Risky Home Equity in Mobile-Home Parks...and Ways to Fix It

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Owners of mobile homes in mobile-home parks have a unique risk structure. Their homes are built on top of a wheeled trailer that can be towed. However, moving a “mobile” home costs a significant share of the home’s resale value and risks damage to the home. Eighty five percent of mobile homes are never moved from their initial placement. Mobile-home parks, where roughly half of the US’s 18 million mobile homes are placed, rent plots to tenants—legally like a very long-term parking lot.

Mobile-home parks have been the subject of media scrutiny, most notably from John Oliver’s Last Week Tonight. Ownership of mobile-home parks has seen significant consolidation, with large real estate investors forming holding companies of hundreds of mobile-home parks. Changes of ownership frequently lead to changes in rental agreements for tenants. Such changes can lead to owners having to abandon their home if the cost of towing it off rented land exceeds its value. A particularly plainspoken mobile-home maven is often quoted as describing mobile-home parks as “like a Waffle House where the customers are chained to their booths.”

Mobile homes represent 6.3 percent of US homes according to Fannie Mae. Owners of mobile homes are significantly poorer than typical homeowners and are concentrated in rural areas.

The purpose of this article is to clearly describe the risk structure of mobile-home owners who rent their land. I then describe a few policy proposals to help mobile-home owners accumulate wealth, including describing a missing insurance market that could reduce their risk.

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Technical setup and analysis

For our discussion, the resale price of a mobile home in its current location is $p$. Imagining the mobile home could be moved for free, its “anywhere” price would be $p’$. To move the home to an alternate site costs $m$.1 Thus, the seller of a mobile home to an off-site buyer receives $s = p’ – m$ for the sale of their house.2 The landowner charges a future stream of land rental payments with present value $R$. The homeowner does not know the value of $R$ but has an expectation $E(R)$.

Home equity at any moment, then, is the greater of $p$ and $s$. On-site resale price $p$ is a function of land rent $R$, local amenities, and the normal supply and demand factors that affect all housing. All else held equal, if the expected rent level $E(R)$ rises, on-site resale prices $p$ should fall. Off-site resale price is a function of moving costs $m$ and normal supply and demand that affects what people will pay for the structure anywhere.

\[p = f(E(R))\] \[s = f(m)\]

The park owner wants to maximize the sum of future land rent payments in the park $ΣR$, including rent streams from existing residents $ΣR^E$ and future residents $ΣR^F$. That is, $ΣR=ΣR^E+ΣR^F$. To do this, they must maintain high occupancy. Note that occupancy here means homes occupying rented lots, not residents occupying homes. Turnover in resident ownership of the homes is not a problem so long as the homes are not towed away or stop generating rent (by abandonment or delinquency on rent payments).

That is, if the rent price is set higher than previously expected $↑E(R)$, the park owner will not lose occupancy as long as $p>s$ and $p>=0$. Simply, the park owner appropriates existing residents’ home equity in the form of unexpectedly higher rent.

On the other hand, if rent is raised, it might be difficult to attract new tenants when turnover does occur. Returning to the crude Waffle House analogy, what limits the restaurant’s ability to raise prices is how firmly chained the customers are to their booths and, thus, how frequently the restaurant needs to attract new customers.

Business analysis

A common news story is to read that a mobile-home park was purchased from long-time owners by a large private-equity backed holding company and tenants complain that rent was raised substantially. The new owner defends the rent hike by explaining a list of facilities improvements they are making. The residents must just wait until they are finished building to enjoy the benefits.

If the same story happened in a traditional rental apartment complex (or where the mobile-home park owner also owns all the homes), the owner could only raise rent once the improvements were in place, at the risk of a temporary exodus of tenants. Once the improvements were finished, they could raise rent. Even if there was resident turnover, the improvements would attract new residents and they could pay back the loan over time from the higher rent payments.

Back in our mobile-home park, it’s different. The new owner can immediately raise rent and use it to fund improvements with no loan or a smaller loan. Doing so decreases existing residents’ home equity, but their homes keep generating rent as long as the conditions from the previous section are met (so residents do not tow their houses away or abandon them). Over time, the park will need to attract new homes. But by that point, the improvements will be in place and justify the higher rent. The new owner keeps the full rent without paying down a loan.

In summary, the new owner placed a wealth tax on existing residents to fund improvements that allow them to receive higher rent from future residents. If those new residents do not realize what happened and form an expectation that land rent will stay relatively steady in the years to come, the owner can repeat the same trick again after a few years, appropriating the new unsuspecting owners’ equity to pay for further improvements. This can repeat until either the neighborhood permanently prices in expectations of further rent hikes or the park reaches a maximum rent level that the housing market will support.

Market-oriented Policy Proposals

Governments, private foundations, or homeowner associations have a few options to disrupt this market dynamic that would not unduly damage the market for mobile homes.

  1. Lower the cost of moving a mobile home. Increasing the mobility of mobile homes increases the threat of park owners losing occupancy if they raise rent. A homeowners association can coordinate a threat by asking tenants to remove siding from the homes and take other preparatory steps to move before a rent increase. Local governments can coordinate a periodic move day when towing companies offer bulk discounts on moving many mobile homes on the same day. Local governments can likewise lower bureaucratic hurdles and utility hookup fees faced by folks who move a mobile home. Finally, foundations can organize volunteers or donate money to subsidize moving mobile homes.
  2. Encourage competition. Having no nearby competitors makes it harder for tenants to leave a mobile-home park. Many municipalities restrict the establishment of new mobile-home parks through zoning. Allowing at least one other mobile-home park to be established nearby is one way a municipality could dissuade predatory behavior by a park owner. If more mobile housing is not desirable, the municipality could seek to split a park into two competing businesses.
  3. Improve transparency of mobile-home park land rents. The mistake that allows mobile-home owners to lose equity is that expectations for future land rent are lower than reality. Keeping a public repository of land rents in mobile-home parks would help the market form more correct expectations of future land rents. It would also make it harder for predatory park owners by exposing to potential residents their history of past unexpected rent hikes.
  4. Introduce home equity insurance for mobile-home owners. The risk of unexpected rent hikes is inherent in placing a mobile home on rented land, similar to the risk of unexpected local tax hikes for traditional homes. However, it is an insurable risk. An insurer could price the likelihood that actual future rents differ from market expectations, $R≠E(R)$. Park owners could minimize residents’ insurance cost by making future commitments to price stability. If funds are available, administrative costs could be subsidized to allow actuarily fair insurance, which would minimize risk without directly subsidizing mobile home ownership. More aggressive regulatory bodies could choose to make the insurance mandatory or a condition of park owners receiving certain benefits.

  1. The home might move to a competing park, their own or a friend’s land. We’ll ignore the choice of how far to move the home. Moving cost $m$ includes labor, towing fees and expected damage incurred in the move. The possibility of damage means $m$ is not fully known until after a move. 

  2. Note that if the “anywhere” price falls below the price to move the home $p’<m$, the owner would rather abandon the home than move it. 

Written on April 6, 2022