2023 Homeowner and Renter Affordability

Current U.S. market conditions and their impact on employee relocation

For years, the phrase “location, location, location” has been synonymous with real estate, emphasizing the important connection between where a property is and its market value. While that remains tried and true, “what a difference a day makes” might be an equally apt descriptor in 2023.

The unusual pace and extent of economic changes and mixed market conditions are what prompted Sterling Lexicon to convene a follow-up session to our “Navigating a Rapidly Changing Real Estate Market” event and recap shared at the end of last year. In the middle of the first quarter of 2023, we brought together a panel of relocation and licensed real estate experts to re-examine the current market, explore the most likely future trends and most importantly, discuss what it all means for employee relocation. In a virtual presentation moderated by Liz Portalla, CRP, GMS-T, Vice President Client Services and Innovation, Sterling Lexicon, presenters included:

• Ashley Davis, Vice President of Operations, Sterling Lexicon
• Lois Johnson, CRP, CSP, Senior Director, U.S. Domestic Mobility & Real Estate Services, ADP
• Darren Wagner, Vice President, Real Estate, Sterling Lexicon

Each contributor brought decades of experience in relocation policy development, administration and residential real estate to the conversation. Here we share a recap of their observations and some proactive steps to take to be ready for what’s next.

Defining Common Terms

While this isn’t the first time we’ve seen dramatic changes in the real estate market, the current
environment is very different from conditions that led to past storms. Unlike circumstances surrounding the 2008 housing crash, for example, stricter underwriting standards, larger down payments and a return to more traditional, fixed-rate mortgages are helping to insulate
homeowners from the negative effects of rising costs. Pandemic-era shutdowns and stimulus programs also contributed to increased levels of consumer savings.

Simultaneously, until the end of 2022, interest rates remained historically low, while the housing market stayed consistently robust. In fact, a recent report from the National Association of REALTORS® (NAR) indicates that despite increases in some areas, the January median existing-home price for all housing types declined overall for the first time in over a decade – the longest period of year-over-year (YOY) increases on record.

What has remained the same, however, is the fact that many of the tools that were successful
in supporting employee relocation through past economic challenges can be effectively used again. Some are highly relevant now, while others have the potential to become important again soon, depending on where the next wave of change takes us.

For those newer to the industry who may not be as familiar with those tools or the various conditions that led to their use, Ashley Davis provided some key definitions:

Loss On Sale (LOS)
The difference between what the relocating employee paid for their home vs. what they can sell it for in the current market. When setting policy to address loss on sale, Davis noted that it’s important to decide whether – and if so, what types of – capital gains should be considered.

Negative Equity
A scenario in which the value of the employee’s property falls below its current outstanding mortgage. Though we are not seeing this at anywhere near the levels witnessed during the 2008 housing crisis, there are indications of some homeowners and regions beginning to experience it again.

Mortgage Interest Differential Assistance (MIDA)
A payment to offset the difference between a transferee’s former mortgage rate and the rate on the home purchase in the new location.

Discount Points
Fees that the homebuyer pays directly to the lender in exchange for a lower interest rate.

2-1 Mortgage Interest Buydown
A financing option that allows for transferees moving to higher interest rates a bit more time to adjust, with reduced rates for the first two years. Under these programs, repayment rates are typically two percent lower in year one, one percent lower in year two, and then return to the original rate in year three.

Rental subsidies
Cash payments offered to transferees to help offset the difference in rental costs between the origin and destination locations.

Interestingly, although most attendees (87%) indicated in an audience poll that affordability challenges are having an impact on their relocation policies and mobile populations, many program administrators still seem to be in a “wait and see” mode before taking specific steps to
change or introduce new forms of assistance. For example, when we took the pulse on what companies are doing right now, we found that 22% are thinking about making policy changes, 6% are helping with discount points and 67% have not taken any specific action, indicating
they are still assessing conditions.

A Tale of Two Markets

While economists and industry experts try to predict what will happen as the Federal Reserve continues to balance inflationary pressures and the threat of recession with rising interest rates, there is another difference that sets 2023 apart: a mix of market conditions unlike any we’ve seen before – for both renters and homeowners.

Rental Affordability

Broadly speaking, rents have been rising, particularly in larger metro areas where major employers are concentrated and demand is high. Darren Wagner shared that six major U.S.
metro areas saw double-digit increases in YOY average rent prices from 2021 to the end of 2022:

Region                                                                                    Average rental rate increases YOY

Salt Lake City, UT                                                                                 +29.8%

Raleigh-Cary, NC                                                                                  +24.0%

Indianapolis-Carmel-Anderson, IN                                                   +16.3%

Cleveland-Elyria, OH                                                                           +14.6%

Nashville-Davidson-Murfreesboro-Franklin, TN                            +11.7%

Charlotte-Concord-Gastonia, NC and SC                                         +10.6%

On the other hand, 14 metro regions saw YOY declines in rental rates, though not at the same levels as the increases. In year-end reporting, some of the largest decreases were seen in the following markets:

Region                                                                                   Average rental rate decreases YOY

Minneapolis-St. Paul-Bloomington, MN and WI                            -8.6%

Oklahoma City, OK                                                                              -6.4%

Idaho                                                                                                      -5.4%

Phoenix, AZ                                                                                           -5.0%

While most Western states are generally considered high-cost markets, some of the largest decreases were concentrated in that region, with Salt Lake City as the one outlier. In the first quarter of 2023, we’re also seeing high rental rates begin to cool in certain Northeastern, Texas and Southern markets, including several major regions in Florida, a highly popular destination at the peak of the pandemic.

