Loan originators and real estate salespeople often work in a limited geographic area. This necessitates being deeply familiar with that place, especially with regard to the jobs and income of the folks who live there.
Household income is one of the main factors in determining both home prices and the loan sizes for which a family can qualify. One recent phenomenon that is affecting this is the hollowing out of the “middle-skilled” workforce. Originators who do business in areas impacted by the decline in middle-skilled jobs must pay attention to what is happening with jobs. Potential clients may be disappearing. Falling property values also may be a concern.
If a significant portion of your clients are middle-skilled jobholders and they are disappearing from where you do business, you need to do something to attract borrowers with either higher or lower employment skills. Fail to do this and you may need to either relocate or change careers. Conversely, if you do business in an area with a lot of high-skilled workers, you also need to adjust your business. That may be as simple as adding a mix of good jumbo-loan products and sources with attractive high-value conforming-loan pricing.
Job polarization
Although there has been a lot of media analysis about income inequality and its causes, the discussion misses what is really happening regarding jobs. In order to understand this, it serves to divide jobs into three sets: low-, middle- and high-skilled.
Low-skilled jobs require little education and are essentially jobs that any able-bodied person can do. Examples include janitors, warehouse workers, security guards or health care aides. An employer that currently offers a lot of low-skilled jobs is Amazon.
Medium-skilled jobs require substantial training but the job is routine after the training is complete. These include sales, construction, production, maintenance, repair, mineral and oil extraction, and clerical jobs. Seventy percent of employees in construction and manufacturing are middle-skilled.
High-skilled jobs require a lot of education, including, in many cases, a college degree. These jobs demand critical thinking and situational assessments of tasks. Managers, electronic engineers, nurses and doctors fall in this skillset. This division of jobs into three skill tiers is sometimes referred to as “job polarization.”
Middle-skill declines
What has been happening is a decline in the demand for middle-skilled jobs. At least three things are responsible for this: international trade, technology and the decline in labor-union membership.
The decline in labor-union membership is related to international trade. To some extent, labor unions are victims of their own success. If unions push salaries above a certain level, it becomes cheaper to import goods than to manufacture them domestically. Most union jobs are middle-skilled.
Computer technology has affected both middle-and high-skilled jobs. In 1983, high-skilled jobs comprised 26 percent of the employment sector. In 2012, that rose to 37 percent. Interestingly, during the same period, low-skilled jobs rose from 15 percent to18 percent of those employed.
To a significant extent, manufacturing jobs strengthened the lives of middle-skilled workers after World War II. This skill segment has been greatly affected by technology. From 1979 to 2018, the U.S. lost about 7 million manufacturing jobs while increasing the dollar value of manufacturing output by 80 percent. Technology enabled manufacturing employers to produce more (in terms of dollar value) with fewer people. A consequence is the significant loss of middle-skilled jobs.
As the demand for high-skilled jobs has increased, more people have wisely responded by getting more education. Women have responded to this better than men. This is why there have been lower unemployment rates lately for women than for men. In 1982, women for the first time earned more bachelor’s degrees than men. In 1987, women earned more master’s degrees than men. In 2006, women overtook men in earning doctorates. Women now earn 57 percent of all bachelor’s degrees.
Automation impact
There has been much speculation in the past decade about how robotics and artificial intelligence may eliminate low-skilled jobs. That is not what is happening. In looking at the shift in job polarization, low-skilled jobs such as cleaning and food preparation have not been impacted by either technology or offshoring.
In the near future, a computer may take your order at McDonald’s, but it is not likely that a robot will cook your burger or fries. Low-skilled jobs are not easily automated and there is little financial motivation to automate these jobs. What has happened is that automation, coupled with low-skilled workers, have replaced middle-skilled jobs.
It is worth noting that from January 2018 to January 2019, the unemployment rate for people who didn’t earn a high school diploma dropped by 1.4 percentage points, while the unemployment rates for those with some college experience or a bachelor’s degree barely changed, according to the U.S. Bureau of Labor Statistics. It was a good year for low-skilled workers.
Extreme effects
The effects of vanishing middle-skilled jobs vary significantly from city to city. At the extreme, it has very severely impacted blue-collar cities such as Detroit and Gary, Indiana, and other factory-heavy cities in the Midwest. In 2017, Detroit saw the first gain in median real estate sales price in at least 17 years. The median sales price for Detroit homes in December 2017 was $30,000.
Increases in the number of high-skilled and well-paying jobs have had an extreme effect on housing in other areas, including San Francisco. Not only has San Francisco added tech jobs, but tens of thousands of tech jobs have been added in Santa Clara County with few additions of housing units there.
An unusual consequence is the rise of “Google Buses,” which drive employees from their residences in San Francisco to their well-paying jobs to the south. The very significant increases in home prices and rents in San Francisco caused by the influx of high-paid tech employees have further added to the inability of middle-skilled people to live there.
What happened in the San Francisco Bay Area was a consequence of poor planning and regional cooperation. Ideally, cities that added jobs also should have added housing as they allowed significant construction of commercial office space. Part of the lack of motivation of cities to allow sufficient housing to be built is because they generally consider additional housing to be revenue neutral.
Housing and jobs
Mortgage originators need to pay attention to these trends and advocate for sensible policies. If a city adds housing, it increases its real estate tax revenue, but it simultaneously increases its expenses for police, fireand schools. In 2017, California passed legislation forcing almost all cities in the state to build more housing or else temporarily lose control of some of their permitting and entitlement processes.
Housing should be built where jobs are being added. Not doing so has several adverse effects. It increases home prices where the jobs are, as demand greatly exceeds supply. It creates price contagion for both home prices and rents in the places where employees actually live. It creates longer commute distances and times. People’s money and time is consumed by lack of regional planning.
If mortgage loan originators encouraged local governments to relax their zoning and land-use regulations, not only would these problems be partially reduced but there would be more business. This almost always faces substantial resistance from suburbanites who don’t want their communities changed and city-dwelling activists who see more housing as an a priori corporate evil, or are concerned that these projects will gentrify neighborhoods.
