Housing ups and downs: relocation specialists must balance the good and the bad in the midst of a hot seller's market

For many American homeowners, the sizzling real estate market of the last few years has been a timely gift. Their 401(k)s may have been tossed around by hurricane-force financial winds, but their homes have rocketed up in value.

For the relocation industry, though--and for HR professionals helping to move employees from one office to another--the real estate boom is a double-edged sword. On one hand, it can drive up employers' costs: Rising prices mean higher closing costs and fees for brokers and temporary housing--all of which employers are subsidizing. On the other hand, hot sales mean employers aren't saddled with purchasing employee homes that haven't sold--a step some employers take to help keep a relocation on track.

"It's been good news and bad," says H. Cris Collie, executive vice president of the Washington, D.C.-based Employee Relocation Council (ERC). "The good news is that the boom has eased the burden of selling homes. The bad news is they [employees] have to buy in the new location, too--and it's a seller's market."

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Of course, not every market is experiencing its salad days. According to Wellesley, Mass.-based real-estate consultant Ingo Winzer, president of The Local Market Monitor, some markets are vastly overpriced (such as Santa Rosa, Calif., overvalued by 41 percent) and some are still underpriced (such as New Haven, Conn., undervalued by 11 percent). So relocation managers in different locales are facing vastly different challenges.

Real estate prices were up 8.2 percent nationally last October over 2002, according to the National Association of Realtors. The most recent ERC survey shows that the cost to relocate a current, homeowning employee rose 8 percent to $65,555 in 2002 compared to 2001, while the costs for a new-hire homeowner were up 12 percent to $55,212 during that period. That's not the best news for cash-strapped companies, many of whose relocation budgets are being carved back.

Rental figures are lower, but not insignificant: Relocating a current renting employee comes in at $18,944, while new hires chew up $15,079.

"The costs are higher than ever," says Daniel Bloom, head of the relocation-consulting firm Bloom & Associates, in Largo, Fla. "And a lot of companies are beginning to question that expense."

So which relocation expenses are companies continuing to cover in this tough economic environment? Each firm has its own basket of benefits, of course, depending on factors such as size and overall financial health. First, there are ancillary costs not directly related to the home purchase, such as household-goods movement (a cost that doesn't vary in a rising market) and househunting trips and temporary-housing costs (both of which can go up in price and length of time, if finding a reasonably priced home proves difficult).

Then there are benefits directly related to home purchase, such as:

* Closing costs. Many companies pay all closing costs for relocating employees. Closing costs can include expenses such as local and state property taxes (both of which increase if the home price is rising substantially, since in many markets a home sale automatically triggers a tax reassessment) and the lender's fees associated with obtaining a mortgage.

* Broker's fees. These fees, which are usually lumped into closing costs, pike in a rising market since they're a fixed percentage of the sale price of the home (typically around 6 percent).

* Mortgage buydowns. Companies offer this benefit as a way to lower employees' monthly payments until they get settled. Rising home prices boost that monthly cost, although low interest rates have cushioned the impact.

* Tax-protection assistance. Since many home-purchase benefits are taxable, many companies "gross up" an employee's income, which gives employees extra money to cover those taxes.

No wonder relocation costs can multiply quickly in a booming market. But HR professionals can take steps to make sure that the relocating employee's needs are met without breaking the organization's budget. Managing real estate sales and purchases, understanding the effects of cost-of-living increases, implementing payback requirements, and encouraging transferred workers to rent homes can help keep your organization's employee relocation costs down.

Selling and Buying

One of the first steps HR and relocation managers must take is discussing with relocating employees the sale of their old homes and the purchase of new ones. Luckily, the hot real-estate market means employees haven't had a lot of trouble finding buyers for properties. Indeed, with housing prices rising, many homeowners are making a nice windfall.

Freelance editor Katrina Brown, for instance, hadn't been in her new home in Pennsylvania long when she and her husband, who works for a large pharmaceutical company, relocated to California in July 2002. But because of the hot market, selling was relatively easy--and profitable. "We were able to get more than we paid for it, and higher than an appraisal would have been. We were happy to be selling at the right time."

