This is the second in a three-part series that looks at the future of remote work. Part I focused on the outlook for overall adoption; Part III will consider the specific impact of remote work on the credit union industry.
In our previous article, we discussed overall adoption of working from home (WFH), which continues to be a reality for many white-collar workers. While it may play a major part in the workplace of the future, its possible effects on the residential real estate market remain murky. This is a salient issue for credit unions: Remote workers’ housing preferences represent an important consideration for any employer thinking about reorganizing their work force in a post-COVID world. As lenders, credit unions must also be mindful of WFH’s effects on the residential mortgage market.
Before considering the possible implications of broader adoption of WFH, it is helpful to look at its impact prior to 2020. In a recent study,1 researchers investigated housing preferences of employees who were already working remotely before COVID hit. After controlling for employment, income, and demographic factors, pre-COVID remote workers who rented their homes were found to spend seven percent more on housing costs than on-site workers, while homeowners who worked remotely spent nine percent more. The researchers found that remote workers’ dwellings were six percent larger than their on-site counterparts. This could resolve one source of tension in the pre-COVID housing market, namely the relative lack of starter homes. It may be that WFH leads first-time homebuyers to seek larger homes than they did in the past, or that younger homeowners will look to upgrade to a larger home sooner.
If remote work requires greater housing expenditures, it may be the case that employers — who will presumably save on commercial real estate — are willing to cover substantially all of those costs. The same study looks at the net effects by metro area, assuming that workers remain local. Overall, the researchers find employees would need a 3.8% increase in wages to cover those costs. However, that number falls to 2.4% when adjusting for the reduction in vehicle spending that remote workers were found to exhibit. The study notes that many ambitious estimates of potential cost savings for employers in moving to remote work fail to consider this source of potential costs. Estimated costs are also highly variable by metro area, essentially representing the difference between housing costs and the cost of commercial space. Despite the reputation it has for sky-high housing costs, the Bay Area was found to offer the greatest potential for costs savings to employers who expand WFH options, due to the cost of commercial real estate.
There is plenty of speculation about how WFH could redistribute workers across the country, from coastal urban metropolises to lower-cost interior areas. Obviously, this migration would radically alter real estate markets, as well. But another study2 suggests that the workforce may not be anticipating such a profound change, at least not yet. Researchers looked at the relationship between real estate prices to their distance from the city core (called the gradient), for both home prices and rents. They found that in cities like New York, Boston, and San Francisco, both rent and price gradients predictably flattened once the pandemic hit as residents moved out of the city’s core. But the effect was greater for rents than it was for home prices, apparently reflecting the market’s view that “urban rent growth will exceed suburban rent growth for the foreseeable future.” This could be a sign that owners are anticipating hybrid work arrangements where closer proximity to the city center is still a valuable commodity.
In time, technology may mitigate some of the perceived downsides of full-time WFH, but for now it appears that hybrid arrangements will be far more common. As long as that remains the case, superstar cities are likely to remain extremely attractive, and expensive, destinations for workers.
Curt Long is chief economist and vice president of research and Nadir Tekarli is research assistant for NAFCU.
1 Christopher T. Stanton and Pratyush Tiwari. “Housing Consumption and the Cost of Remote Work” (February 2021). National Bureau of Economic Research Working Paper No. 28483. https://www.nber.org/papers/w28483, accessed May 2021.
2 Arpit Gupta, Vrina Mittal, Jonas Peeters and Stijn Van Nieuwergurgh. “Flattening the Curve: Pandemic-Induced Revaluation of Urban Real Estate” (February 2021). National Bureau of Economic Research Working Paper No. 28675. https://www.nber.org/papers/w28675, accessed May 2021.