Jerome Powell this year, the head of the Fed decided to raise rates to battle inflation. And he did so with Augusta we've never really seen in the last 40 years. So interest rates have gone up roughly four points from where they started off the year. And who knows, he might even go a bit more up in 2023. This is Frank Roth, with a Mobile Home Park Mastery podcast, we're gonna talk for a moment about some of the issues related to raising the rates. And what happens if those rates don't actually come back down as most economists figure, but in fact, stay at these new lofty levels. The first byproduct of having high interest rates is the cost of the US Treasury. Because you see, our country holds more debt than any group in the entire world, we have over $30 trillion of federal debt. So when you start raising rates, a component of that is how much the Treasury has to pay on all of these securities that fund the government and its drastic, continual short shortfalls. Now, for those who think back to Ronald Reagan, when he raised the rates up like you're seeing now, which is what that 40th year was, when we had ever seen this before. At that moment in time, the federal deficit was only $800 billion, which is a lot of money. But when he raised those rates, the pain and suffering fell upon businesses and individuals who had borrowed debt. The government was perfectly fine with raising the rates ultimately as high as 16 to 18%, which is what Reagan did. Because at the end of the day, what did it mean to the US government when you do that? So if you raise the rates up, you got $800 billion of debt, you raise them up? 10 points, what's that get? Yeah, well, it gives you an extra $8 billion, or no, I'm sorry, $80 billion annually of cost. But the government can easily and handily take that on, pay those bills, and there's no issue. But now let's overlay what happens now with drone pals actions, when you have 30 trillion of debt, and you raise the rates up four points, that would suggest you're gonna have about $1.2 trillion in extra annual interest cost. Now, let's have a reality check. The United States only brings in roughly $2 trillion a year of total revenue from all sources, that's federal income tax and all the various taxes. How in the world when you're $2 trillion of community coming in the door, can you afford to pay at $1.2 trillion of additional interest? Right now the additional interest costs, what he's already done, is going to make all of the government programs Social Security, and Medicare all go insolvent at a much faster clip. Someone just read an article that if he doesn't drop the rate, soon, they're on a trajectory at the federal government hit $45 trillion of debt. Take how crushing that is for future generations think how impossible it is to service right now. So the first issue is if these rates don't come down, this isn't Reagan, Reagan make that bold claim. That's why he was able to stomp out Jimmy Carter's ridiculous inflationary policies. Because people were afraid that he would, he would stick with it. Because he could easily afford the race to stay at 18. Heck, go up to 2025 30 was limitless. The government could still cover its bills now poor old business person, poor old individual with a debt, well, you were gonna get trampled to death. But the government didn't care. It was fine. Now you have the roles reversed. With higher rates. Probably the weakest person, the one who's most impossibly ineligible to make payments is the federal government. So if rates don't come down, if this is the new norm, I don't know where the nation goes. We've never had rates this high with this much debt. That's never been seen before. We have had rates higher for sure. Back in 1776. Interest rates were roughly about 6%. I bought a textbook here not too long ago printed in 1908 was a real estate textbook. I like to buy old weird things and antique stores and read them to learn about the past because there's a lot of good lessons to be learned. But on the glossary section of interest rates and the amortization table they have in the book because there was no Google, obviously, back then, it only showed five different interest rate levels, for any note 56789 and 10. And that's it. That's all they had. So the problem is, if you look back, historically, our nation has had rates like these. And that's fine. The US norm, the average is roughly 7%. But we've never had this much debt before. Back when that book was written, I don't know if the government had any debt at all a century ago. And I remember, even in the days of Bill Clinton of all people, we were almost working our way down to zero. As far as debt, we were actually at a surplus for years. So the test now is can a nation survive? Being so debt written with higher rates? I don't think it's possible. If someone can explain to me how we can pay the bills at these higher rates, then I would love to know how that's achievable. I've looked at everything that you can find online and all the graphs and all the charts, it looks to me like you have a country which is completely insolvent really fast if those rates stick. So that's the first byproduct you have of these higher rates, when people say, well, will they ever bring him down? Well, I don't know. If they don't, I guess we'll be on a hunter gatherer society, you'll have no social programs, you'll have no funding for really much of anything. All we'll be doing