The Housing Market and The Return to the Office: Why Bosses Will Lose the Battle

While numerous articles suggest that employers have emerged victorious in the battle to bring employees back to the office, this triumph may prove fleeting. Why? Because in the short-run, people are working in the same area that they lived in pre-COVID so it is easy to tell workers that they must simply brave the commute or risk losing their job; however, in the long run, housing market dynamics will force firms to relent. The people who think bosses have won the battle are forgetting about talent acquisition.

As I discussed in a previous article, when someone sells his home he generally has to buy a new one: Thus, the decision to sell is also, for most buyers, a decision to get a new mortgage. Only those who have fully paid off their mortgages, generally retirees, can take the cash proceeds and simply buy a new house (and even here capital gains taxes make it so that people who do this must take an out-of-pocket hit or move to a less expensive area). Thus, firms will be left with a choice:

1) Offer people enough money that they can afford a much larger mortgage payment, 2) limit their recruiting to people who already live in the area, or 3) allow them to work from home so that they can stay in their current house. Of course, option one will substantially increase labor costs while option two will reduce the quality of talent a firm can obtain. And as new hires are permitted to work from home, existing hires will be able to argue that they too should be allowed to work from home on the grounds of fairness.  

Studying The Data

People may wonder just how significant the lock-in effect is. Is it powerful enough to decide the battle over returning to the office? Before we dive into the details, consider this: Despite mortgage rates going up by nearly 5%, home prices have continued to increase. That alone suggests that the locked-in effect is a very powerful one.  The National Association of Realtors’ Housing Affordability Index shows that housing is much less affordable than it was three years ago esp. in the West.

On a 360,000-dollar loan for a 440,000-dollar house (so we are assuming a 20% down payment, which is above average), you can expect to pay just under 2,517 dollars a month at the prevailing 7.5% interest rate.  At 2.7%, a fully obtainable rate not that long ago, that payment would be 1,416. Any employer who wants to get someone out of their current home and into their local metro has to pay their workers an additional 1,100 dollars post-tax to make the move a neutral proposition. Of course, as the average home price rises, this premium goes up in tandem.

There are other pressures in favor of working from home, of course. It allows you to acquire talent that would otherwise be unavailable because of the difficulties associated with coordinating a move with one’s spouse—or disturbing your child’s friend group and schooling.  Absent affordability concerns, even finding an adequate home can prove more difficult given the substantial reductions in home inventory the locked-in effect has caused.

Businesses and Remote Work

Furthermore, businesses that opt-in for remote work can spend less on property taxes and office rent: And are also subject to less workers comp and sexual harassment liability. (A highly unpleasant topic, to be sure, but one business must consider and take precautions against.) Furthermore, the reduction in these harassment incidents of all types improves worker productivity, worker happiness, and one’s corporate reputation.

Several studies suggest that, for the most part, worker productivity and satisfaction both improve when people are allowed to work from home. Here is a brief review of a few of the most prominent ones:

• A study by Stanford of 16,000 workers over 9 months found that working from home increased productivity by 13%. This increase in performance was due to more calls per minute attributed to a quieter more convenient working environment and working more minutes per shift because of fewer breaks and sick days¹.

• Owl Labs’ research revealed that 83 percent of remote employees feel they operate at the same, if not higher, productivity level than they did while working in the office. Many survey respondents noted feeling happier and more productive at home, with 70 percent stating that virtual meetings are less stressful than in-person meetings².

• Researchers from the University of Chicago and Stanford analyzed the data collected from nearly 10,000 workers in the US, UK, and Germany about their productivity, well-being, and other aspects of working from home. They found that nearly six out of 10 workers reported being more productive working from home than they expected to be, compared with 14 percent who said they got less done. On average, respondents’ productivity at home was 7 percent higher than they expected³.

• Research from Ergotron further corroborates these findings. Researchers polled 1,000 remote and hybrid employees in the U.S. about their productivity, wellness and other life facets. They found that working from home improves work-life balance, increases productivity and fosters healthier lifestyles.

Read more: Have Mortgage Rates Reached Their Peak?

So, What Is The Answer?

Those who argue for in-person work say that it is necessary to monitor employee productivity, to facilitate manager-employee coaching, and to encourage collaboration. Of course, these are valid points though we can expect them to vary from industry to industry: Some work is easier to monitor remotely than others. Salespeople, for example, continue to earn commission: It is easy to determine whether they remain productive—just add up their sales. Similarly, coders can be evaluated by the number of projects they complete and the quality of their code. Engineers, on the other hand, might need to collaborate in person around a whiteboard: even here, aggregate measures of productivity remain available like whether projects are being completed on time and under budget.

In fairness, other studies suggest that employee productivity drops when working remotely. However, most of these studies monitor productivity on an hourly basis: If you are paying your employees a fixed salary, rather than hourly, the willingness of employees to work longer because they don’t face a commute—or because they can return to work after tucking in the kids—outstrips this effect.  The following study out of the University of Chicago’s Booth School of Business found that hourly productivity dropped considerably but overall productivity declined only slightly.

Consider, however, that the study in question looked at a call center—work that benefits little from a quiet, undistracted environment. It is not clear that these results generalize to other kinds of knowledge work and, more importantly, incentive structures. And even here, total productivity only saw a slight decline as workers were willing to work longer hours from home: Overall call volume declined only by 4%. This suggests that, even if we adopt pessimistic measures of worker productivity, total cost savings associated with remote work are likely to outweigh any productivity declines.

Conclusion

While different industries and companies will adopt different working arrangements, those who think we will largely return to the pre-pandemic norm are simply wrong: Not only are they ignoring the competitive advantages work from home will offer firms, but they are ignoring the housing market dynamics that will force many employers’ hands. We can expect work from home to expand over the next few years. Work from home is certainly here to stay.

Read more: The Complexities of Real Estate Economics

Franklin Carroll

Franklin Carroll is Kukun's VP of Modelling and Analytics; After finishing his studies at the University of Chicago, he worked at Fannie Mae where he helped build Collateral Underwriter, roll out the Value Verify initiative, and specialized in collateral related and credit related policy.

Published November 21, 2023