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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!
Warren Buffett has finally retired from active day-to-day duties at Berkshire Hathaway. He's been replaced by the new CEO named Greg Abel. Abel's been there a while and Buffett has entrusted to him billions and billions of dollars of investor capital for the future of Berkshire Hathaway. And Berkshire Hathaway has been a part of the mobile home park industry since around 2003, when Berkshire Hathaway bought Clayton Homes. And additionally, as we all know, Berkshire has many investments in the housing arena. The one we see frequently is Berkshire Hathaway, the realty group that sells single-family homes. But recently, Berkshire Hathaway made the first big acquisition that Greg Abel has ever done and he bought Taylor Morrison homes for about $8.5 billion. And what did that purchase have to say about the housing industry, mobile home park industry, interest rates? There's a lot of variables involved in that transaction. This is Frank Rolfe of the Mobile Home Park Mastery podcast. We're gonna talk about the perhaps underlying reasons why Greg Abel decided to double down on the housing sector with his very first purchase.
Now, there's some things we all know about Berkshire Hathaway. It's been, over the last almost half a century, the most successful stock fund in American history. Warren Buffett had a lifetime record of about 19.8% per year. And that has been kind of the gold standard if you want to say that you are a top investor. Hitting roughly 20% a year has been the key benchmark. And that's why we always talk about trying to hit 20% on mobile home park acquisition, which you achieve through a three-point spread between the interest rate and the cap rate. But they don't have a spread in stocks. Right. It's not typically levered. So it's probably a whole lot harder to hit 19.8% in the stock market than it is to hit 20% with a mobile home park. And Buffett has been known to be very long-range thinking. He's always thinking at things not like short-term. He's always been very against people who invest short-term. He normally tries to invest with a 5-year, 10-year, 20-year horizon. And because of that philosophy, he's done a very good job of spotting different trends and making decisions like that. And even though he's not in active duty, he is still the head of the board of directors of Berkshire. So there's no way that Abel went out and bought Taylor Morrison Homes without Buffett agreeing to that investment, without him shaking his head, "Yes, let's go do that."
But the key question is why? Why in the world would Warren Buffett and Berkshire Hathaway want to invest $8.5 billion in a single-family home builder? Well, we all know that single-family home building right now is not doing well. They're not making lots of money, not selling a lot of houses. We know that Berkshire Hathaway, which is the realty division, is not doing very good either. There are right now fewer single-family homes sold than there have been in, good heavens, a decade or more. Even Clayton Homes, I don't think is killing it, although we don't really know what their financials are. So in an environment where you already own a lot of housing stuff, you have a lot of capital sucked into the housing industry, why would he do more? And to me, I think the big answer is they're betting on interest rates going down. I look at this acquisition as an interest rate play. Why is that? Because if you were going to buy Taylor Morrison Homes and get a good deal on it, and Buffett obviously likes to make a good buy, you'd buy it when it's in the dumpster. You'd buy it when things are bad. That's when you make good purchases. And so he's bought Taylor Morrison at a cyclical low point, but the only reason you would buy it at a low is if you thought it was going to go higher. And the only way it goes higher is if interest rates come down.
So it's my view that what Berkshire Hathaway is doing by doubling down on housing is they're giving very clear and apparent signs that they believe that the 10-year Treasury will fall. Because the 10-year Treasury is what typically determines mortgage rates. And lower mortgage rates would definitely boost Taylor Morrison's sales. It would also boost Taylor Morrison's margins. It would also make all those other vertically integrated housing companies that Berkshire Hathaway owns, everything from Clayton Homes, the mobile home manufacturer, to 21st Mortgage and Vanderbilt Mortgage, the financial arm, and then these other companies which Berkshire owns that don't get a lot of talk, but I think they have a cabinet maker and other items that go into houses. But why? Why now? They've been sitting on about $400 billion of cash over at Berkshire Hathaway and they haven't shown any desire, no enthusiasm to buy anything. Why right now? Why would you buy Taylor Morrison Homes? Well, again, I think what's going on is Buffett believes that the interest rate decline is very close at hand. Let's look at a few other clues as to that statement.
