Wednesday, October 01, 2008
Merit, Mortgages, and Meltdowns
For new faculty, it isn't so bad, since so many new faculty were renting wherever they were before. But for administrative positions, it's getting difficult to get people from outside the area, since they often can't sell their houses, or fear that they can't, or can't get enough for their houses to make the move possible. And community college salaries generally don't come close to making up for lost equity.
The two-body problem is nothing new; now we're starting to see a two-house problem.
People deal with the two-house problem in different ways. Without betraying any confidences, I'll just say I've seen three ways up close, all of them problematic.
One is just to move, and try to sell the old house from a distance. This is remarkably difficult. It's hard to maintain a property from a distance, and paying a mortgage plus rent (or two mortgages) is no small thing. I suppose one could always try to rent out the old house, but that would presume that you wouldn't need the equity from the sale for a down payment on a new one, and/or that you're willing to move twice in short order, and/or that you know exactly when the house will sell, and/or that you can find trustworthy tenants who won't sabotage your attempts to sell. It could work, but the chain of 'ifs' involved is intimidating.
Complicating matters, the store of 'personal days' and 'vacation days' and suchlike is typically lowest in the earliest days on a new job. But that's when they're most needed for the return trips to try to sell. Taking unpaid days while paying for two homes (and transportation between them) is not for the faint of heart.
Alternately, one could simply sell the old house for whatever it will fetch in short order, eat the loss, and move. I think of this as the fiscal equivalent of ripping off a band-aid – it hurts in the moment, but the moment passes and you move on. This can work, but it presumes that you have the cash on hand to survive the loss. It also presumes a home situation in which burning that much cash doesn't cause a major family crisis. (“Honey, we need to wipe out our savings to move. I'm sure you'll find a new job once we get there. And the kids can make new friends.” Nope, no stressors there.) And, non-trivially, it assumes that both you and your buyer can actually get mortgages. That used to be a no-brainer, but not any more.
Finally, one could simply not move. Judging by the recent candidate pools, that's becoming a popular strategy. Of course, not moving is a decision in itself.
From an employer's perspective, decreased mobility means fewer good candidates available for any given search. Worse, the losses are asymmetric in the sense that they increase with distance, so it becomes progressively harder to get folks who aren't already part of the small local world.
A few years ago I noted that the rapid increase in house prices meant that we were having a terrible time recruiting candidates from outside the area, since our salaries didn't keep up with what it cost to live here. Now we're getting a similar effect from the other side; with house prices plummeting, they can't afford to leave their current posts to come here. In both cases, the real problem is rapid and drastic change, rather than the direction of change. Over time, we could adjust to slow and steady change in either direction; it's the whiplash that gets ya. (Of course, a slow and steady downward slide has a nasty effect on the local tax base, but that's another issue.) Volatility is a problem in itself.
Historically, one of the ways that we've honored the goals of 'hiring the best' and 'diversifying the college' has been to cast a wide net in our searches. (I fully embrace this strategy, btw.) Put the ads wherever we can, and hope that a large enough pool for each position – multiplied over enough positions – will allow us to achieve both goals. To the extent that the real estate follies shrink the pool of truly available candidates, both goals become harder. A pool more heavily weighted toward local candidates will be less diverse, and a smaller pool will probably have fewer big fish in it. Instead of hiring the best people who are currently looking, we'll hire the best people who are currently looking who are renting, or who are already local, and who have great credit scores, and who don't have a two-body problem. That's a smaller group from which to choose.
I suppose a really wealthy institution could use signing bonuses to compensate for lost equity, but my cc simply doesn't have that option. (Try selling that to the taxpayers!) So instead we just hope against hope that the damage won't be too bad, and that the market will stabilize enough soon enough that people will consider moving again.
Over the long term, there's something to be said for the 'grow your own' school of management – if you develop your own people enough, the theory goes, you don't have to recruit so many. But you won't diversify that way, and people's development timelines don't always coincide with openings. It's great to have a young hotshot in the comptroller's office who might be ready for a VP position in a few years, but if you need a new VP right now, it really doesn't solve your problem.
Have you seen something like this at your college? Have you been caught in this situation? Is there an elegant solution I'm missing?