Given the pace at which conditions are changing, relocation managers are advised to check in regularly on their most prominent markets for the most current figures.

Homeowner Affordability

With homeowner affordability so closely tied to mortgage interest rates, consumers are feeling the “sticker shock” of the dramatic increases seen in recent months, particularly given the historically low rates we’d become accustomed to. Rising rates, coupled with increases in the cost of living and consumer goods are having a significant impact on affordability.

Virtually overnight, the market shifted from a seller’s market to a buyer’s market. During the peak of the pandemic, many buyers were waiving inspections and paying well over asking price. Now, with the dramatic increase in rates dictating significantly higher monthly payments, buyers are much more apt to carefully consider inspections and negotiate concessions.

Even as February saw median housing prices decline for the first time following 131 consecutive months of increases, the same NAR report noted earlier found that sales of existing homes reversed a 12-month slide in February, registering the largest monthly percentage increase since July 2020 in all four major U.S. regions.

As NAR Chief Economist Lawrence Yun points out, this suggests that buyers are taking advantage of any dips in rates, even if slight, and buying in areas where “home prices are decreasing and the local economies are adding jobs.”

While we’ve seen a general downward trend in mortgage rates from their high of just over 7% in late 2022, the Federal Reserve opted to raise interest rates for the ninth time in the last year on March 22, 2023, despite some speculation it might hold amid recent banking turmoil. Average rates on a 30-year fixed mortgage have inched up closer to 7% again, from just over 6% in late February.

At the same time, inventory of existing homes remains very low as homeowners also adopt a “wait and see” mindset, keeping a close eye on median sale prices and mortgage rates. Wagner also noted a trend he’s not seen before: new construction being offered for rent or sale at significantly reduced rates, particularly in the exurbs or more rural markets.

What It Means for Relocation

Clearly, long-term planning is difficult in the current environment, which Wagner describes as one in which we’re seeing “a bit of everything.” There are, however, a few key points to note:

• In good news, most industry experts do not predict a housing market crash. Instead, we’re likely to see some markets remaining very robust, particularly those within close commuting distance to major employers, retail centers and with highly rated schools. Others, however, particularly in more rural areas or with lower-ranked school districts, are likely to see some downward adjustments in home values.
• Interest rates will likely continue to fluctuate over the next several months, but are largely projected to level out in the low-to-mid 5% ranges by the end of 2023. As inflation is kept at bay, mortgage rates are expected to stabilize.
• Existing home inventory could remain very tight as many homeowners opt to stay put, keeping their low-interest rate mortgages and investing in maintaining or improving properties. But for those who need or want to sell, they will likely tolerate the higher rates in the hopes of a refinance opportunity in the not-too-distant future.
• Consistently high rental rates in most markets will drive many of those with the means to find purchasing a better alternative, particularly when considering the tax benefits of ownership.

Where Do We Go Next?

To help put all this information into relevant context, we wanted to determine to what extent affordability issues are impacting employee relocation acceptance rates right now. Interestingly, responses were about evenly split:

Are you currently experiencing employees declining an assignment because of affordability concerns?

Yes                                           36%

No                                            36%

Don’t Know                             27%

Next, we explored some hypothetical challenges relocation managers might face in the next 12-18 months, if not sooner, and various options to consider to help address them.

Scenario 1

Transferee is a first-time homebuyer who bought at the peak of the pandemic and may be in a negative equity situation.

While many companies may not be seeing too many cases of negative equity right now, that could quickly change. Companies may want to address it in much the same way they would a loss on sale – considering such key questions as whether any assistance would be grossed-up to
tax protect the employee and at what level assistance would be capped. Other key  considerations are whether the employee was relocated by the company during the pandemic and therefore forced to buy high. If so, what, if any, obligation does your company have to support them to be a viable buyer in the new location? How companies will handle this scenario will depend in large part on company culture, including to what extent the employee is expected to share in the loss.

Key Takeaways

If you haven’t already, now is the time to proactively review or design policies and financial assistance caps to address housing affordability. With higher home values creating larger levels of loss-on-sale or possible negative equity scenarios, it may be time to increase your capped amounts. You’ll need to decide whether you want to include any capital gains when determining loss-on-sale assistance, and whether you will tax protect the employee. With many companies under pressure to trim costs, removing the gross-up assistance may be one way to reduce your spend.