Number one, you recall that a while back Buffett said that the glorious period of the US stock market was over. I think he was being very clear on that, that he does not see stocks as continuing their rapid ascent much longer. And then one big indication of his belief in the stock market is the fact he's been sitting on about 400 billion of cash. Now, it is true he has that in various Treasuries and CDs, but the problem is those only earn right now what, 3 to 4%? This is a guy whose lifetime batting average is 19.8%. That's making his track record go down a whole lot. And the only reason he would be warehousing cash is if he thought about spending it and if he thought that spending it on stocks right now was a bad idea.
But just imagine for a moment, if you are the world's number one stock investor of all time, if you thought there would be a large market correction, which Buffett has always liked, that's when he makes most of his buys, then when he's stockpiling that much cash, the most they've ever stockpiled, you have to imagine he is anticipating a really big fall for the stock market. Because that's when he will go in and he will buy up lots of things at what he figures to be dirt cheap prices. And typically when you have a crash of the stock market, what happens? Well, in every crash of the stock market in modern times, the result is a lowering of interest rates. So if you look back to the dot-com crash, Great Recession, savings and loan crash, all these different things that occurred, the byproduct was, on average, interest rates came down about two and a half points. That's where you end up.
So my belief is he anticipates probably next year a big old American recession, the kind that we haven't seen in the longest time. We always have had them on eight-year centers, and then suddenly after the 2007, 2008 Great Recession, we haven't seen one for nearly 20 years. Even though prior to this moment, it's always happened about every eight. And my belief is the pendulum has been pulled back with a vengeance. It's just about to break. Before we finally let go of the pendulum and it swings the other way. Right now, stock market valuations are higher than they were prior to the Great Depression of 1929. They're higher than they were before the dot-com bust, and not just a little bit. They're enormously over their normal guidelines. So I'm thinking he's buying Taylor Morrison Homes because he believes the dam is about to burst and interest rates will start to come down.
Now, you might say, "Well, but how will rates come down?" Because we all know that Kevin Warsh is at best unable to really move the dial much at the Fed. Because the Fed right now has so many members who have Trump derangement syndrome, they're never going to vote in a million years for anything that Trump wants. Trump says he wants lower mortgage rates. They'll never give it to him. But you don't need the Fed. I urge everyone to go on AI and look what the Treasury can do on its own to lower interest rates. And you'll see the Treasury has just about as many weapons as the Federal Reserve. They have things where they can do debt swaps, they can swap short-term debt to long-term debt or vice versa. They can even do their own form of quantitative easing by spending down their own capital to buy their own stuff. He's got just about as many tools in his tool chest as the Fed has. But the Fed got all the attention after the 2007, 2008 Great Recession. It was the Fed that lowered the rates down to near zero. You remember when they were down at about 0.25. But that's because the head of the Fed at that time was, he took the active role. And the head of the Treasury at that time, he was a very passive guy. So he didn't like the limelight, didn't get too much involved. But you've always had the ability for the Treasury to do the same active steps to reduce interest rates as the Fed has. You just aren't aware of that because the guy in the Treasury's never done it before. This time is different. You have Scott Bessent. He has no fear of breaking out of the mold and being aggressive. And so I believe when the time comes, he's the man for the job.
Now, I urge you, since interest rate movement is a big deal to all investors, don't just listen to what I'm saying. Google it up yourself on AI. You'll learn a ton. You'll learn a whole lot about all of these machinations in the government that none of us are really aware of unless we've done a little research on it. But when it comes to the Taylor Morrison home buy, it's my personal belief that what that is really is a signal of, is a signal that Berkshire Hathaway believes that the dam is about to break and the rates are about to come down. And when the rates come down and mortgage rates go down, then the sales of single-family homes through Taylor Morrison, Berkshire Hathaway Realty, Clayton Homes, 21st, it all ties together. Now, the other part of the puzzle, of course, is the industry that he chose, because there may be other related industries that interest rate movement would have a huge bearing on. But once again, we have to go back to Warren Buffett and the way he likes to stick with basic industries, and he likes industries with a moat. And housing has a pretty big moat. It's very, very hard to build housing in America today that people can afford to buy. So it's not like Taylor Morrison is nothing more than a pure interest rate play. There are other benefits to Taylor Morrison for the Berkshire Hathaway portfolio, many other vertical integration plans with that. But I do believe at the end of the day, people will look back a few years from now and they'll say, "Okay, now I understand why he bought Taylor Morrison Homes." And I just want to give you the information first. This is Frank Rolfe for the Mobile Home Park Mastery Podcast. Hope you enjoyed this. Talk to you again soon.