The Housing Crisis, the Economy, and Their Impact on Recruiting

Over the course of my nearly 40-year career in human resources, I have witnessed almost a dozen recruiting booms (where recruiting budgets ballooned) and busts (where there were sharp and painful drops in the need for recruiters and for recruiting).

While the primary factor driving each differed, all were attributable to economic factors. As news stories continue to unfold, it appears as though the U.S. economy and that of many other nations that base their economies on the U.S. dollar are on the brink of a major correction, one that will not be pleasant for many debt-ridden domestic workers.

The reason I bring this topic up today is to stress the importance of the need for understanding how this will directly impact your ability to recruit and retain talent, and how to plan accordingly.

Is the Sky Falling?

The U.S. economy has for decades been prone to large expansions, moderate corrections, and the occasional recession. I think a good number of recruiters with more than 10 years of experience still remember the last recession triggered by the collapse of the expansion of the tech sector in 2001.

The most recent expansion, largely attributed to the banking sector, has been growing at a declining rate in recent quarters and emerging developments may stall the economy altogether, forcing us into a state of contraction.

While a weak dollar has made U.S. goods and services affordable to the rest of world, enabling corporations to book record-breaking profits, the collapse of the sub-prime lending market is drying up both companies’ and consumers’ access to cheap credit. Even companies experiencing rapid growth as I type these words are discussing cost-containment efforts during executive retreats and strategic planning sessions.

Recruiting, as we all know, is tied to the state of the economy, and labor shortage or not, contractions will impact the recruiting function and recruiting leaders need to be “prepared rather than surprised.”

Yes, companies will continue to need talent, and the labor shortage will somewhat protect the recruiting function even if a major contraction occurs, but impacts can manifest themselves in a multitude of ways. For instance, declining home prices in regions that experienced massive appreciation in recent years may open up such regions to top talent that once resisted migrating due to cost-of-living concerns.

Candidates feeling the pinch of more costly credit may place more weight on benefit programs that leverage the employer to isolate them from economic issues such as transportation credits, pre-tax savings programs, and bulk purchasing. The most likely impact is that employees becoming eligible for retirement will opt to stave off their exit, thereby postponing the impact of a change in global workforce demographics.

You can ignore this warning, an act that has become par for the course in HR, but doing so could hurt you in ways you never imagined.

If you are one of the minority that does not mind a heads-up warning, I suggest you begin forecasting and developing an “if, then” plan for a variety of the following economic issues.

The Housing Crisis

It’s hard to pick up a newspaper or watch a television news program that doesn’t contain a new development relating to the housing crisis. Across the nation, borrowers with sub-prime mortgages who couldn’t refinance due to a lack of equity are losing their homes.

Defaults in Las Vegas, for example, are up 200% over last year. In many cities that once experienced massive appreciation, housing market inventory is ballooning and sellers have to offer significant discounts over appraised values to sell their home. While some think we are near the bottom of this issue, banks have yet to write down the value on more than $2 trillion worth of sub-prime mortgage debt. To avoid institutional collapse, banks are raising interest rates and both consumer and commercial loans are getting harder to get.

This issue is impacting recruiting now and will continue to do so in several ways, including:

  • Talent located in metropolitan regions that experienced significant appreciation in the value of their homes will be more hesitant to relocate because liquidating their current home at this time would require a significant discount in the selling price.
  • Talent located in regions that have experienced conservative appreciation and that currently enjoy a relatively stable housing market may consider this a great time to relocate into regions that were once outside their reach due to the availability of significant housing discounts.
  • Stress of financial issues, including foreclosures, a rising cost of maintaining debt, and lack of access to capital may cause an increase in depression among existing workers, decreasing productivity and necessitating an increase in contingent worker utilization if organizations are to meet pre-established deadlines.
  • Turnover among employees earning wages at the lower end of the spectrum may increase as housing market pressures force them out of the local market and transportation costs make longer commutes unfeasible.
  • With access to cheap capital in the form of home equity loans and equity cash outs drying up, candidates may be more concerned about cash compensation, benefits that impact their economic well-being, and the adequacy of relocation packages.

The Stock Market Correction

One day your company’s stock is up marginally, the next it’s down significantly. One day your retirement looks comfortable, the next a little pinched. The volatility of the current stock market has even some of the most respected analysts flipping coins to predict what the next day will hold.

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With volatility exceeding 10% of market value, many don’t know which way to run. There is a 1:3 chance that despite a rate cut by the fed a recession looms.

How bad is it? So far, it’s not as bad as corrections in 1987, 1990, or 2001, but the story is still developing. In all reality, market prices are most likely adjusting to produce more tolerable P/E ratios, given that earnings for many companies will most likely decline as consumers spend less.