Scenario 2

Transferee is not a first-time homeowner, but also bought at the peak of the pandemic and therefore likely sold at a peak price, too.

Many of the same factors should be considered as in Scenario 1, but negative equity is less likely. As Wager pointed out, most buyers have been putting down payments of 20% into purchases over the last decade or more, unlike the 100%-financed purchases we saw during the 2008 crisis. So even if they sell for less, they might still have some equity. Again, companies will need to decide whether to factor any capital improvements into the equation, and if so, how they’ll treat them. Some companies may consider those associated with new construction in the first six months of ownership, particularly where builders may not have included some of the standard features you would expect to find in an existing property. Consulting the IRS definitions of what qualifies as a capital improvement can help companies set guardrails around what – or what not – to consider and to be able to support those decisions.

Key Takeaways

As above, proactively thinking through all possible scenarios now – and specifically detailing the how and why that determine your approach to addressing them – will position your company well to create policies that are both competitive and cost-effective. Regularly consult outside data sources for current conditions in the primary regions your employee populations are moving to and form, and benchmark your decisions against other best practices companies in similar industries are following. Taking a formulaic or prescribed approach requires more work at the outset, but is well worth the effort to ensure policies are sound, fair and aligned with the company culture, overall business goals and talent strategy of your organization.

Scenario 3

Employee is a homeowner who refinanced at 2.5% and is now being asked to relocate. What can a company do to help the employee be willing to make the move?

In this scenario, having strong relationships in place with a network of service providers goes a long way. Lois Johnson shared, for example, that ADP has enjoyed long-term partnerships with lenders who participate in their affinity and corporate moving program and would work in collaboration to negotiate the most competitive rates, while simultaneously looking for other ways to help minimize the impact to the transferee.

Reutilizing the title policies, for instance, might help streamline the process and keep the search costs down. Even if your company does not have an affinity or other types of employee moving support programs, your RMC will have relationships they can leverage on your behalf.

This is also a situation in which a MIDA or the 2-1 Mortgage Interest Buydown option might work well to cushion the blow.

Key Takeaways

You may not have to use it, but having a formal policy in place and ready to go for this scenario is key. Think about questions like whether you will take an approach based on job level, or at what interest rate level a MIDA might be triggered. Once rates begin to settle into lower levels, will you provide refinance support? Keep in mind there may not be a “one-size-fits-all” solution – perhaps you’ll want to define various levels of support, from MIDAs to interest- or dollar-based subsidies and set sliding scales to determine how much support the company will provide, and at what level the employee will contribute.

Scenario 4

Transferee is a renter, facing a significant monthly rental cost increase.

In this scenario, companies might want to consider offering a rental subsidy, in an amount determined by cost-of-living data. Again, you’ll want to set some parameters around thresholds: at what percentage increase will a subsidy be warranted, how will the payment be capped and what length of time will it cover? Will you consider the COLA data holistically, including taxes, utilities, transportation, goods and services, or just the specific rental differentials between markets? Some companies may consider capping the subsidy at a percentage of the employee’s salary in the new location. As with all types of financial assistance provided to relocating employees, decisions regarding whether to tax protect by grossing up the payment must also be made and communicated clearly to employees, helping to set realistic expectations and lead to better-informed decisions.

Key Takeaways

The current rental market is highly complex and regular reviews of regional and national data and policy parameters are essential to navigating the challenges. Depending on what levels of – and how you structure – financial support, it has the potential to add moderate to significant cost increases to your program. Work closely with your RMC team to see if there are ways to shift support from one category to another that can still provide meaningful assistance to your employees, without necessarily being a total program cost add-on.

Conclusions: Time for Different Thinking

Now is the time to prepare for a variety of scenarios that could be with us for the next several years. As complex as the current market conditions are, however, we are also seeing greater flexibility in how and where we work that can help companies keep their relocation costs down.

Thinking differently might be asking the question about whether a relocation has to be from a low- to high-cost area, for example, or if the employee could successfully conduct his or her role from a different, more cost-effective facility? Could renters be provided with incentives to become homeowners, potentially locking in a much more predictable monthly rate that will only change with taxes and insurance, vs. being susceptible to rapid increases in monthly rents?

Presenting cost analysis and data to support those types of potential alternatives is where Johnson sees relocation managers bringing significant strategic value to the business.

Policy decisions should be informed by a series of data points that guide a company about the best way forward, including company culture and business goals, the employee experience, direct feedback and surveys, total budget and spend, and the rates and types of exception requests.

Continued close collaboration and information sharing between HR or talent mobility managers, the business units initiating the hiring or relocating decisions, RMCs and the employees themselves will be key to navigating the ups and downs in the current market.

“We have to think differently about affordability in 2023.”

Do you need help developing a new or revising an existing policy?

Let our team of experts guide you through the process.