The first half of 2023 is behind us...
...But there’s much economic and real estate market uncertainty going into the second half for renters and homeowners. How will this affect global mobility and relocation services?
Real Estate Market Tug of War
Lawrence Yun, Chief Economist, National Association of Realtors (NAR) recently captured the changing real estate market conditions succinctly: “The market is clearly turning.”
Yet demand is not diminishing with the scarcity of single-family homes and there’s only a three-month supply of existing inventory. Add on to that, one-in-seven homeowners refuse to sell due to current mortgage rates. This puts continued pressure on rising home prices.
“Home price trends are caught in a tug of war between stretched buyer budgets and limited inventory forcing competition despite reduced affordability,” said Danielle Hale, Chief Economist for Realtor.com.
What can be done to help relocating employees with this issue in 2023 and 2024?
Good News / Bad News: First Time Homebuyers
While lower home values could hurt sellers, any listing price drops may entice buyers to submit offers – especially Millennials who rent. This is especially true for the record number of American renters who are spending at least one-third of their income on rents, according to Harvard’s Joint Center for Housing Studies.
However, paying a lower home purchase price and then having to finance it with a high interest rate can seem like “good news/bad news” to first time home buyers. In Q2 2023, the share of all prospective buyers who are in the market for the first time dropped to 61 percent, down from 71 percent in the first quarter per the National Association of Home Builders.
New construction has become an alternative solution for some frustrated buyers. Sales in the $200,000-$300,000 range for new builds surged in May 2023 to 12,000 new home builds sold, compared to May 2022 when only 5,000 sold. With that in mind, 51 percent of all housing market construction in Q1 2022 was for high-cost / luxury rental units and this shift towards higher-cost rental units has been observed through Q1 of 2023, per Moody’s.
Companies can help renting relocating employees who wish to become homeowners. NEI sees more companies now offering reimbursement of destination home closing costs and direct-billed mortgage partner assistance to relocating renters.
Another method companies can use to help recruit critical talent to needed locations is to offer homebuyers funds towards new home down payments or other incentives in the form of forgivable loans that don’t have to be paid back unless the employee leaves the company within a certain period, perhaps two or three years.
High-Rate Environment Drives Corporate Relocation Assistance
There are limited incentives for homeowners to give up their low mortgage interest rate when securing a new 30-year fixed mortgage since the average rate now sits in the seven percent range - over double the average rate during the pandemic.
Fed Chairman Jerome Powell was watching the unfolding situation carefully: “Housing is very interest-sensitive…it’s one of the first places that’s either helped by low rates or held back by higher rates.”
With possibly one or two more Federal Reserve rate hikes expected this year, consider the following options to help employees/candidates consider a company-sponsored move in such a high-rate environment:
- 3-2-1 Interest-Based Mortgage Subsidy
An appealing option for companies to consider is a subsidy program that supports mortgage payments over a set period to help the employee ease into the higher mortgage payment.
Many companies use a three-year period with the subsidized rate decreasing each year until the company would no longer subsidize interest. For budgeting, some prefer to define a maximum subsidy dollar amount spent per year for the benefit.
- Mortgage Interest Differential Allowance (MIDA)
MIDA was developed as a solution to assist employees purchasing a home at a significantly higher interest rate. Eligibility is based on if a specific interest rate threshold is passed (e.g., 7.5 or 8 percent with at least 2 percent differential on the employee’s existing mortgage). The company would temporarily pay the difference in interest between the employee’s former mortgage rate and their new one, for a set amount of time. The MIDA is sent to the lender and reflected on the employee’s payment.
Some mobility policies require employees to invest their full equity from the sale of the old home into the new home’s purchase to be eligible and maximums are sometimes placed on the total differential.
- Prepaid Interest
Companies can pay for loan discount points to assist relocating employees facing higher rates on a home purchase. Discount points are paid up front in exchange for a lower interest rate over the life of the loan.
Some mobility policies have a sliding scale for points coverage tied to the current market rate. If using a sliding scale, it may make sense to lower thresholds. Companies may offer to pay for one point when rates reach seven percent, two points at eight percent, and so forth. Thresholds help keep pace with changing rates and make moving more agreeable. Because this benefit impacts the life of the loan, this may not be the best option for an employee who could be relocated again within a few years.
