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Welcome to the Mobile Home Park Mastery Podcast where you will learn how to identify, evaluate, negotiate, perform due diligence on, finance, turn-around and operate mobile home parks! Your host is Frank Rolfe, the 5th largest mobile home park owner in the United State with his partner Dave Reynolds. Together, they also own and operate Mobile Home University, the leading educational website for both new and experienced mobile home park investors!
From 1973 to 2022, the ratio in cost between owning a house and renting a house was a very stable average of 1.03. Imagine that for 50 straight years, that ratio hovered around 1:1, that means it was the same price to own or to rent, and since most Americans desire, the permanence, the stability, the wealth creation of owning, it wasn't hard to convince them since they had equal price to go ahead and buy a house. But now all that has changed, and the current ratio, which no one wants to talk about, and the Biden administration refuses to ever even mention, is currently 2.8. We have jumped from 1.03 for the last 50 years to 2.8. That's a current premium between owning and renting, it cost you three times more to own a house in America today on average than it costs to rent.
This is Frank Rolfe, the Mobile Home Park Mastery podcast. We're gonna explore what this means, this has huge ramifications for the housing market and also for mobile home parks. So how did we get here? How did we get so screwed up. 50 straight years of roughly an average of 1.03 jumping 300% in just two years. Well, you can probably guess that a lot of that change must have come from COVID, because we saw home prices jump about a third from about a US average of 300,000, roughly 400,000 at the end of the pandemic. Now, why that occurred? We'll never know or guess, we can't even figure out exactly why the pandemic occurred, but certainly this whole nonsense of supply chain interruptions and stuff that isn't what fueled it.
So I think what happened was people who lived in apartment screwed and not like their life, they were stuck at home, pondering their existence and said, "You know what, I hate living in apartments, I wanna go buy a house." People also wanted to get away from others because everyone was told that being in close proximity is what caused you to get COVID to begin with, so everyone went on a home shopping spree fueled by websites like Realtor.com and Zillow, they started buying homes on their phone, that's what the ad commercials on TV told you and as a result, with supply and demand, the price of homes sky-rocketed. But another factor is the fact that mortgage interest rates have grown to among their highest levels in 40 years. We saw the Fed funds rate go from 0.25 to about 5.5 in no time flat.
Jerome Powell just woke up one day and said, "I don't like this 0.25, I'm gonna raise it." And rather than do it in small, methodical steps, like everyone had always assumed the Fed would do, maybe a quarter point increase here and there, no. They just took it all the way to the limit. They just floored that old interest rate car and even popped a wheelie with it. As a result, your mortgage rates today, are at least double what they used to be, even triple based on the house you buy, and at what point in the cycle you would have bought it. And when you combine home prices jumping up by about a third, and interest rates, a mortgage is doubling, it's really not that hard to see why home ownership is now three times more expensive than renting. And it then begs the question, will this end? If we averaged 1.03 for 50 years, can we get back down to 1.03? No, I don't think so. Here are the problems you're gonna have. Number one, the home prices that we're seeing today are also created by a lack of supply because baby boomers, my generation, people born between 1946 and 1964, they no longer share in this concept that older people are supposed to sell their home downsize, move to Florida. That narrative just isn't fitting. Earlier generations did, but the boomers, they're not. They're staying put. They're staying in their homes, and no one can build inexpensive homes anymore.
The average lot in America right now is $100,000. If you look at the typical algorithm of home building at $100,000 lot you end up with a $400,000 house. So I just don't really see home prices coming down really at all. So then the question is, will interest rates come down? Yeah, I think interest rates will come down, I believe we'll have a recession in 2025. I believe that rates will drop probably two to three points, but the problem is, I don't know if that two to three points on the Fed funds rates will necessarily translate to mortgage interest rates on homes dropping a parallel amount. But the other problem you have is as those rates drop, what's gonna happen? More people are going to enter the housing market. So if the price of homes remains at 400,000 interest rates drop, well, then that might help a little, but what happens if the interest rates drop and two or three times as many people go out looking to buy homes, then the home prices go up 500,000, 600,000, and everything equals back to the current amount of price.
Now, I think part of the problem may be here, it's kind of like the stock market. When I was a economics major back at Stanford in the late '70s, early '80s, the price to earnings ratio on stock was a very stable 10. Everyone back then said if you buy a stock with the PE ratio greater than 10, you were a fool, that 10 is where things would always be and today, the average is about 20. And then some stocks are in the hundreds and some are even infinite. There's a lot of companies on the Stock Exchange, highly valued by investors that have never shown one penny of profit today. So maybe what's also changing is our expectations on housing cost. The nation always used to believe that housing should be roughly about a third of your income but we know in America today, that's no longer the case. People spend far, far more than that with their housing obligations. So maybe what's happened is the American consumer is just saying, "Hey, you know what, I want a house and I'm just gonna go ahead and pay half my income, I'll get three jobs even and pay half then to own that house of my dreams at these current prices." But the problem with all of this is, if you look at that ratio of 2.8 times, what does it really tell you about renting?
It tells you that rental rates are far too low. There have been some articles recently by a guy named Grant Cardone, I don't know the guy, I've never even read any of his books, he's an apartment guy, I'm not really into apartment investing. I own no apartments unless little apartment complex is inside of a mobile home park, but what he says is true. He predicts the apartment rents will rise at least 50% or 100%, because they're gonna go back until that ratio gets back to 1.1. There's no way that anybody is gonna buy if they can rent cheaply, so as a result, rental landlords in the apartment sphere, they're gonna start raising those rents up significantly to move that ratio back from 2.8 back to 1.03. And then what happens? We all know the answer to that. Mobile home parks have always had their rents as a function of apartment rents. We're a tiny little segment of the housing market, and we watch our big brother, the apartments and what they do and we kind of follow suit. Back during the great recession, we saw a lot of rent growth and mobile home park lot rents, because apartment rents went up significantly, and we all said, "Okay, well, I guess we're too low, let's go up again."
We didn't go up that much because the average lot rent in American mobile home parks is somewhere between $300 and $400 a month, but the average apartment rent in America is at $2000. So that ratio is completely screwed up. It makes no sense, the apartments are five times in average, the average mobile home park lot rent. So what is that 2.8 multiple really mean? It means we are probably about to see the longest and largest run in rent increases perhaps in housing industry. So what will the historical footnotes be to all of this? Well, basically, America blinked, it really screwed up, it did not keep it's eye, on what really happened to the housing market, it failed in developing more affordable housing, it failed in setting interest rates, it's really generally done a horrible job over the last three years.
But specifically, you're going to see some big winners and some big losers. The big winner will be those who own apartments, mobile home parks or any form of rental housing, because you're gonna see those rents go up significantly until that ratio gets back to 1:1. This is Frank Rolfe with Mobile Home Park Mastery podcast. Hope you enjoyed this talk to you again soon.