But I do see a lot of my peers (in their late 20s/early 30s) in bigger cities who are feeling place-limited by housing -- right at the time their jobs are becoming uncertain, too.
The only thing an employer can do, I think, is offer an attractive package and a lot of job security. I can think of people who'd be willing to take the real estate loss if they knew their employment would be secure.
I wonder -- would faculty living close to campus in "starter homes" have an easier time turning it into a rental property and renting to students? Student rental markets remain pretty robust even in economic downturns, and college towns serving big state Us haven't been as hard hit by the real estate crisis because demand remains strong. If you're close to campus in a big Victorian-era mansion in a wealthy neighborhood, that's not so good, but if you're in a littler house in a campus-abutting neighborhood, I'd think that would be pretty sellable or rentable -- you could probably even turn a profit on renting it. There's a smaller private 4-year in my town, and the neighborhoods around campus definitely sell faster than elsewhere in town, and off-campus housing demand isn't nearly what it would be somewhere bigger. Probably not an option as often for CC folks, but for other profs?
We bought a smaller home here for far more money than we are asking for or could hope to get from our other house. In the long run, the move is going to be good for both my wife and I career-wise (we're both in higher-ed administration) but until we can get out of the other house it's beans-and-rice and rice-and-beans to eat.
Sometimes you have to make short-term sacrifices for long-term goals; anyone with an advanced degree knows about that but we occassionally forget or think, "I paid the piper once already. Now I just want to dance," when every once in a while you have to keep paying for the song to get better.
But no, haven't actually come into direct contact with someone in this problem.
But people are certainly talking about the "crisis" in mortgage lending (and credit in general) even if they don't know of anyone who is actually experiencing the problem.
But my brother (who lives in California) knows some people who paid $500,000 for a second home that they now can't sell for $300,000 . . . and didn't Ed McMahon need a bailout from Donald Trump?
Either way, I've been happy to see these offers, as it signals an awareness on behalf of the schools that the problem needs more than acknowledgement; something has to give.
I would highly encourage anyone to rent out their old home, and rent at the new location.
Still, we bought our house for less than what we will sell our other house for, even having dropped the price by almost 1/3. We'll have a much bigger mortgage here than we had, but if we can sell the house, we'll begin to pay down the principal. We're open to renting, but no one has come forward on that.
But what about hiring from within. I just read an article (I think it was in the NY times) about the lack of tenure-track professors in the age bracket of 30-45. The comparison of tenure track ages from 30-50 years ago and today are unbelievable. Some massive age discrimination has been going on towards younger academics and now colleges are unable to hire from within. I thought you posted about this issue recently?
This may not work well in a high-price environment, but depending on how many of these cases you have a year, perhaps buying an apartment building might work?
I've had relatives (people I know firsthand not friend of a friend ;-) ) who made significant sums of money in their moves by buying the right value - and the market then definitely helped.
But, think how much we spend moving given that most colleges and universities specifically do not allow this. In the business world, they don't expect to get you unless they move you. Plus, when a company moves you, they usually go first class - they send people in and move everything. My cousin (again, only secondhand from the source :-) ) was sent on a business trip to LA one week and his company informed him he was being promoted and that they were moving him there and that they would send people to his Houston apartment to move everything that same week.
I do like the houses idea - we used to have something like that here if you knew whom to ask but I think now all of those nearby houses are now parking lots. ;-)
This brings us back to my initial question--why do we assume that buying a house is the "ideal?" Dean Dad seems to have bought into the idea, Rubashoc has as well.
I mean, I understand co-owning a house with the bank makes us feel better about using garish paint schemes, and putting weird carpeting in, but what is the logic that says we should be owning our home, instead of renting?
Barney Frank and Chris Dodd told us so . . .
Most of the candidates we interview are rational.
Apparently, at the "Junior Varsity" level of academia, things are somewhat different . . .
For may last move, I rented until my old house sold (took over six months since my realtor was pregnant and somewhat err "undermotivated"). And I would never buy a house that cost more than 2X my annual income.
Right now I am living in a house that cost less than 1 year of *my* (not family) annual income.
And I put 20% down.
Then again, I live in Reality, not LaLa Land.