Few Economists Expect Housing Crash
Predictions about a housing market crash create headlines, but few economists expect a nationwide decline like 2007-2009. Consider some big differences today:
- There are simply not enough homes to meet current demand and the country ultimately needs 4.3 million more homes, according to a Zillow analysis.
- Most homeowners with a mortgage today have great credit, significant home equity and a low rate. Housing prices in October 2022 were 38.1 percent higher than they were at the start of the pandemic in March 2020, per Fortune.
- About 90 percent of U.S. mortgaged homeowners have an interest rate below 6 percent, a Redfin report showed. 62 percent have a rate below 4 percent and nearly one-quarter have mortgage rates below 3 percent.
- Home value increases or decreases are more impacted by location today as compared to nationwide 15 years ago. Western U.S. home values have been hit particularly hard.
- Finally, we have strong consumer demand today and unsold inventory sits at a 3.1-month supply. “There are simply not enough homes for sale,” said Lawrence Yun of NAR. Realtor.com reported home sellers were less active in June 2023 with 25.7 percent fewer homes newly listed for sale compared to 2022.
For comparison, there was an 11-month supply of inventory in June 2008, interest rates were 6.32 percent, and 33.8 percent of homeowners were in a negative equity position. Since then prime mortgage requirements have become significantly tighter.
Unpredictable Markets, Proactive Relocation Services
The U.S. may likely end 2023 with higher short-term interest rates, but Moody’s Analytics Chief Economist Mark Zandi anticipates housing affordability will improve over the next few years, as reported in Fortune magazine.
Zandi feels rates will drift towards 5.5 percent in 2025 and national home prices may fall around eight percent, but "In our thinking this [price] weakness plays out over the next three years, there's no cliff event here, it's more of a slow grind lower," Zandi told Fortune.
NEI proactively counsels relocating employees about the emotional ups and downs when buying/selling a home and during the necessary negotiations, and we help clients brainstorm solutions. NEI monitors market and economic conditions to proactively discuss various options with clients, so client recruitment and retention goals are achieved.
For more information on the above or other needs or to discuss in more detail, please reach out to your NEI representative.
This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, tax, legal or accounting advice. You should consult your own tax, legal and accounting advisors before engaging in any transaction.
The first half of 2023 is behind us...
...But there’s much economic and real estate market uncertainty going into the second half for renters and homeowners. How will this affect global mobility and relocation services?
Real Estate Market Tug of War
Lawrence Yun, Chief Economist, National Association of Realtors (NAR) recently captured the changing real estate market conditions succinctly: “The market is clearly turning.”
Yet demand is not diminishing with the scarcity of single-family homes and there’s only a three-month supply of existing inventory. Add on to that, one-in-seven homeowners refuse to sell due to current mortgage rates. This puts continued pressure on rising home prices.
“Home price trends are caught in a tug of war between stretched buyer budgets and limited inventory forcing competition despite reduced affordability,” said Danielle Hale, Chief Economist for Realtor.com.
What can be done to help relocating employees with this issue in 2023 and 2024?
Good News / Bad News: First Time Homebuyers
While lower home values could hurt sellers, any listing price drops may entice buyers to submit offers – especially Millennials who rent. This is especially true for the record number of American renters who are spending at least one-third of their income on rents, according to Harvard’s Joint Center for Housing Studies.
However, paying a lower home purchase price and then having to finance it with a high interest rate can seem like “good news/bad news” to first time home buyers. In Q2 2023, the share of all prospective buyers who are in the market for the first time dropped to 61 percent, down from 71 percent in the first quarter per the National Association of Home Builders.
New construction has become an alternative solution for some frustrated buyers. Sales in the $200,000-$300,000 range for new builds surged in May 2023 to 12,000 new home builds sold, compared to May 2022 when only 5,000 sold. With that in mind, 51 percent of all housing market construction in Q1 2022 was for high-cost / luxury rental units and this shift towards higher-cost rental units has been observed through Q1 of 2023, per Moody’s.
Companies can help renting relocating employees who wish to become homeowners. NEI sees more companies now offering reimbursement of destination home closing costs and direct-billed mortgage partner assistance to relocating renters.
Another method companies can use to help recruit critical talent to needed locations is to offer homebuyers funds towards new home down payments or other incentives in the form of forgivable loans that don’t have to be paid back unless the employee leaves the company within a certain period, perhaps two or three years.
