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Domestic Home Sales: 2010 Tools That Can Help Manage 2011 Realities

I have blogged earlier about my observations regarding U.S. domestic home prices and the domestic real estate market; the latest prognostication was in my entry for November 3, where I noted:

The bottom line for the employee mobility industry is that, given what we know now, it looks like bank foreclosures will continue to slow housing absorption until about late 2013 unless the economy picks up rapidly and decisively, driving up demand and lowering foreclosures. It is likely that prices will decline slightly when the shadow inventory hits the market and that they will remain weak until inventory moves back to previous equilibrium levels, depending on the location.

And here at year’s end, there are precious few signs that things are changing to any great degree, even though many economists are beginning to write that 2011 could bring a slight uptick in the GDP, and that business output correspondingly could begin to rise, causing the unemployment numbers to ease. Thus it looks like a bifurcated recovery; on the one hand housing absorption will continue to be weak (with prices correspondingly flat), on the other hand, consumer spending on non housing goods and services will likely rise moderately over the year. While the increase in employment should slightly spur demand for housing, some will likely be driven to rental properties, and the remaining will help reduce inventory; but absent a very large spurt in hiring, no dramatic change in the housing market can be confidently expected.

There are several relocation specific external factors besides the economy which will be affecting decisions affecting employee sales, inventory and BVOs this year.

As with any analysis of the housing situation, the mantra “location, location, location” needs to be repeated; we all know that there is no one “housing market”, rather there are dozens, each determined by geographic location. Some are quite stable over time, such as the Washington, D.C. market, while others are less so, driven by exogenous variables which are less reliable than federal government spending; Las Vegas is a good example.

In the past decade the statistics also show a corollary of the location rule which focuses on price ranges, which might be the called the “market segment” corollary. Since most relocation properties fall into the middle and upper segments, all of the housing statistics and analyses need to be focused through both location and segment filters when looking at an individual relocation property.  Both of these factors will be even more important in analyzing relocation properties this year.

A good source of this data broken down by major markets is the NAR® Existing Home Sales Series which presents the previous monthly and quarterly sales and pricing data; it can be found at http://www.realtor.org/research/research/ehsdata.

Perhaps the best source of absorption rate data for relocation properties can be found in the RAC Report, a publication of the Relocation Appraisers and Consultants group, at http://rac.net/fusebox/index.cfm?fuseaction=market.reportList .

Both of these sources, and the others which are available, can be used to make the business decisions which need to be based on if, when, and how much a relocation property will cost to sell. They should be used in conjunction with local professional advice from relocation trained appraisers and real estate brokers, where appropriate.

Another factor which is relatively new to the domestic relocation process is the rise of rentals at both the departure and destination sides of the move. While rentals have always been common in international assignments, and continue to be so, domestic relocations are now showing a significant increase in rentals. So long as prices remain flat, transferring employees are going to continue to look at alternatives to home sales, especially those whose are underwater – an increasingly large segment of owners in the middle and upper segments.

At first glance, renting seems like a panacea in almost all relocation scenarios in areas where the housing market is soft. However, there are risk management and policy considerations which need to be considered before either the employer or the transferee decides to rent. On inventory property, the employer needs to assess holding costs against rental revenue and direct rental costs; most often the property will not “cash flow”, but even so, in many cases the actual carrying costs will still be lower because of the slow absorption rate in that location. Needless to say, tying up a property with a lease will definitely decrease the ability to put it on the market quickly, but as I discussed earlier, in many markets affected by a shadow inventory of preforeclosure properties, this will not be an important deterrent.  An employee needs to make a similar analysis, but most are far more sensitive to the cash flow issue.

The most important issues in rental cost/benefit analysis boil down to finding a responsible tenant and properly insuring or reserving against rental risk. Most current rental programs have found ways to handle tenant selection; usually though the choice of an experienced rental agent. Many rental programs I have seen recently, however, have not dealt carefully with the risk issues, which need to be figured into any properly structured program.  In short summary, these are the risks of damage to the property, risks of abandonment or nonpayment on the part of the tenant, and risks of claims or lawsuits by the tenant over property condition, maintenance or habitability. I will write a blog on the landlord-tenant liability environment in the relocation world next month, but for the purposes of this discussion, it should be noted that there is a real necessity to budget some amount for this risk to all inventory rentals; in some cases, the risk may outweigh the benefits of renting. While many of these risks can be insured against – which raises the cost to the landlord – many cannot, and must be considered a business risk necessitating a budget reserve.

This analysis will also apply to employees who are trying to decide whether to rent their house at the departure location. Fortunately, an employee who decides to do so for a period of time need not lose the capital gains exemption, as Pete Scott explained in his blog on December 14th.

Often transferees are unaware of the extent of the loss they would take on a sale of their existing property. The increasing use of pre decision counseling (PDC) will continue to focus employee and employer attention on housing cost issues which in the halcyon days of rising housing prices were not particularly relevant. These programs, which I have described in previous blogs (an analysis of them appeared in the September 17th blog) have proved very beneficial to both employer and employee, allowing the former to understand the real financial costs of a move, and the latter to more fully understand and plan for them, too. Because their effect on relocation programs has yet to be studied statistically, there is only anecdotal evidence upon which to determine whether there has been any direct effect on relocation costs. That being said, companies that I have talked to that have an active PDC program almost universally find that costs appear to be lower, transferees happier, and perhaps more importantly, managers have a much more precise idea of how much a move will actually cost.

The bottom line for the employee mobility industry when planning and budgeting for domestic home sales is not bleak, but current economic circumstances require more careful analysis of each of the factors affecting every sale individually, and this individual analysis should include the participation of the transferring employee and the employer responsible for the budget decision. Fortunately, many of the tools developed over the past years can provide the platform to accomplish this.

PS. Pete and I wish all of our readers a Happy and Prosperous New Year.

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