Affordable Housing Institute : US

We think of a home as security – if you own it, no one can take it from you – and that security comes at a cost, in capital investment and reduced mobility.  Most of us willingly make that trade.  We like the familiar nest, the morning-evening commute to and from work dividing our lives into discrete segments, the ability to relax in our secure tenure.
 

Smile, everything’s paid for

 

Yet the difference between a haven and a prison is who has the key, and if we lose the economic key, the house is a financial trap, and we become economically house-locked, as illustrated by this profile from The New York Times:

 

Dr. Michele Morgan migrated last fall from Detroit to Phoenix, taking a job as a psychiatrist. She expected her husband, Sam Kirkland, to soon join her, since he was accepting an early retirement package from his employer, General Motors. But he cannot move, he says, because he has not been able to sell the four-bedroom family home.

 

Sam Kirkland expected the home in Detroit owned by him and his wife, Dr. Michele Morgan, a psychiatrist working in Phoenix, to bring $200,000. A similar home nearby sold for $90,000.  [New York Times]

 

As the photo shows, the remarkable thing about Mr. Kirkland’s home is not that it is flawed, but rather that it is a perfectly good and attractive house that undoubtedly would have cost a great deal more than $90,000 to build.  Yet at the moment, the only price point we have for the house is an ultra-bargain – and yet even with that, the house has not sold.

 

“As things now stand,” said Mr. Kirkland, who is 51 and intends to seek work in Phoenix, if he ever gets there, “my wife might decide to give up her job in Phoenix and come back to Detroit for a while, until we can sell the house.”

 

Unable to sell his Detroit home, Sam Kirkland has been kept apart from his wife in Phoenix.  [New York Times]

 

Marriage makes of us an economic team, and Mr. Kirkland and Dr. Morgan as a team are seeking to solve a complicated optimization problem.  Had Mr. Kirkland’s home been easier to sell, the problem would be trivial, but it is not, stretching the couple’s finances even as it stresses their relationship.

 

The rapid decline in housing prices is distorting the normal workings of the American labor market. Mobility opens up job opportunities, allowing workers to go where they are most needed. When housing is not an obstacle, more than five million men and women, nearly 4% of the nation’s work force, move annually from one place to another — to a new job after a layoff, or to higher-paying work, or to the next rung in a career, often the goal of a corporate transfer.

 

Four percent sounds like fairly little, but think of it – 1 worker in 25, five million workers, moves a long distance every year. 

 

On a average, 1 of these people will move every year

 

In labor mobility-terms, that’s extraordinary – the equivalent of the entire state of Pennsylvania (assuming 2½ people per worker) uprooting home and family to seek a better job and a better life.

 

America is a land formed by people who were willing to move house and home and family

 

Or people seek, as in Dr. Morgan’s case, an escape from harsh northern winters.

 

Labor mobility is a national asset – and a family economic asset. 

 

A fluid and efficient housing finance system is thus part of a nation’s economic competitiveness. 

 

In the US, we normally maintain 66% to 70% household homeownership, which despite our pride is much lower than our OECD peer countries.  Our strength derives from America’s extraordinarily good permanent professional rental sector, which makes move-in-move-out-move-away easy.

 

More space, lower cost, more amenities, more choice = American apartments

 

Now that mobility is increasingly restricted. Unable to sell their homes easily and move on, tens of thousands of people like Mr. Kirkland and Dr. Morgan are making the labor force less flexible just as a weakening economy puts pressure on workers to move to wherever companies are still hiring.

 

In terms of housing quality, housing affordability, and service quality, the American apartment sector is head and shoulders above any other nation’s rental sector. 

 

Signaling an incipient recession, nearly 85,000 jobs disappeared in the United States from December through February, and the Bureau of Labor Statistics is expected to announce on Friday that March failed to produce a turnaround in hiring.

 

 “You hear a lot about foreclosure and the thousands of families who are being forced out,” said Joseph S. Tracy, director of research at the Federal Reserve Bank of New York. “But that is swamped by the number of people who want to sell their homes and can’t.”

 

Tracy’s not happy about those who want to sell their homes and can’t

 

Even those figures are national, concealing shrinkages in the upper Midwest and job growth in the Southeast and Southeast.

 

No government agency counts those who move for a job, either across state lines or just from one town to another in the same state. The Census Bureau, however, calculates how many people move across state lines for all reasons, and that number fell by a startling 27% last year, after climbing by almost that percentage for each of the previous three years.

 

Ignore the Times’s innumerate gloom-and-doom: mobility increased by unprecedented rates three years running, and then fell back one year’s worth.  It’s still higher than normal.

 

With homes changing hands easily in a booming market, interstate migration reached 2.2 million people in 2006, excluding the effects of Hurricane Katrina. As the economy and home prices began to unravel in 2007, however, interstate migration plunged to 1.6 million people.

 

That’s a lot of people.

 

“That is still a historically high number,” said Mark Zandi, chief economist at Moody’s Economy.com. “It reflects the relatively strong economy until midyear. But given what’s happening now, I would be surprised if domestic migration isn’t at a record low in 2008.”

 

As work becomes ever more information-oriented, and as bandwidth goes to infinite (meaning information costs go to zero), companies and jobs involving brains can be ever-more far-flung.  If you speak the same language, and you’re in the same time zone, how much does it matter that that email respondent with whom you’re exchanging messages is a floor below you rather than a thousand miles away?