High-Rate Environment Drives Corporate Relocation Assistance
There are limited incentives for homeowners to give up their low mortgage interest rate when securing a new 30-year fixed mortgage since the average rate now sits in the seven percent range - over double the average rate during the pandemic.
Fed Chairman Jerome Powell was watching the unfolding situation carefully: “Housing is very interest-sensitive…it’s one of the first places that’s either helped by low rates or held back by higher rates.”
With possibly one or two more Federal Reserve rate hikes expected this year, consider the following options to help employees/candidates consider a company-sponsored move in such a high-rate environment:
- 3-2-1 Interest-Based Mortgage Subsidy
An appealing option for companies to consider is a subsidy program that supports mortgage payments over a set period to help the employee ease into the higher mortgage payment.
Many companies use a three-year period with the subsidized rate decreasing each year until the company would no longer subsidize interest. For budgeting, some prefer to define a maximum subsidy dollar amount spent per year for the benefit.
- Mortgage Interest Differential Allowance (MIDA)
MIDA was developed as a solution to assist employees purchasing a home at a significantly higher interest rate. Eligibility is based on if a specific interest rate threshold is passed (e.g., 7.5 or 8 percent with at least 2 percent differential on the employee’s existing mortgage). The company would temporarily pay the difference in interest between the employee’s former mortgage rate and their new one, for a set amount of time. The MIDA is sent to the lender and reflected on the employee’s payment.
Some mobility policies require employees to invest their full equity from the sale of the old home into the new home’s purchase to be eligible and maximums are sometimes placed on the total differential.
- Prepaid Interest
Companies can pay for loan discount points to assist relocating employees facing higher rates on a home purchase. Discount points are paid up front in exchange for a lower interest rate over the life of the loan.
Some mobility policies have a sliding scale for points coverage tied to the current market rate. If using a sliding scale, it may make sense to lower thresholds. Companies may offer to pay for one point when rates reach seven percent, two points at eight percent, and so forth. Thresholds help keep pace with changing rates and make moving more agreeable. Because this benefit impacts the life of the loan, this may not be the best option for an employee who could be relocated again within a few years.
Few Economists Expect Housing Crash
Predictions about a housing market crash create headlines, but few economists expect a nationwide decline like 2007-2009. Consider some big differences today:
- There are simply not enough homes to meet current demand and the country ultimately needs 4.3 million more homes, according to a Zillow analysis.
- Most homeowners with a mortgage today have great credit, significant home equity and a low rate. Housing prices in October 2022 were 38.1 percent higher than they were at the start of the pandemic in March 2020, per Fortune.
- About 90 percent of U.S. mortgaged homeowners have an interest rate below 6 percent, a Redfin report showed. 62 percent have a rate below 4 percent and nearly one-quarter have mortgage rates below 3 percent.
- Home value increases or decreases are more impacted by location today as compared to nationwide 15 years ago. Western U.S. home values have been hit particularly hard.
- Finally, we have strong consumer demand today and unsold inventory sits at a 3.1-month supply. “There are simply not enough homes for sale,” said Lawrence Yun of NAR. Realtor.com reported home sellers were less active in June 2023 with 25.7 percent fewer homes newly listed for sale compared to 2022.
For comparison, there was an 11-month supply of inventory in June 2008, interest rates were 6.32 percent, and 33.8 percent of homeowners were in a negative equity position. Since then prime mortgage requirements have become significantly tighter.
Unpredictable Markets, Proactive Relocation Services
The U.S. may likely end 2023 with higher short-term interest rates, but Moody’s Analytics Chief Economist Mark Zandi anticipates housing affordability will improve over the next few years, as reported in Fortune magazine.
Zandi feels rates will drift towards 5.5 percent in 2025 and national home prices may fall around eight percent, but "In our thinking this [price] weakness plays out over the next three years, there's no cliff event here, it's more of a slow grind lower," Zandi told Fortune.
NEI proactively counsels relocating employees about the emotional ups and downs when buying/selling a home and during the necessary negotiations, and we help clients brainstorm solutions. NEI monitors market and economic conditions to proactively discuss various options with clients, so client recruitment and retention goals are achieved.
For more information on the above or other needs or to discuss in more detail, please reach out to your NEI representative.
This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, tax, legal or accounting advice. You should consult your own tax, legal and accounting advisors before engaging in any transaction.
