Immigration and Housing Prices

This Wikipedia entry suggests that illegal immigration is about 700,000 per year, in net terms (1,500,000 gross).   I presume this refers to the trend rate before the recession.  I also found an article in Yahoo that makes the following estimates:

The study released Wednesday estimates that 11.1 million illegal immigrants lived in the U.S. in 2009. That represents a decrease of roughly 1 million, or 8 percent, from a peak of 12 million in 2007.

The study puts the number of illegal immigrants down to about where it was in 2005. They still make up roughly 4 percent of the U.S. population.

The Homeland Security Department’s own estimate of illegal immigrants is slightly lower, at 10.8 million. The government uses a different census survey that makes some year-to-year comparisons difficult.

Of course these are rough estimates, but let’s say a ballpark estimate is that since 2007 we have been losing about 300,000 illegals per year, instead of gaining 700,000 per year.   If so, then it appears population growth in the US might have slowed by about 1 million per year.  Births and deaths don’t change much year to year, and I was also unable to find any indication that legal immigration had changed much in the last three years.  It turns out the data is collected in a very confusing way, and I wasn’t able to find a reliable Census bureau estimate of the components of population growth.  The Census doesn’t show much change in US annual population growth rates, but given they were embarrassed to find 6 million more in the 2000 census than expected, I think it’s fair to say they don’t have a good handle on illegal immigration.

So let’s suppose US population growth fell by one million after 2007, as a result of both the immigration crackdown and the recession.  Could this have caused the housing crash?  Just to get a rough idea of the magnitudes here, let’s assume a very simple model:

1. Three people per family
2. Normal population growth 3 million per year
3. 300,000,000 US residents
4. 100,000,000 US housing units
5. Houses depreciate at 1% per year

In this model we need a million new houses a year for new population, and another million replacement houses for depreciation.  Total construction should be 2,000,000/year, which was roughly the level of the mid-2000s.  Now assume population growth falls by 1,000,000.  This should reduce steady-state housing construction by 1/6th.  Not enough for a housing crash.

If the slowdown was concentrated in illegal immigrant-rich areas with fast population growth (California’s Inland Empire, Arizona, Nevada, etc) it could have had a significant effect on local markets—perhaps two or three times as large as the nationwide effect.  That could have triggered a significant housing slump in the sub-prime markets.  On the other hand, some immigrants left for reasons other than the immigration crackdown and the resulting drop in housing construction jobs.  So there is the issue of disentangling the various shocks.  If the immigration crackdown contributed to the decline in housing construction, there would be some sort of multiplier effect, as other immigrants would leave because of the resulting drop in economic activity.  But I don’t want to oversell that multiplier, as most of the recession was in non-housing areas.

Let me also emphasize that I am not trying to explain away bubble-like behavior at the micro level.  None of this explains banks giving mortgages to low income farm workers so they could buy $500,000 homes, rather I am trying to better understand how at the macro level otherwise intelligent investors might have gotten caught off guard by the nationwide housing slump and fall in real estate prices.  One factor propping up prices (rapid immigration) was pulled away unexpectedly.   In other parts of the country, the early stages of the housing slump were much less severe.

Now let’s suppose that some combination of less immigration and ordinary post-bubble problems led to severe banking problems for institutions that held lots of MBSs.  The Fed mishandles this problem and lets NGDP fall 8% below trend.  Now falling NGDP causes housing prices in non-sub-prime areas to begin falling.  Ditto for commercial real estate.  We saw in an earlier post that it was commercial real estate, not subprime housing, which was the main cause of bank failures.

I actually think immigration was much less than 50% of the initial problem.  But even if it was only 20%, because of the various ripple effects that I just described it is not inconceivable that the ultimate effect of the immigration crackdown could have been quite significant.  In 2008 there may have been a “knife edge” equilibrium, where if the economy had been a bit stronger we might have avoided the zero rate bound.  And if we had avoided that problem, monetary policy might have been able to prevent a steep fall in NGDP.  Maybe immigration is one reason Australia avoided the zero bound and steep recession.  Still, this is all speculation.  Even though I favor a high rate of immigration, the preceding story seems far too speculative to inform our immigration policy.  We are better off learning from other countries that do it better than us (yes, I mean Australia and Canada.)

PS:  There are lots of guesstimates in this post.  My hunch is that immigration slowed, but by less than 1,000,000 per year.  But births have also slowed by a few hundred thousand, which I excluded from the estimates.  Again, I am not looking for a monocausal explanation of the housing crash.  I think it likely that almost all giant economic disasters have multiple causes, whether it be the Great Depression, or the Great Recession.

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