The Housing Crisis and Illegal Immigration
By blackhedd Posted in Economy | housing | illegal immigration | unemployment — Comments (20) / Email this page » / Leave a comment »
Submitted for your consideration: is the weakness in the housing/construction industries reducing illegal immigration?
This is a connection I haven't seen anyone else make. Instead, the question people are asking is: why isn't unemployment a whole lot worse than it is?
The recently-departed US bubble in residential and commercial real-estate prices understandably touched off a huge boom in overbuilding in many regions of the country. And this activity created a lot of (real) economic activity and growth, just as the Internet bubble did ten years ago.
But now that the construction boom has departed along with real-estate overvaluations, what has happened to the employment picture?
To the great consternation of many in the business-journalism trade, the received narrative ("lower home values leads to lower consumer spending leads to job losses leads to recession") isn't showing up in any of the government statistics on the economy.
US employment and wage growth are just about as robust as they were before this year's momentous (and continuing) global financial disorders. Consumer spending does appear ready to take a dip according to some leading indicators, but this has not yet been confirmed.
So who felt the pain when the construction industry fell comatose onto the floor?
Maybe it was the armies of illegal immigrants who put up the sheetrock and do the roofing in nearly every region of the country. And the legions of small businesses (like restaurants, landlords and check-cashers) that cater to them.
And since the government's various employment surveys (some of which are based on household interviews and some on the hiring plans of large companies) probably don't measure too much of the illegal labor market, they may be missing a large effect.
And it's not just black markets that government agencies aren't that good at measuring. There's a good case to be made that the key measurements on which we base all kinds of policy-making (from consumer-price inflation to the activity of small service-sector businesses to labor productivity itself) are outdated and far from accurate.
If I'm on the right track here, the effect is going to show up in the finances of the entities that are directly exposed to everyday economic activity: state and local governments. (The Federal government is funded much more by income taxes.)
Keep your eyes on tax collections by states, cities and counties, particularly sales taxes, and particularly in areas like south-west Florida that were most affected by the housing bubble. If we start seeing an unexpected amount of distress in municipal and local finance, that's the clue.
So what do you think of this theory?
If you live in a border state or a region that is heavily dependent on illegal labor, are you seeing any evidence or anecdotes of reductions in the number of border-crossings? Are underemployed illegals starting to pack up and go back to Mexico or wherever they came from?
As I said in the OP, it'll show up in the public finance of localities most affected by the boom and bust.
If it's a real effect, it'll also show up quite reliably in a reduction of political pressure to "do something" about illegal immigrants. If there aren't as many of them, anti-immigrants won't howl as much.
You say it won't be easy to prove my hypothesis via statistics (and implicitly prefer a hypothesis of your own that is theoretically more measurable).
But a big part of my point is that statistics are probably close to worthless in the first place.
LA Times has a front page story on this very issue today.
http://www.latimes.com/la-fi-migrate26dec26,0,940088.story?coll=la-home-...
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Proud member of the Barry Goldwater wing of the party !
I live in central Florida, and I can tell you that you are partially correct. The house slow down (not bust) has hurt illegal aliens without question. I know, my house was built (I believe by illegal aliens. (Not that I had anything to do with it, the builder hired who he hired). But all you had to do was look at every development and you could see most of the workers were more than likely illegal aliens.
While I don't know if you meant to say this, but the housing bust is over blown. Especially her in Florida. Yes, there are some fire sales, but most are holding their price. In the mean while 1,000 people per day are moving to Florida, and should soon increase as more baby boomers retire and Europeans come over for bargains (thanks to low dollar). What has been hard hit (and should have been) are condominiums. They were well over priced. Two bedroom apartment condominiums were sold for 800,000 when they were worth no more than 400,000. (This is in South East Florida). It turned out to be a scam. An investor would buy the condo for 400,000 and then resale it to a partner (sucker) for 800,000. They would split the profit and the buyer was stuck holding the bag. The Condo get reposed and the parties split town.
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American First, Conservative Second, Republican Third
There's the huge boom in construction. That's now over in many parts of the country (but not in New York City, where I live). And that's what I was exploring in terms of its impact on illegal immigration, in both its economic and political dimensions.
