By Denise Oemig
July 19, 2022
Increased prices for everything from groceries to gas have made domestic relocations a challenge this year. Appreciating rents, increased home market values and the highest mortgage rates in decades have given rise to relocation concerns. Transferees are now extremely sensitive to increased costs when moving to a new location. However, it is important to understand how these rising costs relate, and don’t directly relate, to the cost-of-living component of a relocation policy.
Inflation continues to be at its highest levels in almost four decades, impacting all regions of the U.S. Typically, comparing two locations—the cost of goods, services and rents—there’s a difference in locations. As prices increase, the difference does not change. Overall inflation should be addressed through compensation. According to the Federal Reserve Wage Growth Tracker in May, average wages increased by 6.1% compared to last year. That’s over double the annual increase of a year ago, and the highest since the 1990’s. A recent SHRM article states: “For employers, high inflation puts upward pressure on wages and salaries. To hold on to workers, many employers are resetting their pay strategies and increasing their salary budgets for 2022.”
Home values have also increased significantly in many markets across the country over the past 18 months. When comparing the cost of living between locations, as with inflation, if home values are going up in two locations at the same rate, there is no change to the difference between these locations.
Say one market has gone up by 30% in a new location while the pre-move area has gone up by only 20%. As housing is only one component, and a mortgage is amortized over 30 years, this means the overall cost-of-living differential may only go up by a couple percentage points. For homeowners, increased values also means that they should be getting more for their existing home when they sell it. Another housing factor is limited availability and bidding wars in certain markets. While these factors make it much more difficult to buy a home, low inventory of homes for sale is not a part of the of the cost of housing.
Significantly higher mortgage interest rates have become a new issue for home buyers over the past few months. According to the Federal Reserve, while the average 30-year mortgage rate was 2.67% on January 1st, 2021, it increased to 5.70% on June 30th of 2022. That is an increase of over 3 percentage points (or over 100%) in 18 months. With the average relocation mortgage being in excess of $500,000, this means that purchasing the same home, without appreciation in home market values, would increase a mortgage payment by over $1,000 per month.
Needless to say, many potential transferees, who have favorable rates in the 3% range, will have some reluctance to relocate. Exactly what rate an employee has for their current mortgage, if or when they refinanced, or if they don’t have a mortgage, is not a part of a cost-of-living calculation. Cost comparisons use current rates in both locations, so when rates are up in all locations at a national level, it won’t change the difference between locations in a cost-of-living report. However, companies will need to be prepared to help employees deal with higher interest rates, depending on the employee’s personal situation relative to their current mortgage.
One solution to address higher mortgage interest rates is a Mortgage Interest Differential Allowance (MIDA). This was a fairly common policy entitlement in the 1980’s and 1990’s that has been forgotten or removed from relocation policies by many companies over the past few decades. A MIDA is designed so if rates are over a certain threshold, companies purchase a point, or points, to buy down the mortgage interest rate. They won’t fully buy down the rates to previous levels, but they do provide some assistance to transferees in a higher rate environment. Any of the national relocation mortgage lenders can provide assistance in helping to design or implement a MIDA program.
While challenges due to COVID have been difficult for the relocation industry over the past few years, we are now facing a new set of challenges. Transferees’s relocation concerns around higher costs for everything—groceries, gas, home values, mortgage interest rates—can’t be tied to their relocation policy. Much of this is related to inflation, a factor impacting everyone, not just relocating employees. Inflation must be addressed by compensation. These higher costs affect both the origin and the destination locations. Therefore, the difference does not necessarily change dramatically. Increased costs to relocate are largely related to higher mortgage interest rates. These can partially be addressed by separate policy benefits such as a MIDA.
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