into the discussion of the overall residential housing market can include reports on the state of the retail, hospitality, and office sectors.
But outside of these asset classes, few other classes are discussed. Why?
It’s because the residential, retail, hospitality, and office real estate markets are highly correlated with the overall health of the economy. An economic downturn characterized by rising unemployment, a plunge in the stock market, and consumer confidence will all correlate with a decrease in demand for new homes and retail, hospitality, and office space.
You never hear about the state of the mobile home market or other real estate segments like storage facilities or assisted living because those segments are less correlated to the overall market.
Economists aren’t typically interested in the effect of a fall in employment, the stock market and housing start on mobile home demand.
It could also be that the mobile home market is an unreliable indicator of the overall health of the economy because mobile home demand moves in the opposite direction of the global economy in an economic downturn – especially in the last decade. There are a plethora of reasons for that:
- Since the Financial Crisis, the supply of affordable housing has been severely constrained with demand far outpacing supply with the gap continuing to widen.
- Part of this is due to home affordability for Millenials, and part is due to Baby Boomers electing to downsize upon retirement.
These factors have contributed to the U.S. becoming a renter nation – putting particular strain on the affordable housing sector. No more is this problem more acute than in the mobile home community (MHC) space where due to strict zoning laws, very few new MHCs are being developed.
During a recession, tenants will gravitate towards more affordable housing solutions. Since mobile home parks are the most affordable option, this causes higher demand from prospective tenants.
What the News won’t tell you is that there is unprecedented demand for MHCs that will only multiply in a downturn. The lack of new supply is a significant factor in this unsatisfied demand.
According to PGIM Real Estate research, a unit of Prudential Financial Inc., only ten new MHCs have been built in the last two decades. Not only are new MHCs not being developed, but some of the existing ones are redeveloped into other uses.
Ironically, asset classes such as MHCs, affordable housing, and other cash flowing real estate segments that are uncorrelated to the broader markets are rarely discussed in the News, along with other macroeconomic discussions.
It’s ironic because sophisticated investors who hold these types of assets in their portfolio are actually protected during recessions where their incomes will be preserved. In contrast, those who do not hold passive income investments experience a reduction in revenue from job loss or wage reduction.
When you hear about real estate in the News, it usually involves a discussion of the health of the broader markets.
It makes sense then that discussions of the state of the real estate market usually involve the residential, office, hospitality, and retail space that all move in unison with the broader markets.
What’s hardly ever discussed is the real estate segments that will protect you in a downturn, and one of those segments happens to be in the mobile home community space.