The bust in home values is another one. In case you were saying that its effects on larger economic effects like consumer spending is overblown, you're 100% right. This upsets the conventional wisdom in regard to the drivers for the coming recession (if one is indeed coming).
There's also the mortgage bust. I'm extremely interested in this one. We're going through a time of tremendous strength in the government-bond sector. In the past, this generally has coincided with waves of refinancings as non-government bond markets adjust upward.
While we know about the problems in subprime and ARM sectors, I haven't been able to collect any convincing skinny on the vast majority of the mortgage market that is healthy. As far as I can tell, the pace of "normal" refinancings to capture lower rates is fairly strong.
That would contradict my own prediction from looking at the rest of the bond market, which is flat on its back and barely breathing.
I live in the greater Phoenix, AZ area which is both (1) a high population center for Mexican (most of them undocumented/illegal) immigrants and (2) one of the two or three real estate markets in the country most affected by the bubble.
Here is a bit of anecdotal evidence. There is a particular corner I run by every morning and a year and a half or two years ago there were, literally, every morning a hundred or more Mexican day laborers waiting to be picked up for work. Now there are only a small handful and some mornings there aren't any. I also do some volunteer work within the immigrant (mostly Mexican) community and I've heard several stories of people who, for lack of work, are either returning to Mexico or moving on to a different state.
The only bit I'd take issue with in your blog is the suggestion that the real estate bubble has already departed. I think that we've only begun to feel the affects. Unless the democratic congress and the president (I have no idea what party he actually belongs to) can manage to legislate away the law of supply and demand, housing prices have a looonnnggg way to fall before things stabalize.
This is an open question, the answer to which I've never been able to find. I know that the capital losses when the tech bubble burst were in the neighborhood of $5 trillion, but if housing prices were to revert to, say, January 2003 levels, what would be the corresponding loss of capital?
-exits
I don't agree on the bubble. But of course it depends where you live. If you are in the North East, then it has a long way to go. Same for parts of California. But in Arizona, (same as in Florida) your about to see an Army of Retire's flocking south. So unless your house has gone through the roof (compared to North Eastern Houses), you will see at least a flat line and maybe a growth. Of course, I don't know much about the Arizona Market, but I am keeping a close eye on the Florida Market and here is what I am seeing.
Most owners are holding onto their homes instead of selling them for a lose. Some flippers are having fire sales as well as those who shouldn't have bought the house in the first place. In the mean time, Home builders have gone under, which means less homes are being built. So depending on how many people are moving in or out of your state will determine what happens to home prices.
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American First, Conservative Second, Republican Third
...a powerful residue of underpriced assets ripe for the taking.
The guys who overbuilt residences in the hot neighborhoods of Florida and Arizona are getting slaughtered (not least from the losses on the value of the raw land that they overpurchased).
If you're in the market for a house, try to buy from them, because they have to sell, and they will.
On the other hand, homeowners who overpaid are going to stay put in order to avoid taking a loss. (Yes, this is economically irrational, but not everyone knows how to be a trader.) That suggests that the number of transactions for existing homes will be relatively low.
It also suggests that home valuations are already far, far below where everyone thinks they are, and the market will just stay frozen in place. But again, the macroeconomic effects of this are overrated.
Happens every time.
But again, the macroeconomic effects of this are overrated.
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American First, Conservative Second, Republican Third
The transaction costs to trade a house are enormous. There also is the requirement to replace it.
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"Those who expect to reap the blessings of freedom must, like men, undergo the fatigue of supporting it."
-Thomas Paine: The American Crisis, No. 4, 1777
This is true.
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American First, Conservative Second, Republican Third
I know the transaction costs (about 600 basis points) are high. (The only common transaction I can think of that's more expensive is an IPO, at 700 BPs.)
But that's true in good times as well as bad. As for needing to move into another house, its value is going to be just as low (relative to the recent past) as the one you're selling.
It would be possibly more convincing if you had said that executing the financing is a big challenge. But in the prime, non-jumbo sectors (most of the market), I've seen no real-world evidence to convince me that this is true.
