Recently read an interesting proposal by John Mauldin: use immigrants to prop up the housing market. After all, if housing is deflating because supply exceeds demand at current prices, we can avoid attempting to balance supply & demand via lower housing prices by increasing demand.
I’d read earlier proposals (*) along such lines, but Mauldin’s addressed many of the concerns I had about previous proposals. E.g.,
Relation of such a proposal to current immigration levels:
I am suggesting we transform the already existing legal immigrant flow, which is going to happen anyway, into a form which helps us solve a major crisis. I am not talking about adding another 1 million immigrants on top of the current legal inflow. Just change the nature of that inflow until the excess housing inventory is settled, and then we can go back to the current program, if that is what is wanted…I am not suggesting we bring in or condone illegal immigrants.
Qualifications of the immigrants in question:
Background checks and references should be required. […] The immigrant should demonstrate the ability to support himself and his family for a period of time (at least one year, preferably two), including the purchase of health insurance. Cash or letters of credit or other guaranteed commitments would be required. Only immediate family members (spouse and children) would be allowed to come with the immigrant. Cousins and siblings must buy their own homes. The permanent visa should be contingent on not having gone on welfare or public assistance at any time in the past five years. […] I would make an exception in having 100% financing for immigrants with advanced degrees or special skills, especially those who did their schooling in the United States.
Alas, even given of such details, I’m not sure I can support this. Which is annoying, since in good times I would probably favor it. But now, in a time of recession, during deflation of a massive housing bubble? I’m not so sure.
1. For one thing, while housing deflation certainly hits some homeowners (namely, those with negative equity, whose mortgages were either always unaffordable, or suddenly become so), it also benefits others (e.g., first-time homebuyers, or current homeowners with plenty of equity who are looking to move). I’m not so sure we ought to favor the former over the latter.
2. Then again, there’s also the stimulative effect of massive investment by immigrants in our economy. In a time of recession. Something to consider. OTOH, a “salutary effect on the value of the dollar”, resulting from the FDI attracted by this program, is exactly what we don’t need at present. The dollar needs to come down, IOT close our trade deficit & spur our exports. On the gripping hand, increasing exports also pressures the dollar upwards; and private-sector FDI is the type of foreign investment we should want to attract (as opposed to, say, hot money investments in highly-liquid securities).
3. Re. housing prices & toxic assets – methinks making the latter whole requires more than simply housing purchases at current prices (which is what this plan would entail). The credit quality of many of these assets was premised on zero housing deflation at the peak of the bubble (**). Unless housing prices rose back to such peak levels, methinks many of those toxics will remain toxic.
4. There’s also the (big) question of political feasibility. This could be political dynamite (in a bad way) for those who support it. The only upside to housing deflation is increased affordability for (mostly-American) homebuyers. Importing immigrants to prop up demand (and hence prices) would eliminate that upside, while swelling the labor force in a time of unemployment. Re. the latter, although sufficiently wealthy & skilled immigrants may indeed create jobs in the long term, unless they do so overnight (unlikely – any such effect would take years, as immigrants invested hereabouts, started new businesses, etc.), this plan will be perceived as basically contributing to unemployment.
The fact that we’re still currently allowing 1 million immigrants is irrelevant to the political feasibility of this proposal, IMHO. (Are we, BTW? I note that Mauldin’s only source for this stat is ’06 data.) The same political factors I mentioned above (rising unemployment in particular) make me wonder whether this flow is sustainable either – particularly in the country that executed the Mexican Repatriation back in the ’30s. On the best of days, American xenophobia remains latent, thanks to the Jacksonian tradition. Xenophobia plus sufficiently high unemployment isn’t a pretty sight.
I find this unfortunate, since I actually agree with Mauldin et al’s take on the potential long-term contributions of such immigrants to our economy & society.
1. Prohibiting rental of immigrant-purchased properties (as Mauldin suggests) would be key to propping up housing prices. Otherwise, the latter continue to fall as millions of immigrant-owned rentals deflate rents – thereby preventing the necessary adjustment of price-rent ratios down to (non-bubble) trend levels. However, I don’t see how feasible enforcement of this provision would be – are we going to inspect millions of immigrant-owned homes monthly, to ensure they’re owner-occupied? Perhaps we could rely on local neighbors to report violators, but this doesn’t work if 1) most of the homes in a neighborhood are immigrant-owned (as is likely to be the case in many “bubble” neighborhoods; and 2) if the immigrant owner makes clear to neighbors that the choice is not between owner-occupancy & renter occupancy, but rather between rental or vacancy.
Then again, this may be a moot point. AFAIK, foreigners are currently free to buy & rent out US-domiciled housing while they themselves remain domiciled abroad. So, presumably, this sort of program would attract aliens indeed interested in becoming owner-occupiers who reside on US soil. Even if such they didn’t live in the houses they bought, presumably they’d be living in a house somewhere in the US; as such, they’d still serve to prop up the overall US housing market.
2. Even if we were to do this, I’d prefer a more general investment requirement (not limited to housing). IMHO, we’ve historically overallocated resources to housing (and certainly in the last few years!). We’d be better off encouraging investment in (say) export industries, or energy independence, or infrastructure than in housing.
(**) See here (355 KB PDF), which notes that Fitch – the most conservative of the ratings agencies, didn’t even consider the possibility of sustained housing depreciation when rating CDO’s. Also here (2 MB PDF), which notes that the credit quality of subprime mortgages for homebuyers (and hence of RMBS based thereupon) was basically premised on perpetual housing appreciation.