I overheard an interesting conversation recently that seemed to focus on the challenges of economic opportunity. The speaker was espousing the perspective, essentially, that if things where you live are not what you would like the best option would be to find somewhere else to be. That was intriguing to me from the perspective of accrued value and investment. It is a simplification that perhaps bears consideration. Possibly there are expenses to relocation? Those might be monetary or otherwise?
Of course, there is at least an emotional cost to relocation. In many instances, there will be ties to a community. One may belong to clubs, civic organizations, a church/synagogue/mosque, etc. One might have family or friends in a community from which they would not wish to distance. There are a variety of reasons that relocation might be untenable or at least not preferred. But, there are financial costs. Certainly, taking the time to locate new employment and accommodations are a cost. The actual expense of loading belongings and transporting them is a cost. But, perhaps the housing cost deserves a bit more consideration.
There are a great many people whose greatest single investment will be their home. For some, it may instead be their education. In all likelihood, these are the two most likely to consider. The investment in a home includes both financial and emotional components. According to Nerdwallet.com, the down payment minimums are currently around 3.5% of the purchase price. So, to purchase the median single-family home ($313,000 according to the Federal Reserve Bank of St. Louis) the buyer needs about $10,955.00 and will borrow $302,045.
That expense ($10,955.00) is an investment, which the home buyer would expect to recoup when the house is later sold. But, in the purchase there are also transactional costs. These add another "2 to 5 percent of the home's purchase price," according to Investopedia. Those transactional costs on the median home are therefore are $6,260 to $15,650. Those are payments for taxes, filings, services, and more at the time of purchase. A buyer cannot expect to recoup these costs when later selling that house, and will likely face some level of such "closing costs" on the eventual sale as well. Of course, the buyer might hope that the property would increase in value over time, such that upon resale that appreciation might offset all of those transactional costs of both getting in and getting out.
So, the day of closing on a new home for $313,000 the buyer has $10,955 in equity in the house, and has written expense checks of $6,260 to $15,650. Thus, if the buyer is compelled to sell the house the very next day, and s/he is fortunate enough to pay no real estate commission (typically 5 to 6 percent according to ownerly) or seller's closing costs, and the market is unchanged, s/he likely loses $6,260 to $15,650. Realistically, however, there will likely be real estate commissions, at those rates of another $15,650 to $18,780.
So, our hypothetical homeowner having bought the median home and then immediately re-selling it would be likely to lose the real estate commission and her/his own closing costs originally paid. The loss would thus be $21,910 ($15,650 + $6,250) to $34,430 ($15,650 + $18,780). This assumes, of course, that our hypothetical new homeowner would be able to sell the median house for the same price that s/he paid for it. Thus, if the sale occurs before there is some opportunity for market appreciation, the buyer turned seller loses significant money on this turn around.
What determines the value of the house to begin with? There are aesthetic considerations; home buyers like attractive houses. There are financial considerations; people worry about being within their budget. There are amenity considerations; how are the local schools, recreation, commute time to work, property taxes, local services available, etc.? Among those amenities are the services provided by the local government, led by the elected officials. The market value is also influenced by how many potential qualified buyers there are in that market; this comes down to whether people are relocating in that community and looking to buy. The most perfect home, at the ideal price, will not sell if no one is willing to buy.
Across America, there are towns that are dying. People are not moving to them. See Small Towns are Dying, can they be Saved? If one has made this real estate investment in such a town, they may struggle to sell that home, and may simply fail. Detroit has been a prime example of this over recent years. It is responsible for part of the 380,719 homes that were vacant in Michigan in November 2020. And, many of those are being simply destroyed by the city. Around the country, some towns are paying people to move there. Examples include Tulsa, Oklahoma; Italy; and West Virginia. Others in Maine, Vermont, Alaska, and Iowa have been similarly mentioned.
Another consideration in the purchase decision is insurability. This means, first, are their insurance companies that are willing to write coverage on the house that is for sale. If you cannot get insurance on the house you are purchasing, then you would be essentially self-insuring your new purchase. That would mean that if the $313,000 house burned, sunk into the earth, or was blown apart by a storm you would be 100% liable for that loss. Most homeowners are eager to insure their property against such loss potentials.
But, even if they are not so eager, the "real owner" (the mortgage holder that owns the $302,045 debt after the down payment $313,000 - $10,955), will likely (certainly) insist that the homeowner has property insurance to replace the value in the event of some disaster. If a risk cannot be insured (the house has previous sink hole exposure, is in a high-risk wind or flood zone, etc.) then selling it may require quite a discount because the population of potential buyers would likely be only those who could buy without borrowing money.
Thus, as you see the security and predictability of a community deteriorate, you see the marketability of property in that community similarly deteriorate. Those who have invested their funds in a property may find that they cannot possibly resell. A community could proceed from vibrant and evolving to something completely different, like Detroit, Michigan. The Metro Times reports that city has tens of thousands of abandoned homes. Each of those who abandoned a home there lost their investment (down payment) and the transactional costs associated with their initial acquisition of the property. Some of them did, essentially, what the advocate I overheard was suggesting, and simply "got out."
