The hot-button topic dominating mobility conversations right now is…you guessed it: Real Estate. Mortgage rates have experienced the steepest hike in history, the volume of new sales is slowing drastically, and prices are far out of reach for those who are hungry to buy. In short, it’s all a bit weird and messy out there.
Recently, two of our top real estate SMEs — Betsy Roche and Joe Palumbo — came together for a lively discussion on the state of the US housing market and how it’s impacting the mobility industry. In just 30 minutes, we covered a lot of ground and offered a lot of good advice. While I would recommend you listen to the whole podcast to get the full picture (in all it’s weird and messy glory), I couldn’t help sharing some of the top Q&As that offer tips on what to do and what to avoid as you navigate – or support those navigating – the current market:
Q: Although the market is not as hot as it was 3 or 4 months ago, interest rates are rising, inflation keeps escalating, and there are warnings of a possible recession – do you think an over-abundance of inventory is a concern? Are buyer incentives required at this time?
A: Definitely not yet. Everything is relative, and with mortgages still below 7-8% and an ongoing housing shortage globally, there is no reason to offer buyer incentives right now.
Q: So, in your opinion, why are some homes still coming into inventory today? Is it because employees have to move really fast when asked to relocate and don’t want to bother marketing the home, or are they selling homes that haven’t been maintained which limits demand for them?
A: The demand is still great, even if just a little less that 6 months ago. When you account for seasonal adjustments, there is not a significant drop-off in most markets, and there is still a high reluctance to move. As such, there are still very few homes coming in. It’s important to note that some clients acquire very quickly and or don’t have mandatory marketing periods. That would apply more in Canada than the US. Frankly, though, more commonly, the properties that end up in inventory are distressed properties in some way – either they are not in great locations, or are in poor condition, or the owner is setting an aspirational price based on glorified stories and recounted experiences of friends and neighbors who might have sold within the last couple of years and experienced a very different market.
Q: Going back to the question of reluctance, according to the WSJ, almost 90% of mortgages right now have an interest rate below 5% and more than two thirds have an interest rate below 4%. So, lots of people right now have locked in really low borrowing costs on their current home. Why would anyone want to move into a new mortgage at 7%?
A: Many folks don’t factor in the reality that they have unrealized equity now that they would not have had in the 20-21 explosive lift of the market if that hadn’t happened. And, what often gets ignored is the loan-to-value that matters most. Folks tend to compare the current selling price with the highest potential values they have seen instead of comparing to their actual purchase price.
Q: OK, all that said, what can clients do to help overcome reluctance to sell? Should companies reinstate their loss on sale incentives? What caps and/or thresholds make sense in today’s market?
A: Yes, keep this provision, but don’t change the cap. This may vary depending on the markets your employees live in and average home prices. The average cap on loss on sale is between $25-$50k. The loss calculation should be based on the difference between 1) the original purchase price and 2) the Appraised Value or Selling Price, whichever is greater. Capital improvements should not be considered in determining the loss on sale.
Q: Should companies consider commuter or short-term assignments where possible?
A: This is a temporary solution that involves some risk, as the market could get softer from a seller’s perspective before it levels out. It’s not a bad idea, but it may only push the problem out rather than resolve it.
Q: What about extending home sale eligibility and allowing homeowners to rent in the new location and buy later?
A: Like the previous example, this too has its risks due to market volatility. And frankly, the rental market in many locations is just as tight as the ownership market.
Q: What is the actual impact of higher mortgage rates on buying power?
A: Let’s consider a home priced at $389,500 (US median) and a 30-year fixed loan at 7% vs. 3%. A loan for $311,600 (80% of value) at a 3% interest rate will have a monthly payment of $1,314. That same loan at 7% will have a monthly payment of $2073. Most people would agree that the monthly payment difference of $759 per month or over $9000 per year is substantial. An ARM mortgage might be a solution for short term buyers, but it’s also risky in this current market in which interest rates are on a rather steep upward trajectory.
Q: What are some final thoughts you’d like to share?
A: Fall is typically a season of slower activity, so sales will NOT increase for homes priced correctly, and marketing times will remain similar to what they have been until supply increases significantly. Inventory will creep up, but not by much because new construction has slowed some due to supply chain challenges, shortages, and inflation. Most likely, the market will drop slightly and then level out in the next 60 days unless the Fed takes a bigger bite than expected when they raise rates again, which they are expected to do.
Although housing inventory is improving, it is still limited. Here are five guidelines I’d recommend every company follow to help overcome these current market challenges:
Hungry for more insight? Stay tuned for the Podcast, going live tomorrow!