Thursday, October 6, 2016

In Defense of Mobile Homes

Consider the trailer park.

Or, better yet, reconsider the trailer park, whose stereotypical association with peeling paint and unemployed seniors is outdated.

The quiet story of trailer parks over the last two decades is their reinvention as “mobile home communities” by investors who saw a lucrative opportunity in providing housing to low-income Americans.

The billionaire investor and real estate mogul Sam Zell recently said of his investment fund that owns mobile home communities—some of which advertise amenities like pools and tennis clubs—that he doesn’t “know of any stock or property I’m involved in that has a better prospect.”

Since 2003, Warren Buffett has owned Clayton Homes, which builds houses destined for trailer parks across the country. At 1400 square feet, many of the homes don’t look like they were delivered on the back of a truck.

Franke Rolfe, a Stanford graduate who teaches people how to profit in the mobile home industry, buys dilapidated trailer parks, cleans them up, and rents mobile homes to the working poor. A 2014 New York Times Magazine article reported that he and a partner earned a 25% return on their investment.

Trailer parks’ appeal to these investors is simple. Millions of Americans struggle with rent payments, but still want a lawn. For them, mobile homes are the cheapest form of housing available. At the same time, it’s rare for someone to build a new mobile home park, because no homeowner wants a trailer park nearby. An industry with healthy demand but a fixed supply attracts the country’s capitalists.

These capitalists realized that trailer parks are an undervalued asset. But maximizing profits at a mobile home park isn’t pretty. It means taking advantage of the lack of supply and the expense of moving a mobile home to raise rents every year. These investors avoid states with rent control, and they’re attuned to just how much a family can pay without becoming insolvent.

But in their pursuit of profit, investors also dramatically increased the stock of well managed, affordable housing. And they’d create a lot more—at better prices—if America’s homeowners weren’t dead set against trailer parks.

Building the Affordable House

During his presidency, Bill Clinton championed efforts to “steadily expand the dream of homeownership to all Americans.” George W. Bush, too, promoted an “ownership society.” Helping Americans to own their homes, he said, would “put light where there’s darkness.”

Neither president could change the reality that many Americans cannot afford a house. The percentage of homeowners increased from 64% to a peak of 69% during their tenures. But the bump relied on no money down mortgages and irresponsible lending—the phenomenon satirized in The Big Short when the character played by Steve Carell tells a stripper in Florida that she really shouldn’t have five home loans. (In real life, it happened in Vegas.) Since the housing bubble burst, the homeownership rate has returned to 64%.

Why can’t we build affordable homes? America is full of gargantuan houses that are customized like each owner is a reality TV contestant. It sure seems like more people could afford homes if we made them smaller and more efficiently.

But according to Witold Rybczynski, an emeritus professor of architecture at the University of Pennsylvania, that is not the case.

Writing in The Wilson Quarterly, Rybczynski cites the famous case of the “Levittowns” built for newly married GIs after World War II. Levitt and Sons constructed houses like Henry Ford built cars. “Teams of workers performed repetitive tasks,” Rybczynski writes, and every house was a one-story with the kitchen and bathroom facing the street to reduce the length of the pipes.

Each “Levittowner” was identical except for its paint job, and thanks to the cold efficiency of the process, they cost $9,900 in the 1950s. That’s around $90,000 in 2016 dollars. A new home today is more than twice as large and sells for $300,000.

So if we made ‘em like we did in the old days, could we slash the price? Rybczynski says no.

The modern McMansion seems like an expensive, bespoke product. But its construction is actually a triumph of industrial efficiency. Windows, doors, and other parts arrive prefabricated, Rybczynski writes, so labor costs have actually halved since 1949. Levitt and Sons spent $4 to $5 per square foot building Levittowners, and, adjusted for inflation, builders today spend the same amount.

Instead the problem is almost wholly that land is too expensive. Reduce the size of a new, modern house by 50%, Rybczynski notes, and houses in metropolitan areas will still cost over $200,000.

That’s the secret to the extreme affordability of a mobile home—take land out of the equation. (...)

When a business makes boatloads of money from poor customers, the answer can be unseemly if not illegal. In the subprime auto loan industry, executives offer low-income Americans car loans with such high fees that 1 in 4 customers default. Hidden fees are common, and when a customer fails to pay, companies still profit by repossessing and re-lending the car. The LA Times found that one Kia Optima was lent out and repossessed eight times in under three years.

Warren Buffett’s mobile home construction business, Clayton Homes, has been accused of using a similar, exploitative business model. According to reporting by the Seattle Times and the Center for Public Integrity, Clayton Homes lent customers money to buy their mobile homes at above-average rates and unexpectedly added fees or changed the terms of the loan. When low income buyers fell behind on their mobile home payments, Clayton Homes profited by repossessing the house and re-selling it.

The situation at mobile home parks like Rolfe’s, however, looks more like the poor’s experience with financial services. Since their meager savings aren’t profitable for banks, they pay for services wealthier Americans get for free: a few dollars to cash a check, a few dollars to send money to an aunt. And since they can’t afford a mortgage, they pay more dearly for the land under their mobile home.

As Rivlin recounts of his time at Rolfe’s Mobile Home University, he learned that “one of the best things about investing in trailer parks is that ambitious landlords can raise the rent year after year without losing tenants. The typical resident is more likely to endure the increase than pay a trucking company the $3,000 it can easily cost to move even a single-wide trailer to another park.” A 30% increase in rent “might sound steep,” but Rolfe says residents “can always pick up extra hours.”

This realization has earned Rolfe, his partners, and his fellow mobile home moguls handsome returns: poor Americans could afford to pay much more for a taste of homeownership.

by Alex Mayyasi, Priceonomics |  Read more:
Image: uncredited