Thus, the homeowner is betting on a community when purchasing a home. Similarly so when someone opens a business. These are investments in a community. It is possible that such an investor would own a structure and live or work there. That person would be responsible for the mortgage payment, insurance, taxes, etc. It is also possible that person would own the structure and lease it to someone else to live or work in. The landlord would be counting on a stream of income from the rent to pay those expenses such as mortgage, taxes, etc.
COVID has interestingly impacted the plans and expectations of many in our communities. They have committed to pay a mortgage or other expenses, but their own income from working or from tenants paying rent have diminished or ceased. The government stepped in during the pandemic and told landlords that they could not evict tenants that did not pay rent. The United States Supreme Court in August 2020 concluded that moratorium was inappropriate. Similarly, the lenders were precluded from foreclosing on those who have stopped making mortgage payments, according to sources like the Federal Housing Finance Agency and CNN. In effect, the health officials stepped into people's contracts during the pandemic and suspended people's responsibilities.
There, relief was afforded due to the nature of the pandemic. But, would the same kind of consideration be afforded for those who merely want to relocate? For whatever reason, a person might fall out of love with a geographic location. A June 2020 Forbes article noted that some who lived or owned businesses part of Seattle were spontaneously denied police and fire protection. The emotional value of a home or business in such an area might suffer. Similarly, the resale value might suffer from perceptions regarding the behavior of public servants in an area. Perceptions might make a piece of property easier or harder to sell.
This is hindrance to the sentiment of just "getting out." That new home buyer described above that has just spent $17,215 ($10,955.00 + 6,260.00) to become a homeowner may be reluctant to walk away and leave this property to the mortgage holder. And, if the driving force of relocation is similarly affecting neighbors, there may be many properties offered for sale at the same moment. It has been said that "an increase in supply will cause a fall in price." An Investopedia post explains this. Thus, the seller finding disenchantment with the actions of government may be steered toward departure but at a moment in time that is disadvantageous.
If there are many homes suddenly on sale in a neighborhood because COVID closed a factory or devastated an employer, then the price of that $313,000 home may suddenly decrease. The homeowner looking at a loss of $17,215 might also face a loss because buyers no longer perceive a $313,000 value. What if the neighborhood price drops only $10,000. The homeowner sells for $303,000 and pays a real estate commission (5%) of $15,150. This homeowner has lost $42,365.
And, as the volume of homes on the community market increases, as employment in the area decreases, it may become increasingly difficult to sell that home. Oversupply was cited by various sources as part of the "bubble burst" in the financial crisis of 2008. Whether the health scare and pandemic or the rioting that was occurring in some places, it is possible that some areas will become less desirable for ownership and rental. If that happens, those who have invested in real estate will be unable to relocate it; some may be unable to maintain payments for it, and some may face the challenge of foreclosure and even bankruptcy.
The simplification of finding somewhere else to be is perhaps illusory. The reality may be that many will face a long road back to normalcy in months and years to come. This all came to me when I was honored by a role in the closing panel at the WCRI in March 2022. Our topic was the 50th anniversary of the National Commission Report. Friends, Romans. Countrymen (March 2022), At the WCRI 2022 (March 2022). There was discussion there of the perceptions of a "race to the bottom," in which critics perceive state workers' compensation laws as providing diminishing benefits to achieve diminished costs. Those lower costs, the critics allege, are to incentivize businesses to locate in a particular state.
Great minds have concluded the "race" is real. But, in reality, it would present many long-term costs for a company to relocate. Such change would likely accrue over years or decades. I mentioned on stage there that it is critical for the concept of "employment" that there is both the employee and employer. This is definitional and perhaps obvious, but worthy of reminder. There has to be some benefit to each in the relationship in order for each to prosper. I suggested that some degree of symbiosis is appropriate. But, it is also critical to recognize that statutorily and regulatorily, that symbiosis must also include government. The actions or inactions of government might indeed become intertwined with employment.
Employees may be motivated to "find somewhere else to be" if employment opportunities falter. Employers may do so if regulation is overzealous or too complex. There is the potential, seemingly ignored in most of the expert's analyses of the "race," that any particular state might be competing not only with the other 56 states (joking, there are not 57 states), but with the other 194 countries in the world. I note that a fair few of those countries have no workers' compensation, no OSHA, no unemployment system, and much more. Employers in many market segments are competing against the advantaged price point that businesses in such countries may bring. And, periodically, businesses in America may not prevail in such competition. Jobs may be lost, families relocated, and the real estate example above is emulated and repeated.
In the end, there are a multitude of market forces at work on the employment relationship. There will be fluctuations in supply and demand for people, shifts in demographics, and migration of workers and businesses. The challenge, I would suggest, is in appreciating that employees, employers, and government are in a symbiotic relationship that is delicately, perhaps precariously, balanced. The goal it seems is a system that is conscious of the impacts on each, and is focused on maintaining that balance so that each prospers but each also carries responsibility.
The economy is complex, changing, and perhaps less than predictable. Businesses and families invest and harbor expectations. Markets change, competition happens, and there will inevitably be winners and losers. In the big picture, predictability, stability, and agility are perhaps attributes important to all? It isn't maybe so simple, but it is critical.
