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Houses for Sale! Houses for Sale!
Tyler and I have both suggested that increased immigration would help to increase the demand for housing and relieve some of the financial crisis. Writing in the WSJ Lee Ohanian concurs:
We should encourage the immigration of prime-age individuals. Beginning in 2007, net immigration fell to half of its level over the previous five years. Increasing immigration would increase the demand for housing and raise home prices. And note that the benefit would be immediate. Home prices -- and the value of subprime obligations -- would rise in anticipation of a higher population base. The U.S. particularly needs highly skilled workers. These workers not only would purchase homes, but would generate higher living standards for all Americans.
More generally, Ohanian warns that what made the Great Depression great was the misguided policies that Hoover and Roosevelt adopted to fight the depression. Ohanian has an ill-considered swipe at Obama on this score but the general point is valid and worth remembering as we rush onwards.
Posted by Alex Tabarrok on October 9, 2008 at 07:15 AM in Economics | Permalink
Comments
1. A looser immigration policy for skilled workers should be embraced even without this financial crisis. Perhaps the crisis can provide the necessary impulse to get it done.
2. I'm weary of any plan that tries to "stabilize" home prices (including Martin Feldstein's piece in the WSJ last weekend). Bubbles need to deflate - quickly. Otherwise, we're looking at a decade of stagnation. If American households are in so much debt, why do we want to keep housing costs at 40% of household income (or higher)? Wouldn't allowing it to drop to 25% help alleviate our massive consumer debt?
3. What do you think of Greg Mankiw's proposal to recapitalize markets by having Treasury match private funds dollar-for-dollar in exchange for a non-voting equity stake in the companies? He outlined it in his blog yesterday:
http://gregmankiw.blogspot.com/2008/10/how-to-recapitalize-financial-system.html
Posted by: Zach at Oct 9, 2008 8:03:46 AM
I agree. I would really really appreciate an analysis of Mankiw's proposal as it seemingly strikes me as brilliant.
Posted by: Sean at Oct 9, 2008 8:07:10 AM
I have had the same thought.
The root problem moving forward is the prior misallocation of capital in building a greater supply of houses than there is actual demand at the prices required to keep today's mortgages above water -- and possibly actual demand at any price.
Too much supply? There are three solutions. Lower the price, which puts financiers and therefore government in a tizzy. Lower the supply, which means blowing up houses. Or raise the demand, which means finding new people who want houses.
And as a bonus we get a little bit of sanity in immigration policy.
Posted by: MikeP at Oct 9, 2008 8:12:00 AM
I'd like to take America up on that.
But, are there jobs waiting for these new immigrants?
Posted by: Gunther at Oct 9, 2008 8:32:32 AM
How about expanding Optional Practical Training (post-degree visaless work permit) from one year to three?
Posted by: ogmb at Oct 9, 2008 8:38:25 AM
so the way to save the housing market is to depress wages by incresing the supply of labor and while increasing housing costs and increasing white flight.
I guess another round of Hispanic immigration is needed to buy up the houses built by the last round of Hispanic immigrants.
Posted by: superdestroyer at Oct 9, 2008 8:44:08 AM
This entry actually brings to mind a somewhat related issue that I've been wondering about for years: Supposedly the Black Death which reduced Europe's population by ~1/3 provided the final nail in the coffin for feudalism and greatly increased the income of the survivors because they were no longer bound to the land. Great estate owners competed for workers to work there land, and there was suddenly a lot of land available.
Why isn't a reduction in population ever seen as a great opportunity for those remaining?
Posted by: Jeff at Oct 9, 2008 8:59:31 AM
The labor participation rate is low and going lower. Plus, we've had plenty of immigration in the last five years, it's just been low-skilled and illegal. We don't lack for a willing working age population, we lack homeowners. That's why the best form of immigration would be wealthy retirees who plan to retire and buy homes in the US. Right now a wealthy German or Brazilian who wants to retire in Florida can stay here for six months. Expand that to 12 months (no work visa) and much of the excess housing supply in Florida and elsewhere would be quickly snapped up.