Such a sale can be fantastic for employers, also; however, not all sales are as successful. Many firms arrange for a buyout of an employee's home if it doesn't sell after a given amount of time (say, 60 days). You don't, after all, want employees to be financially strapped after agreeing to go where the company needs them to go. But that then can saddle the company with the costs of owning a home--property taxes, insurance and marketing. "It's a drain on the company finances," says Patricia Shinn, relocations manager for AstraZeneca, the Wilmington, Del.-based pharmaceutical giant.

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The purpose of the buyout is assisting the employee, but, in doing so, some employers get stuck holding difficult-to-sell homes.

"If a home is decent, it will sell quickly," says Shinn. A house that doesn't interest buyers quickly may have a structural problem, or the location may not be desirable. To unload it, the company may have to offer bonuses to real estate agents.

But even that may not be enough. Some areas lost so many jobs recently, says Shinn, that the locale is enough to make the home unattractive. In that case, the firm simply swallows the maintenance costs until the house sells.

One solution to such a costly dilemma is for the employer to actively help the employee sell the place more quickly, says ERC's Collie. If an offer comes in at a mere 2 percent below listing price, for instance, the firm might step in and cover that difference. That expedites the process and prevents the employee from rejecting a solid offer. That scenario comes into play more in economically weak regions.

Cost-of-Living Increases

Part and parcel with housing costs, of course, are cost-of-living issues. If you're asking an employee to move from Kansas to, say, New York City or Washington, D.C. (a big percentage of employee moves are to such high-profile and high-cost cities), the employee's costs for both real estate and daily living expenses are likely to go through the roof.

Many companies chip in and help with daily living costs, too, for either renters or homeowners--at least for the first few years until the employee begins to earn a higher salary and the family is more settled.

"Typically a company will help with cost-of-living on a three- or four-year basis," says Dennis Taylor, a consultant with Rochester, Wis.-based relocation specialist Runzheimer International, which computes cost-of-living differentials for cities across the United States. "It might be 100 percent [of the cost-of-living increase] the first year, 66 percent the second, 33 percent the third." Housing-related costs such as property taxes, utilities and maintenance all might be factored into that differential.

There's another way to attack the cost-of-living issue: Some companies arrange for a temporary mortgage buydown, which means lowering the rate directly with the lender for a while, so the employee faces lighter monthly payments and can get a footing in the new environment. Mortgage buydowns aren't as popular as they once were, when interest rates were much higher, but they're still used as an effective way to deliver cost-of-living help.

In recent years, companies haven't had to go overboard with such pot-sweeteners. Because the labor market has been so tight, employees have been glad to hold on to any job. In fact, 85 percent of firms report few if any problems in getting employees to relocate, according to the ERC.

But if the job market finally turns around, as many economists are predicting in the wake of some positive economic indicators, it could create some challenges for HR professionals who are encouraging employees to transfer. By the end of the year there had been four straight months of modest job increases, according to the Bureau of Labor Statistics. With more employment options available to them, employee resistance to a move might be greater, and companies might be forced to boost their relocation packages.

"If you look at the No. 1 reason people resist transfers, it's always the cost of housing and the cost of living," says Pam O'Connor, president of Chicago real-estate firm RELO. "In a better job market, you're going to have to offer them more to help with those costs, otherwise you're never going to get anybody to move."

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Managing Relocation Costs

Offering more is not a pretty prospect for HR managers, whose relocation budgets have already been squeezed. The latest annual relocation survey by Atlas World Group, an Evansville, Ind.-based moving company, found that 57 percent of respondents expected budgeting to remain level through 2003, and 15 percent saw an increase. On the other hand, 28 percent predict a decline in their relocation budgets--even while average costs are going up.

"Companies have become very cost-conscious, and that's reflected in their policies," says O'Connor. "Everybody is trying to do more with less. But you can't get too tough on the transferees themselves, or you won't be able to get them to move."

The result is that it's the vendors serving the process who are losing money, O'Connor notes. Many van lines and real estate agents, for instance, are seeing their take go down as internal relocation managers renegotiate rates agreed on in a booming economic environment.

