US
June 1, 2022
Experts believe the dramatic increase in home prices in the U.S. over the past year was due to several factors. There was a mismatch between supply and demand resulting in the largest annual gain in single-family home values and rentals, historically low foreclosure rates, and the highest number of home sales in 15 years.
The rise in mortgage rates in 2022 will likely affect the buying power of transferring employees who wish to purchase rather than rent. For mobility programs, this may mean reluctance to accept a relocation.
Housing inventory has remained low, compounded by current homeowners deciding to remain in place combined with a slow comeback for new construction. Predictions about the housing market in the next few years include a stabilization in home prices, but that doesn’t offset the mortgage rate impact on affordability for employees being asked to relocate.
Why this housing boom is unique
Fortunately, the mortgage market is operating differently from the bubble of 2007 which led to a rapid housing market decline. Significant differences include the following:
- Mortgage debt has risen more slowly than home values.
- The number of mortgages originated is far lower.
- Loan originations are for higher credit score borrowers.
- Sub-prime mortgages, which led to a foreclosure rate of 79% in 2007, aren’t driving up risk
Even though there was a refinance boom in 2020 and 2021, the total is about half the number of loans that were refinanced in 2003.
How competition for homes raised prices
As home prices skyrocketed in 2021, potential buyers were offering purchase prices considerably higher than the asking price. Another sign of the competitive housing market last year was waiving of inspections to make offers more enticing.
Before relaxing policies in your home sale program around inspections, consider this: if a serious mechanical issue surfaces, or something else emerges that wasn’t addressed via pre-sale inspection, will employees ask the company for financial assistance to mitigate the problem?
And when it comes time to sell a home from these competitive situations, there is a possibility the home will be worth less than what the employee paid, creating a loss-on-sale situation.
Is it time to re-activate loss-on-sale benefits in your relocation program?
Let’s define this term first: loss-on-sale (LOS) refers to a capital loss defined by the difference between the purchase and sale price of a home.
Employees asked to transfer by their company do not want to lose money. Therefore employers have instituted these provisions to offset the loss due to a lower selling price to facilitate the move and to improve the employee experience.
This benefit typically includes a cap on the amount of the loss, with most limited to $50,000. Executives may be eligible for a higher amount when the benefit is tiered in line with your mobility policies. There are many ways to structure this benefit with most companies excluding capital improvements in the calculation and requiring the employee to bear some of the burden. Tax assistance may or may not be part of the program.
Why this benefit may re-emerge
There are several factors that may influence an organization to provide this type of assistance, notably the continuing war for talent and a growing reliance on internal mobility as a retention tool for total rewards.
While relocation budgets may increase because of this benefit, preventing loss of employee productivity and engagement can outweigh the costs. In turn, other aspects of relocation, such as temporary living, duplicate housing, and household goods storage, may be offset by supporting the home sale process more extensively with a loss-on-sale benefit.
With today’s market conditions, we may see the total loss – on average – to be higher than in previous years. Whereas a typical LOS program may have assisted the employee up to a $50,000 loss on sale, in the hottest markets, that loss may be closer to $100,000 because of the rapid rise in home prices.
A few exceptions of that magnitude add up quickly, but the noise of declined assignments or a drop in employee satisfaction can be tougher to address. Explore your options now, rather than later, to prepare the organization and set your program up to deliver the positive employee experience that drives a greater employee retention rate.
The Newest Complication: Work from Anywhere
Another consideration for employers may be determining which houses will be eligible for home sale assistance. Most corporate relocation policies support the sale of the primary residence only.
During the height of the Covid pandemic, remote work became compulsory for many job functions. This led some employees to move to areas where vacation properties dominate the local real estate market. This type of home can be more problematic to sell, delaying the employee’s transfer timing. If the employer offers a guaranteed buyout (GBO) program, this could mean more homes in inventory thereby raising the total cost of the mobility program.
There are many ways to structure home sale programs and benefits for an employee’s loss on sale when relocating for work. Partnering with an experienced relocation management company (RMC) to explore options can help determine the right program to fit your company culture.
What companies can do now to help employees make good homebuying decisions
Global mobility professionals can play an important role in avoiding a future need for loss-on-sale support by setting expectations with transferring employees.
- Ensure relocating employees understand the local real estate market, different types of mortgages, etc. which can help homebuyers avoid costly mistakes.
- Offer employer-sponsored credit counseling so employees can learn how to check their credit score, as well as how to improve their score if needed.
- Provide financial assistance towards the purchase of a home by offering a housing subsidy (mortgage buydown) for a set period of time or reimbursing some discount points.
- Promote any local or state government-sponsored programs to help first-time homebuyers.
Offering the assistance of an RMC and the counseling they can provide, as well as their deep connections with the best local real estate agents, can go a long way to show support for your organization’s transferring employees. It may be time to assess adding or revising a loss-on-sale benefit in your relocation policy. Contact Sterling Lexicon for expert advice.
Leah Johnson is Sterling Lexicon’s Director, Client Solutions, and has worked in the global mobility industry for more than 20 years. She has held management positions in business development, operations, account management, and consulting, and had the opportunity to live and work in Tokyo and Hong Kong for six years. She initiated destination services in Hong Kong for a relocation management company and directed global mobility for Goldman Sachs in the APAC region. She graduated from Colgate University, earned an MBA from the University of Alabama in Huntsville, and maintains a Senior Certified Professional (SCP) certification from SHRM.