Wh
Posted by: bjk at Oct 9, 2008 9:00:06 AM
Illegal residents but responsible homeowners
http://www.latimes.com/news/local/immigration/la-me-immighome6-2008oct06,0,1279877.story
Home loans held by illegal immigrants in California and across the nation generally have had fewer delinquencies than similar loans held by U.S. citizens, in part because of stricter lending requirements, according to banks, insurers and Realtors.
"Every indication is that their performance is better than the average" mortgage account, said Tim Sandos, president of the National Assn. of Hispanic Real Estate Professionals.
(Begin tongue in cheek) 50 million immigrants from China would solve the mortgage problem and all our school problems. (end tongue in cheek) Of course I would rather that home prices fall another 40% so that I can trade up cheaper and so my sons can buy homes for cheaper. Same with stock prices the VTI yield is still way to low (about 2.6%). I hope to one day live off dividends.
Posted by: floccina at Oct 9, 2008 9:09:55 AM
New home owners are the weakest segment for demand for new homes. Besides its way cheaper to rent now due to excess inventory.
Posted by: Jeffy at Oct 9, 2008 9:13:47 AM
Sorry to deviate immigration. But another thought that I have if the assumption that higher home values will relieve the financial crisis is true, how about making it more difficult for new homes to be built by making it restrictive for construction to take place on undeveloped lands. This can be done by either a federal land purchasing program or by states making it prohibitive in permitting new sites. This wouldn't be applied to all land, but to areas near or around suburban areas.
I understand how the libertarians would hate this idea. But since the US has selected the route of state intervention, why not?
It seems to me that because the US has abundant land, the marginal cost for new home build relative to other developed countries is really low. Plus the greenies would like it as you are now preserving green space.
Posted by: JC at Oct 9, 2008 9:17:18 AM
Good idea, but while we are deciding how we should move around the animals in order to best alter our various indicators, may I propose that we also prohibit humans from leaving the country? perhaps we could implant chips in them and a huge electronic taser fence so that when people try to cross the border they are subject to large doses of voltage. A lot of the people leaving have tremendous wealth so this is hurting our housing market as much as the lack of low wage immigrants coming in. Lets focus on restricting this outflow of wealth.
Posted by: Gabe at Oct 9, 2008 9:35:07 AM
We need not higher home values, but lower home values.
"Affordable housing" would mean Americans would be spending some normal percentage of their income on housing. There's still more bubble left because housing is still high relative to income or where it was in 1987-2000 adjusted for inflation. See, for example, the graph here of the National Home Price Index http://online.wsj.com/article/SB122351051370717359.html
Left to its own devices, the market is heading there. The question in the current crisis is how to let the market do what it wants to do (deflate housing costs) without large collateral damage.
If we keep thinking about this crisis from a perspective of stabilizing home prices at some artificially high level -- isn't that doomed to fail?
Posted by: zbicyclist at Oct 9, 2008 10:07:29 AM
Why are the comments on Obama "ill-considered"? Wouldn't raising taxes right now be a very bad idea? And isn't raising taxes a centerpiece of Obama's economic plans? Are people not allowed to criticize The One?
Posted by: y81 at Oct 9, 2008 10:13:35 AM
Wouldn't raising taxes right now be a very bad idea?
Isn't raising taxes on the wealthy always a "bad idea" Economy is going well "Don't raise taxes, otherwise good times will go away" Economy is going poorly "Don't raise taxes, we can't in a recession"
Besides tax rates similar to those imposed by Reagan and Clinton didn't exactly crush the economy now did it?
Back on topic, for immigration to work we'd need to import highly skilled/paid individuals. We'd also need to find them jobs that are highly paid, and I'm not convinced that there are enough of these jobs out there to matter. Housing demand is down because the prices are too high, once prices are in the affordable range they get snapped up. The main problem is that it would put many people underwater so they can't sell, or sellers are delusional and think their house is still worth 2005 prices because it's special.
Posted by: JordanT at Oct 9, 2008 10:33:23 AM
@Jeff:
But in Eastern Europe, feudalism experienced a resurgence after the plague. There, the typical commercial farmer had been a freeman holding a long-term lease. When labor prices rose and agricultural prices fell, while rent remained constant, they fell into debt and serfdom.
The ability to reorganize following contraction is not equally distributed through the economic system.