All of this economic speak has considerable impact on recruiting. For instance:

  • Companies that are most likely to be impacted by declining earnings may find that stock options, stock grants, and company funded retirement benefits carry less weight with both candidates and already employed top talent.
  • Employees nearing retirement may postpone their exit, as recent corrections may have significantly impacted their nest egg.
  • Companies with diversified global operations and in industries not affected by consumer spending will become more attractive, enabling them to recruit top talent away from firms more heavily impacted.
  • Capital expansion plans may be postponed or canceled as access to cheap capital dries up.
  • Mergers and acquisitions may slow down, as the cost of using equity to complete such transactions exceeds the economies of scale such a transaction would produce.

The Credit Crunch

The ability of large organizations to get financing for capital projects and market expansion has been relatively “easy” for the last few years. It was this fact that enabled many private equity firms to go on a spending spree.

However, business financing like consumer financing is becoming much more difficult to get. Bloomberg has reported a 93% drop in the availability of certain types of institutional debt. Upon the close of the sale of Chrysler to Cerberus, bankers found they couldn’t sell off nearly $10 billion in loans.

This tightening of the credit market will impact recruiting by:

  • Decreasing the volume of mergers and acquisitions once funded with borrowed money. The cutting of M&A activity will increase the number the number of companies that have to pursue alternate exit strategies, such as the less-common ceasing of operations. This will free up talent employed by organizations incapable of competing in a global market.
  • Slowing capital expansion plans. This may reduce forecasted headcount growth, or shift it to a different region.
  • Decreasing local investment while increasing foreign investments where markets are expanding. There are no doubts that despite this local economic blip, markets in Asia are expanding. Look for more companies to ramp up operations in Asia. Expat assignment anyone?

Action Steps

Your estimate of the likelihood of these “negative” economic events might vary significantly from mine, but the key lesson to be learned here is that these types of events will happen. The only question is when.

Whether you are optimistic or pessimistic, plan to handle every reasonable eventuality in recruiting. In order to be better prepared, take these steps:

  • Read the paper. Now is the time to read more about economic factors and to look at both the positive and negative forecasts that are made by leading investment banks and economists.
  • Revisit the past. Determine whether there are any “precursors” or predictors of these negative events. Look for past trends, timelines, and what worked or didn’t work.
  • Work with your company’s forecasters. If you work in a medium- or large-size organization, you probably already have forecasters in your strategic business-planning unit. Rather than trying to do forecasting on your own, work with these professionals and piggyback on their forecasts.
  • Develop “if, then” scenarios. The most effective but simple way that I have found to prepare for ups and downs is to have an “if, then” plan for each possible problem and opportunity. This encourages you to practice, in advance, what you will do “if” a positive or negative thing occurs. Generally, the first step in “if, then” planning is identifying the most likely future events. Then attempt to identify early-warning signs that precede these events. Finally, you require the manager to prepare an outline of the action steps that you would likely take if this event actually occurs. The best plans have variations depending on the severity of the event.
  • Assume the worst. I don’t know why, but in my experience, most people in HR are eternal optimists. Avoid this common pitfall by having a “worst-case scenario” plan to handle any potential disasters. In addition, be extremely careful of any plan or anyone who tells you that the current recruiting boom will continue on indefinitely, with no indication for downturn. It turns out that almost everyone in HR or recruiting are prepared for good times; it’s the bad times that almost universally seem to surprise them.
  • Recruit locally. Until the economic turmoil in the housing market subsides, focus your recruiting efforts on individuals who don’t have to buy or sell a house in order to take your job.

Final Thoughts

Now let me be clear. I’m not predicting that an economic downturn will occur tomorrow, but I am saying that if you look at the history of recruiting, downturns turn out to be relatively frequent occurrences.

You can choose the myopic view and continue to look “only at recruiting” and to ignore economic bad news, but if you expect to be in this business over the long term as I do, now is the time to pay attention and to do some scenario planning so that you will never be “surprised” again.

Dr. John Sullivan, professor, author, corporate speaker, and advisor, is an internationally known HR thought-leader from the Silicon Valley who specializes in providing bold and high-business-impact talent management solutions.

He’s a prolific author with over 900 articles and 10 books covering all areas of talent management. He has written over a dozen white papers, conducted over 50 webinars, dozens of workshops, and he has been featured in over 35 videos. He is an engaging corporate speaker who has excited audiences at over 300 corporations/ organizations in 30 countries on all six continents. His ideas have appeared in every major business source including the Wall Street Journal, Fortune, BusinessWeek, Fast Company, CFO, Inc., NY Times, SmartMoney, USA Today, HBR, and the Financial Times. In addition, he writes for the WSJ Experts column. He has been interviewed on CNN and the CBS and ABC nightly news, NPR, as well many local TV and radio outlets. Fast Company called him the "Michael Jordan of Hiring," Staffing.org called him “the father of HR metrics,” and SHRM called him “One of the industry's most respected strategists." He was selected among HR’s “Top 10 Leading Thinkers” and he was ranked No. 8 among the top 25 online influencers in talent management. He served as the Chief Talent Officer of Agilent Technologies, the HP spinoff with 43,000 employees, and he was the CEO of the Business Development Center, a minority business consulting firm in Bakersfield, California. He is currently a Professor of Management at San Francisco State (1982 – present). His articles can be found all over the Internet and on his popular website www.drjohnsullivan.com and on staging.ere.net. He lives in Pacifica, California.