 

Corporate transfers contribute significantly to worker mobility, and employers often cover at least some of the cost of selling a home in the old location and buying one in the new.  That practice can backfire, says Richard Shaw, a vice president of Applied Industrial Technologies, which sells gears, motors, bearings and other industrial parts from 337 centers around the country.

 

Out of 3,500 employees in the United States, Applied normally transfers 25 to 30 each year from one center to another, or to the headquarters in Cleveland.

 

One percent of their work force – not too much.

 

 

Almost all are career people rising in the ranks. Despite the opportunity, transfers have fallen by half, Mr. Shaw said. That is mainly because transferred employees too often find themselves owning two homes — one in the old location and one in the new — and paying two mortgages.

 

Doesn’t it make sense, in those circumstances, to maintain a few corporate apartments near the headquarters, to provide a transition pied-a-terre?

 

Mr. Kirkland is determined to sell before he moves. But that might take months, he acknowledges. A house that he thought would bring $200,000 — its appraised price three years ago — in fact might bring only $90,000 if he were to sell it today. That was the selling price for a similar 2,500-square-foot home on the next block, and Mr. Kirkland wants more than the $125,000 in debt that he and his wife still have on their house.

 

Perhaps Mr. Kirkland should consider seller financing.  [Will you post on it sometime? – Ed.  Probably — Auth.]  It’s not trivial to do so – even with a second mortgage, there are risks for a distant seller – but it’s the question begging to be asked.

 

“When I stop working at G.M., I am going to devote myself to the house, making it look as pristine as possible,” Mr. Kirkland said.

 

As usual in a New York Times anecdote, the prototypical customer turns out to be anything but.  Mr. Kirkland is still fully employed at GM – good for him – and as such he’s dependent on the brokerage community.

 

He is also trying to make a major career transition. After 30 years as a G.M. employee — most recently at a parts warehouse in Pontiac, Mich., serving as a full-time union official of his United Automobile Workers local — he accepted one of the early retirement packages that the company is offering to shrink its work force.

 

Dr. Morgan’s move thus is logical for the family.  Blue-collar and even supervisory manufacturing jobs in Michigan are shrinking – and with it, Michigan’s population.  When the jobs go, the people have to follow.  While Mr. Kirkland has an understandable emotional attachment to his family home, he is “playing with profits” (in the form of the early-retirement settlement he received from GM). 

 

Taking courses by mail, he is studying for a master’s degree in organization and development. His goal is to get work in that field in Phoenix, perhaps with a community organization. His wife, who is 47, relocated in October, in time to escape the Michigan winter, and his two daughters are away at college.

 

There is a price point at which selling now will yield a better outcome than staying and not selling. 

 

But getting to Phoenix is now problematic. He will not leave the house, afraid that if it sits empty, it will be a target for vandals.

 

In that, he is right.

 

Leave a house vacant long enough, and it decays

 

“I might have to spend so much time living at the house and working on it,” Mr. Kirkland said, “that my wife will say, ‘I can always have a job as a psychiatrist here in Phoenix, but I might have to go back to Detroit for a while.’ ”

 

The same economic equivalence is seen in the Times’s second anecdote:

 

Gayle Newton, in a somewhat similar fashion, delayed her departure from Taylorsville, N.C., for two years while she tried to sell her two-bedroom home, on a large parcel of land, for $89,000. She finally gave up, rented the house last September and moved in with her daughter and son-in-law in Baltimore,

 

She had put her home on the market in 2006, not long after her husband died and she found herself alone in Taylorsville in a job that did not pay enough to keep her there.  She decided:

 

Why did she move?  Let us count the ways:

 

Three ways, amigos?

 

To live near her daughter

To find higher-paying work, and

To apply the proceeds from selling her home toward another one in Baltimore.

 

Her strategy worked:

 

[She quickly landed] a job there for $15 an hour in the accounts payable department of a granite quarry. Until she left Taylorsville, Ms. Newton, who is 53, did similar work for a furniture company at $9 an hour.

 

Let’s compare the math.  $15 per hour - $9 per hour x 40 hours x 50 weeks’ employment means about $12,000 per year more income.  Take 35% of that for taxes of all stripes and you have $7,800 net after-tax take-home; capitalize that at 8.0% and you have roughly $100,000 higher house value.

 

 “That seemed like a good year, 2006,” Ms. Newton said, “but the downturn in housing had already started in our area. I didn’t realize it. I never imagined that a house on seven acres would not sell. I thought at $89,000 it would be a steal and I could move on to Baltimore much sooner than I did. My daughter finally came and insisted. She could not stand my whining any longer.”

 

The house in Taylorsville is still unsold.

 

The Taylorsville house’s equity is illiquid and immobile, temporarily ‘dead capital’ as Hernando de Soto puts it – and that is the point of this post.  Home equity is valuable if you are confident you’ll want to stay in the same neighborhood a long time.  If you think you might move, you should rent, a philosophy best expressed by bank robber Neil McCauley in Heat:

 

“Don’t let yourself get attached to anything you are not willing to walk out on in thirty seconds flat if you feel the heat around the corner.”

 

And don’ put up no effin’ big security deposit, capisce?

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