Housing is a human necessity. It's also a tradeable asset. Those two facts were at the core of the 2008 subprime mortgage crisis. They are also at the heart of a disturbing trend: the financial exploitation of one of the last remaining areas of affordable housing in the US, mobile homes.
Large private equity funds such as The Carlyle Group, Blackstone and Apollo, as well as other major institutional investors such as the Pennsylvania Public School Employees' Retirement System (PSERS) and the Singaporean sovereign wealth fund, GIC, have gone long on trailer parks. Institutional investors accounted for 17 per cent of the $4bn in sector transactions in 2018, up from 9 per cent of $1.2bn transactions in 2013.
In America, trailer parks are a fragmented, "mom and pop" business, making them ripe targets for consolidation. They are also shorthand for "poor" — most people who live in them are part of households earning less than $50,000 a year. Some 22m individuals live in trailer parks; roughly 1 in 15 Americans. Most own their trailers, which depreciate just like cars, but rent the land underneath them, since traditional mortgages on such properties aren't available.
For investors, trailer parks are cash cows. They offer relatively strong and steady returns of 4 per cent or more — around double the average US real estate investment trust return, according to research data cited in a recent report on the topic by the Private Equity Stakeholder Project and two other non-profit consumer advocacy groups.
What's more, they are a growth business. Shipments of new trailers have been rising steadily since 2009, thanks in part to the fact that an increasing number of people can't afford stationary homes in many urban areas.
Part of that is down to monetary policy that has made housing the one area of the US economy that has seen any real inflation. Another part is a housing "recovery" that has been driven largely by cash-rich and institutional investors. Invitation Homes, which Blackstone founded and floated, has become the largest single-family home landlord in the US, a development its chairman and chief executive Stephen Schwarzman says has been "good" for America.
Some tenants disagree; private equity's moves into housing were followed by activist and tenant complaints about disproportionately high rents and absentee landlords. A spokeswoman for Invitation Homes acknowledges "bumps in the road" but says most complaints have been addressed and lease renewal rates in the first quarter of 2019 were 72 per cent.
But complaints are now coming in the manufactured housing sector. While aggregate national data is impossible to find, a recent report by the brokerage firm Marcus & Millichap noted sharply rising rents coinciding with investor demand which remains "well above available listings in most areas of the nation, as more buyers are entering the market from other property types in search of higher returns".
As investors looking for yield have piled in, activists and academics say that lot rents on private-equity-owned properties are rising sharply — as much as 15 per cent over two years in some parks, according to Michael Swack, director of the Center for Impact Finance at the University of New Hampshire, who has studied the sector since the 1980s.
Consumer advocates say that can result in tenants with few means having to pay for costly moves, or even to abandon their trailers altogether.
These concerns are amplified by the fact that large investors can take advantage of government-backed loans originally designed to help individual homeowners. The Federal National Mortgage Association, or Fannie Mae, an institution founded as part of Franklin D Roosevelt's New Deal of the 1930s, provided more than $200m in financing in 2018 to help private equity firm TPG Capital buy up dozens of manufactured home communities.
Fannie Mae also backed a $1bn loan to Yes! Communities, which is majority-owned by GIC and PSERS.
Even if individual tenants were able to outbid such large buyers, most states don't grant them the right of first bid on their properties, says Paul Bradley, president of ROC USA, a community lending group based in New Hampshire. His state is one that does, which means that Mr Bradley has helped 237 mobile home parks switch to tenant ownership since 1984. Not a single one has filed for bankruptcy or faced foreclosure. "People in these communities tend to be financially conservative," he says. "They know what it's like to live on the edge, and they don't want to."
If all this sounds familiar, it should. In the wake of the 2008 crisis, many Americans bought into the false narrative that poor people borrowed more money than they should have. But at its core, the crisis was about a system that incentivised financial engineering. It was the system that was flawed.
Wall Street's sudden interest in trailer parks has dangerous echoes. Ten years on, we still have a dysfunctional housing sector, financial markets that provide incentives for asset bubbles and a public disenchanted with regulators and politicians who have let it continue.
Is it any wonder that even the titans of finance themselves are calling for a reset of Anglo-American capitalism?
© 2019 The Financial Times Ltd.