Employer-assisted housing: Part 1, the how

Start with three facts:

1. People want to own homes. 

2. Owning a home decreases labor mobility. 

3. Employers value loyalty and longevity of service. 

The simplest formulas can yield the most complex results

Mix them together and you have the formula for a cluster of initiatives known broadly as employer-assisted housing – which, in part because of the housing policy innovation inversion, is a movement without leadership, a concept without a structure, being advanced by hundreds of initiatives like those profiled recently in a Chicago Tribune article:

Tara Morin and Coleman Hillstrom are refinishing the woodwork after discarding the green shag carpeting and re-tiling the bathroom in their one-bedroom condo.

Employer-assisted housing encompasses both rental (as in Vicarage of the church of football) and ownership; it touches hard debt, hard equity, soft debt, soft equity and subsidy; and because it involves people in two parallel enduring economic bonds, employment and housing, it raises touchy questions about dependency and exploitation.  Still, it arises out of genuine need and in the modern era, nearly always for the best of motives on all sides.

Morin, like many first-time buyers, had cobbled together savings and gifts from parents last year –

While it’s no part of this post, parental gifts are among the most common forms of grant-converted-into-hard-equity used in housing purchases.

–  to buy the unit near the home of President Barack Obama.

But it was the $7,500 from her employer, the University of Chicago, that put the deal over the top.

Just the edge I needed!

What stake does the employer have in its employee owning this condo?  One can quickly think of three reasons:

1. To reward employee loyalty.

2. As golden velvet handcuffs to discourage job-hopping.

3. To protect the neighborhood around its campus.

“Without the loan, it would have impacted how fast we could renovate,” says Morin, 25, of the foreclosed property she shares with Hillstrom, her 27-year-old fiancé, who is studying for his doctorate.

Moving a property out of foreclosure emptiness and into employee occupancy has to be good for the value of all other U Chicago property.

Morin joined the U. of C. staff as a department assistant in art history last summer and soon learned that what she had paid to rent a house in North Dakota would get only a small apartment in Chicago.

Even as people move to cities because that’s where wealth is created, this economic pressure drives up the price of housing, and with it the price of urban land.  Thus when an aspirant moves to the city, expenses rises more quickly than does income.  Income will catch up, but only if the household succeeds in implanting itself in a secure affordable tenure.  Without down payment assistance, in other words, newcomers like Ms. Morin would be forced into unacceptably constricted accommodations, retarding their formation of a new household (more bedrooms means more babies) and impairing their job effectiveness. 

After shopping around, she decided to buy.

To be precise, she decided she wanted to buy.  Then she had to assemble the money, which included tapping parents and the corporate uncle, her employer.

For my next trick, I will make money from my relatives appear!

She applied to the school’s employer-assisted housing program and used the five-year forgivable loan –

Thus Ms. Morin, in addition to using her parents’ gift as hard equity, takes soft debt from her employer.  The loan requires no payments (making it soft) but must be repayable (making it debt) if she moves or leaves Chicago‘s employment. 

[As a technical matter, structuring this as a forgivable loan means Ms. Morin does not recognize income from the money until five years hence, when it is forgiven, so it’s effectively passed to her tax-free, as does her parents’ gift, which they are allowed to give up to $24,000 jointly to each child each year.]

The university is one of more than 60 Illinois employers ranging from Allstate Insurance Co. in Northbrook to Medela Corp., a McHenry manufacturer of breast-feeding equipment, offering help to workers who want to buy.

These employers have stumbled upon a happy value-chain synergy. 

Employees buy = decreased labor mobility = greater company loyalty = greater employee retention. 

To say nothing of the enduring flush of simple gratitude.

Because mommy and daddy bought a house, they were able to make me!

Thanks, Chicago!

[Cynical note: If Chicago did not have this program, to lure those like Ms. Morin it would have to pay higher salaries, so we can see the loan as a $1,500 annual in-lieu-of-raise payment, front-ended and recoverable.]

We creative types are always underpaid

– toward a $78,000 fixer-upper unit with four layers of cracked and peeling kitchen linoleum, purple walls and leaky toilet.

Home ownership decreases labor mobility.  In the abstract, one can debate the national-competitiveness socioeconomics of this – like most things, I think it’s good in moderation but not to excess – but in the specific, one can quantify the consequences precisely. 

The structure of Chicago‘s loan – its maximum amount – has a controlling effect on the maximum price employees can afford.  That, in turn, means they must come in via a lowest-decile-quality apartment, which being below-market in amenities will require them to invest substantial sweat equity in its renovation.  They will, in short, not be flippers any time soon, even if the market were to recover, so in addition to the soft-debt velvet handcuffs, Chicago has also induced Ms. Morin and her fiancé to indenture themselves for five years while they pursue making their new space worth their imagining and investment. 

The programs vary from employer to employer but in general are a benefit aimed at attracting and retaining good workers.

Is the university Machiavellian?  Or frugal? 

When neither their property nor their honor is touched, the majority of men live content.  – Niccolo Machiavelli

Or merely lucky?

Just lucky, I guess

Employer-assistance programs usually begin as benign, arising in times when housing affordability is racing away out of reach:

Started when housing prices began to skyrocket –

Employers tend to be older than the people they are hiring, and more affluent, and as such are more likely to be homeowners already, with their monthly payments locked in.  As such, they experience a sticker shock when the candidates they want tell them, almost apologetically, that they cannot afford the job because they cannot find housing in the area.  Because home ownership has proven a great investment for the employer in his or her personal life, they can naturally enough discover a ‘doing well by doing good’ approach of offering capital to get people into homes.

– employer-assisted housing programs are proving to be just as valuable in a down real estate market.

Aside from contributing soft debt to enable the aspiring family to buy, employers can act as de facto credit enhancers for their employees.  Lending the candidate money is a strong indicator the employee’s unlikely to be laid off or fired, meaning that the employee’s income stream is more secure, and therefore safer to lend against.

“It is more important now because lending is more strict. People were getting home mortgages with no money down, but now buyers have to have a down payment,” says Christopher King, president of Robinson Engineering, which has had a program for its 100-plus employees in South Holland and Frankfort for five years.

As I’ve written elsewhere, the commitment of hard equity represents more than just money.  It psychologically anchors the participant to the investment.  People fight harder to prevent loss of something they believe is theirs than they do to gain something equally valuable whose ownership is an open question –

Mine!

– one of the many reasons home ownership changes behavior for the better, and a component in the value of hard equity.

It “really takes some of the pressure off; so many fees seem tacked on at the end,” says Melissa Mares Stambor, Loyola University’s director of donor relations, about a $5,000 five-year forgivable loan she received last year from her employer.

Please give Loyola money and they will lend money to me: Melissa Mares Stambor and her husband

Stambor, 29, and her husband, Zak Stambor, 27, in August decided to buy after shopping for more than a year. They used the loan, one of 25 the university makes available to staff each year, to cover the closing costs on a two-bedroom, two-bath condo in Lakeview.

Likely any other discretionary benefit, this one is structured for best triage: making the biggest difference in those whom the employer might lose otherwise.

[Continued tomorrow in Part 2.]