is paying the debt, the only other way out of it would be to go ahead and default all the debt, wipe it all out, had the nation declare bankruptcy. I don't know how you'd ever be able to borrow money, again, would be the issue. And then you have the problem that all of these Americans who invest in all this all the stuff that's supposed to be stable, and income producing, they would all be wiped out. So be terrible ending. And I think the government doesn't want to go there. So when people say, Are these rates permanent? I don't know how they could be permanent. The other issue is what happens to all those properties, whether they are mobile, home parks, or apartments or anything, what did they do if these rates stay at these higher levels? Are they just going to roll over and say, well, that's the way life goes? No, they're gonna aggressively raise their rents, to get those parks and those apartments and all these things back on track. There was a group recently that raised the lot rent in a mobile home park in North Dakota by $400 a month in one whack. We've never suggested anyone ever do anything like that. Most operators try and hold rent increases even in areas where they're woefully below market through roughly $50 a year. But this group said no, you know what, we're gonna raise them up $400. Now, $400 is probably what they needed to do to make sense perhaps, of buying that property. At a lower interest rate environment, maybe they're trying to get ahead of everybody else, get a jump on everyone. I don't know if they'll lose any customers. Because in our industry, the $400 increase probably still only gets you to the fourth most affordable thing in town. But there's lots of others who won't be able to, I don't know if apartments can raise their rents up enough to handle new interest rates. I know office buildings can't. retail centers, they certainly can't. Industrial based on the company they serve might have a shot. Single family, people who have bought large numbers of single family rental homes, I don't think they probably can. But mobile home park standalone were the only game in town where we have the ability to raise rents up significantly and quickly. The average lot rent in the United States is only running about $300 a month. That's against an environment a backdrop of apartment rents of $2,000 a month and up. So if a mobile home park decided to go from 300 to 600, wouldn't impact at one iota wouldn't lose a single customer. Even higher rates than that it's been done. Denver, Colorado is nearly $900 a month with a waiting list. The bottom line is we are the best position of any asset class, if in fact, we must start raising rates to balance the net effect of those higher interest rates. It's just a fact of life. There's not much that can be done about it is simple economics. So if someone bought a mobile home park with the expectation of a spread level between interest rate of x and you raise interest rates up and you don't back and back down, they'll raise the rates to make that possible to get right back to where they were to be healthy. And what happens is even those who don't have a whole lot of debt, or don't have any exposure, the higher interest rates there He will follow suit.
If you have only one operator in any market, he raises the rents up significantly, everyone else follows behind saying that they are the market leader and trying to keep up with market. So the net effect of these higher rates, which Palas introduced is you're gonna see a lot higher of everything, particularly housing cost, and most specifically mobile home park rents. The others would like to raise them to believe me, the apartments will do their best, but it's questionable whether they can pull it off. And don't forget that as the apartments tried to raise their rents, single family, their rents is all housing escalates in price, including the what you have to pay with a mortgage that will once again allow park owners to do significant rent increases, I would imagine if the rates don't come down soon, you will start to see some of the largest mobile home park lot rent increases in American history. Also, don't forget that mobile home parks all started out life at a rate of about five to 600 a month. Back when they were built the standard lot read back in the 50s and 60s, was about $50 a month. If you inflation adjust that today, that's about $500 a month. So really, if we have fast, significant raises, we'll only be getting back to where we started. When you account for inflation. It's perfectly reasonable to thank our customers can withstand higher rates, because we're still even at large bumps are, by far the least expensive form of housing in the United States. So we'll have to see what happens with these interest rates. I would imagine they will come down by necessity, because I don't think the government can afford to pay higher higher interest charges on a regular basis. You'll start seeing those articles popping up from economists saying Wait, everyone is Powell aware of the pain and suffering he's bringing on his own government. But if he still wants to take the pain as long as he can handle it, well, that's fine because park owners and others in all other forms of real estate who can do it will raise their rents to readjust for that new environment. This is Frank Rolfe, the Mobile Home Park Mastery podcast. Hope you enjoyed this. Talk to you again soon.