If the smartest people you can hire think home ownership is a "right" and they bought a home they couldn't afford, assuming the Mortgage Fairy was going to pay for it . . .
well, standards *have* been slippiing in academia severely in the last couple of decades . . .
If you take off your ideological blinders and read what I actually wrote, you'll notice that I never suggested that it's better to own than to rent. I suggested that it's better to have a large candidate pool than a small one.
To the extent that houses have become illiquid, we have seen candidate pools shrink.
If you want to take issue with what I actually write, go ahead. But I don't appreciate having words put in my mouth.
I know that at least in my case I am responding to other responses, not your original posting.
As to broadening the candidate pool, that's great if yoiu are also not watering it down- which, IMNSHO, is the natural result of broadening it.
Without the rudeness, arrogance, and condescension this time, my point is that if by broadening your pool you are interviewing more and more candidates who can't manage their own personal financial matters responsibly, then a broader pool is no benefit.
My apologies for the rudeness (but maybe not the arrogance and condescension!) . . . this is very frustrating in light of all the disinformation spreading around about the current mortgage-backed securities revaluing.
That said, there's basically nothing that can be done about this problem, except try to recruit in areas where the housing market isn't so bad (mine, for example). If salaries in the industry are crappy, which they are, there's not much of an inducement to sacrifice $50K of equity in the hopes of making it up later. That's not fiscal irresponsibility.
I believe we may not share the same assumption sets and/or definitions.
I could sell my house tommorrow for what it is worth- you could too.
I *couldn't* sell my house tommorrow for some arbitrary target value that I had my heart set on getting- including quite a bit less than what I paid for it.
So if you find yourself in a position where you are unable to sell your house, under my assumptions and definitions, you are asking too much for it.
Why? Why are you trying to sell your house for more than it is worth?
I guess I assume that the vast majority of people who find themselves in that position (barring force majeure like pending eminent domain etc.) share some of the responsibility for the house not selling.
While this has generally been true in the past, it is much more true under the current circumstances.
Real property values have been grossly overinflated in many market by unscrupulous buyers, sellers, and mortgage lenders (for a variety of reasons).
Yes, I realize this sounds like a very unsympathetic perspective. And I understand how people who find themselves in this position might not want to connect their original purchase decision with their current selling decision.
Me personally? I have never sold a home for more than I paid for it.
And I never expected to.
Especially since homes are commodities, subject to oversupply, depreciation, etc. and other market forces.
I will apologize for one more thing (in addition to apologizing for rudeness): I will apologize for my passion on this issue.
People could donate houses to the college for appraised value, and the college could rent it out at a return that beats lots of investment alternatives, and to a tenant that had better not mess it up! Quite the win-win situation.
My take on buying has to do with inflation protection. If I had bought a house rather than rented during college, that initial investment would have been hedged against 10% inflation. (The increase in "value" would be entirely made of paper, but that paper profit would have been a % of the entire cost of the house, not the cash I put in it, at the expense of the mortgage holders.)
My view now is that our rent will fall to less than $100 per month plus utilities in a few years, and will remain at that level forever during retirement until we have to head for The Home.
What I cannot comprehend are people who buy a new house, with a fresh 30 year mortgage, within 5 years of retirement.
The point I'm making, and that I think DD is making, is that all job changes come with opportunity costs. If you have to move, this means at the very least that you'll be shelling out a few thousand in moving expenses, plus have a disrupted life for a month or so. If you have a working spouse and kids, and a house to sell, that adds a whole new dimension. So, a job offer to a non-local candidate has to be juicy enough to overcome this.
No matter how responsible you've been with your finances, this is not a good time to sell a house. It will cost you money. So, the job offer has to be good enough to outcompete the other option, which is to stay put and continue working at your current job. Apparently, the people DD would like to hire don't think that the salary on offer is good enough to make up for the sacrifice, so he's only getting local applicants.
I don't see why this is evidence of greed or bad money management on anyone's part. If I have two job offers at roughly equal salaries, only one of which requires me to move, am I morally obligated to completely ignore the fact that by moving, I will probably cost myself tens of thousands of dollars?
(PS to CCphysicist: Exactly. By taking out a mortgage and staying put for a while, you can wind up paying 1/3 of what a renter in your same market would pay. Something senior professors often forget at hiring time.)