Another option for HR is to outsource relocation services. Delegating to specialized vendors can lower costs and ease strain on lean staffs. "Relocation takes a lot of handholding, and many corporations just don't have the resources to handle it all," says Shinn, who has only one staffer helping her with domestic relocation. "When we were hiring 1,500 people, we just didn't have the staff to handle that. But outsourcing companies can staff up for it."

Hard times also mean that the total number of transferees has been going down significantly, as companies shy away from the huge payouts involved in relocating workers. "It's definitely decreased in a down economy," affirms Runzheimer's Taylor. "Our clientele moved 35 percent to 40 percent fewer people in the last two years." That is slowly turning around, though, and Taylor says he expects relocations to reach previous highs in another couple of years.

Cost-conscious companies also are getting quite firm about so-called "payback" clauses in relocation agreements. Since it doesn't make financial sense for a firm to buy and sell homes just to lose the relocated employee to another firm in the new area, companies often require employees to remain with the company for a specified time. If they don't stay put, they have to pay back either part or all of the relocation benefits they've accrued.

"There's been an increase of companies wanting payback agreements," says Taylor. "Typically it's one year, but sometimes it's even up to three years that they must stay with the company."

Renting vs. Buying

Another way to reduce overall expenses is to shift employees toward rental situations. It's really the employer's prerogative whether to treat a move as something permanent (as most domestic relocations have been, traditionally) or temporary (the norm for most international relocations). But in recent times, "Preferences have been given to renters when all other qualifying criteria are the same, because of a reduced cost impact," says ERC's Collie.

The downside to such a shift is that there may be more resistance from an employee who might want to take advantage of low interest rates to buy. HR may need to sweeten renter relocation policies to help mitigate any reluctance, Collie says.

For example, renters might get a lease-breaking benefit, as at Shinn's AstraZeneca, where employees are covered for two months of rent on their old place if they're forced to cut out on a signed lease.

The average cost of such a move is much lower than when a homeowner is involved. And while home prices have remained strong even through a recession, rents have been slowly softening, making it cheaper for firms to put their people up in rental units. In fact homeowners in 2002 made up only 50 percent of total transferees, down from 55 percent in 2001.

There are a few factors contributing to that, say experts. One is that "companies are beginning to look at domestic moves in the same light as global moves," says Collie. "In some cases they're making assignments temporary, as opposed to permanent."

That approach can help reduce a company's relocation expenses because homeowners who plan to return in a few years may opt to rent their property, rather than sell it, thereby eliminating the employers' home-ownership-related relocation costs. This approach also gives employers more flexibility if they need to move the employee again.

In fact, many transferees these days are younger and more entry-level, and they may not have the kind of money needed for a down payment, or they may not want to be tied down to a particular area--a trend that began in the dot-com boom. "That created a need for better rental services than companies ever used to have," O'Connor says.

But Runzheimer's Taylor doesn't see the idea of transferee homeownership fading away anytime soon. Not only are there still low interest rates available, and not only do workers have the opportunity to build equity and benefit from mortgage-related tax deductions, but also companies still "think it's a good way to keep employees," he notes. "Homeownership is still the way to go for most transferees. It's the American dream."

Home Values in Major Cities

      CITY        HOME VALUES IN DOLLARS *

   San Francisco          $706,400
     Los Angeles          $526,000
          Boston          $479,600
        New York          $473,400
        Honolulu          $426,100
Washington, D.C.          $422,600
         Seattle          $341,700
          Denver          $338,400
         Chicago          $330,800
     Minneapolis          $328,800

* March 2003 composite averages for 2,200-square-foot home with four
bedrooms.

Source: Runzheimer International

Note: Table made from bar graph.

Online Resources

For more information about employee relocation, see the online version of this article at www.shrm.org/hrmagazine.

RELATED ARTICLE: U.S. Cities With Highest Cost of Living

New York

White Plains, N.Y.

Los Angeles

Chicago

Miami

San Francisco

Honolulu

San Juan, Puerto Rico

Houston

Washington, D.C.

Source: Mercer Human Resource Consulting

CHRIS TAYLOR IS A STAFF WRITER WITH SMARTMONEY, THE WALL STREET JOURNAL'S PERSONAL-FINANCE MAGAZINE.

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