Posted by: Cyrus at Oct 9, 2008 10:33:28 AM
Yes, we all remember how the economy tanked after Clinton raised taxes on the wealthy. Then the Bush tax cuts created the prosperity we enjoy today. Why can't Obama understand this? That guy at AIG who was getting the $1 million a month retainer would go out and re-create a few of the thousands of jobs he destroyed, if only we would cut his taxes again.
Posted by: FE at Oct 9, 2008 10:36:31 AM
Decreasing housing supply in any form is a positively satanic proposal while there are still homeless people, and while housing prices make fat, stupid, anxious, earth-murdering wage-slaves of everyone. But your proposal to increase immigration is already actualizing and will continue to work for the good. Luckily, it is being deployed in exactly the opposite direction: more "unskilled" labor to build houses more cheaply to deflate housing prices as near to zero as possible.
Any inflation you achieve will just increase investment in housing to secure this same eventual result.
Posted by: Scott Martinez at Oct 9, 2008 10:41:03 AM
Well, if Messrs. Tabarrok and Cowen think, with some of the commentators, that raising taxes right nowwould be a good idea, they should say so more forthrightly. The phrase "ill-considered" is usually taken to mean something other than "wrong," and that is how I interpreted it.
Mind you, I have noted that our hosts are not the legendary one-handed economists, and doubtless would respond that raising taxes could be both a good idea and a bad idea in various respects . . . .
Posted by: y81 at Oct 9, 2008 10:51:23 AM
JC - the practices you advocate have been in force in most of urban California for the past 30 or so years. In most states outside the northeast and pacific coast, the cost of land is about 20% the cost of a house. In California, the cost of land is sometimes in excess of 50% of the cost of the house. (The house I bought for $262k is insured for $150k, which is generous, but it's all I'll need to replace the structure with new construction.)
Studies have been done on this subject - the price of land in California is determined by the potential to build, so a one-acre lot with permission to build one house is worth only slighty more than a quarter-acre lot with permission to build one house, while in places like Ohio and Texas, the one-acre lot would be almost 4 times the price, because permission to subdivide it would be readily forthcoming.
Posted by: Anthony at Oct 9, 2008 11:14:52 AM
So if I follow the reasoning correctly, then during the tech crash of 2000-20002, the government should have found a way to prop up tech stock prices?
Posted by: Mercutio.Mont at Oct 9, 2008 11:36:10 AM
"Why are the comments on Obama "ill-considered"? Wouldn't raising taxes right now be a very bad idea? And isn't raising taxes a centerpiece of Obama's economic plans? Are people not allowed to criticize The One?"
Read and enlighten yourself:
http://online.wsj.com/article/SB122221857642269749.html
Posted by: meter at Oct 9, 2008 11:45:09 AM
"If you already built it, they will come" ??
Wishful thinking.
Ignore day-to-day or year-to-year volatility; considering the span of the next few decades as a whole, it is almost inevitable that the major economic growth in the world will have happened in places like Asia. So if you're an ambitious highly-skilled younger person making plans for the rest of your lifetime, which continent would you choose? America might be a multi-year pitstop at best.
There is actually no need to create demand for housing in the US; the demand is already there. Unfortunately, the prices, having gone so far out of whack, are still well above what most Americans can afford. Reversion to the mean will carry on for the next couple of years at least, either in nominal terms or in real terms after they finally give up and let inflation rip. There's no need for (and no benefit from) futile price-support schemes.
Posted by: anonymous at Oct 9, 2008 11:58:00 AM
FE,
So Clinton only raised taxes on the wealthy in 1993.
What alternate reality do you live in?
Posted by: cfpete at Oct 9, 2008 12:01:56 PM
"There is actually no need to create demand for housing in the US; the demand is already there. Unfortunately, the prices, having gone so far out of whack, are still well above what most Americans can afford."
Amen, brother.
I can afford to buy, but won't pull the trigger because the cost benefit analysis tells me that renting is a far better option. It's cheaper, having mobility is important, extra liquid assets are useful in an economic downturn, and I have no idea what my job situation will be. There are, I'm guessing, lots of others in the same boat.
Posted by: meter at Oct 9, 2008 12:33:41 PM