 

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6 Comments on “The Housing Crisis, the Economy, and Their Impact on Recruiting

  1. I work for a fortune 100 firm. Relocation is down significantly. It has already shown impact to our recruitment of executive talent.

    The housing crisis is a concern. In some markets, ex, LA & SF, it’s not as severe (not yet however with rate increases for jumbo mortages, we expect to see challenges)

    BofA released a report indicating that $700 billion in ARMs will re-set in 2008. The credit crunch has slowed down a lot of acquisition activity.

    I don’t believe sky is falling and I worked for a major tech company during the 2001 downturn so I think the US economy will be fine but there’ll be a period of correction.

    The sourcing and branding challenges to recruit the top talent will take greater focus as talent becomes less willing to be mobile and virtual management skills in both recruitment and for hiring managers will become key.

  2. Real Estate ‘Oases’: Markets Thriving in Tough Times

    Home prices may be flat or anemic in many parts of the country, but not in as many places as you might assume from listening to the evening TV newscasts. Prices are up in dozens of metropolitan markets — two out of every three, according to the latest study-and within most metropolitan areas there are oasis-like micromarkets that are outperforming national and regional trends.

    Full Story

  3. Excellent.

    Except the part inferring $2 Trillion in sub-prime loans needing to be written down. 1st,$1 Trillion worth will be RESET from this past July thru June of next year, or about 5 million loans (& not all sub-prime), probably averaging $200k or less (some still actually do make down payments) given the national average of $223k per house sold. Maybe 20% (estimates have ranged to as high as 23%) will be repo-ed, -or a million houses. Inventory in the last year rose by over 2 million houses (to 8.8 mo inventory), prices only fell 2-3%.

    Multi-Trillion $ #s will only add to dizzy fluctuations in the Markets accelerated July 16 when a rule in place to prevent shorting declining markets since 1929 was reversed, arming computer aided programs and causing an average Dow swing of 265 a day so far this month.

    Incidentally, repos from resets will drop dramatically starting in July of ’08 – from 420k to 75k houses a month. We need to keep things in perspective and also realize, some houses will actually net a profit to the bank, none will drop to zero and most will net somewhere inbetween, but fairly close to what was owed.
    But the problem will linger into the latter part of next year until demand catches up with supply and inventories drop, and housing will be a positive rather than a negative.

  4. Excellent.

    Except the part inferring $2 Trillion in sub-prime loans needing to be written down. 1st,$1 Trillion worth will be RESET from this past July thru June of next year, or about 5 million loans (& not all sub-prime), probably averaging $200k or less (some still actually do make down payments) given the national average of $223k per house sold. Maybe 20% (estimates have ranged to as high as 23%) will be repo-ed, -or a million houses. Inventory in the last year rose by over 2 million houses (to 8.8 mo inventory), prices only fell 2-3%.

    Multi-Trillion $ #s will only add to dizzy fluctuations in the Markets accelerated July 16 when a rule in place to prevent shorting declining markets since 1929 was reversed, arming computer aided programs and causing an average Dow swing of 265 a day so far this month.

    Incidentally, repos from resets will drop dramatically starting in July of ’08 – from 420k to 75k houses a month. We need to keep things in perspective and also realize, some houses will actually net a profit to the bank, none will drop to zero and most will net somewhere inbetween, but fairly close to what was owed.
    But the problem will linger into the latter part of next year until demand catches up with supply and inventories drop, and housing will be a positive rather than a negative.

  5. You need to further analyze any stats – Housing prices are up in many areas, but the per sqare foot price is down. Take Orange Co (1st co S. of LA) – a year ago median on a used detached $705k, 1500-1600 sq. feet in a decent area, miles from the ocean. Slipped to $660k, climbed back to $735k during July – but now you are getting 1800-2000′ i.e. cheaper houses are selling slower presumably due to sub prime mess hindering mostly the less affluent. i.e. your $735k house may have sold for $800k a year ago.

    The rich seem to get richer in these times, so John Templeton’s statement recently real estate could drop up to 50% would seemingly refer to the $700k property that has almost trippled in recent years, belied by recent sales trends. Surely he can’t be referring to the $223k national average home.

    And I haven’t relocated anyone since 9-11 and used to do several a year. -Jon

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