1. 600 basis points is to the realtor alone it is hardly the whole of the transaction cost. Rather its just the beginning
2. There is the matter of moving. I don't know how bad it is for you but for me its pretty significant. The monetary costs being the least of the problems.
3. On the subject of financing there are upfront fees involved in obtaining a new mortgae which can be added to the initial 6% cost.
4. Depending on what state you live in, you may find yourself with an enormously larger tax bill.
So yes unless you are willing to adopt houseflipping as a lifestyle, the idea of trading their domicile doesn't work for most people. The comparison between trading an option or otherwise fungible security just isn't valid.
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"Those who expect to reap the blessings of freedom must, like men, undergo the fatigue of supporting it."
-Thomas Paine: The American Crisis, No. 4, 1777
You're making a very familiar case, but we already knew that housing is illiquid. What you're not doing is telling me why the market is more or less illiquid now that a larger-than-normal proportion of homeowners purchased their current homes for more than the homes are now worth.
My point, which you didn't explicitly disagree with, is that people in such a circumstance tend not to accept offers that would cause them to lose money on their homes. As long as they can continue to service their mortgages, they'll often stay put and "wait for the market to come back," which it may or may not do.
This reduces transaction volume and masks the true extent of the decline in housing values.
I was addressing the portion of the comment about it not being economically rational to try and sell and avoid riding the decline.
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"Those who expect to reap the blessings of freedom must, like men, undergo the fatigue of supporting it."
-Thomas Paine: The American Crisis, No. 4, 1777
That should read
economically rational to ride out the decline. Rather than sell and try to avoid the decline.
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"Those who expect to reap the blessings of freedom must, like men, undergo the fatigue of supporting it."
-Thomas Paine: The American Crisis, No. 4, 1777
You are stating that you do not see any effect from the mortgage crisis on AAA/Prime paper/housing prices. You will, as time goes by. For example, take a look at the MBS/SIVs that Etrade Financial just dumped for pennies on the dollar. It was all prime. It's getting scarier out there. My house is down 29% in 16 months. I know national data puts the off-peak drop at under 10%, but the statistics are miserably inaccurate, even compared to our labor stats. Not included are the myriad remodellings done around the country that would cause one to expect higher values without any increase in the baseline value of said original property. Just food for though.
Why is there a requirement to replace? What's wrong with renting?
-exits
And you usually have to have a binding lease.
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"Those who expect to reap the blessings of freedom must, like men, undergo the fatigue of supporting it."
-Thomas Paine: The American Crisis, No. 4, 1777
on bls.gov that relates to the discussion:
"Are undocumented immigrants counted in the surveys?
Neither the establishment nor household survey is designed to identify the legal status of workers. Thus, while it is likely that both surveys include at least some undocumented immigrants, it is not possible to determine how many
are counted in either survey. The household survey does include questions about whether respondents were born outside the United States. Data from these questions show that foreign-born workers accounted for about 15 percent of the
labor force in 2006 and about 47 percent of the net increase in the labor force from 2000 to 2006."
link to where I found it:
http://www.bls.gov/news.release/empsit.faq.htm
Unemployment figures are estimated by conducting monthly surveys of approximately 60,000 households. The data is then given "the business" by experts and reported via media outlets to you and me.
I don't think the government figures account for all the undocumented workers, but they do include some.
I find it hard to believe that the majority of "illegals" would return to thier home country after losing a job. Wouldn't YOU rather switch careers (at least temporarily) rather than leave altogether? We won't see voluntary deportation become significant until either the economy gets REALLY BAD, or serious sanctions are placed on employers who hire illegals.
There are many people still unconvinced that we will see a recession in 2008. I am not one of them. The housing bubble is however not going to be the cause, but rather a symptom of a larger problem.
If you would like a real hot potato to toss around, why not discuss the potential failure of "monoline" insurers that are being used by the five largest US financials to hedge their risk from off balance sheet SIV/CDO losses? Bush is already calling for full disclosure of any exposure. If losses materialize, and the safety net evaporates, look for some big names to be scrambling to remain solvent.
I don't know what sort of statistics one could find to measure this. In other words, while you may be right, I am not sure how you would go about proving it.
I would say a few things. The first is that one industry doesn't necessarily drive the economy. Thus, while the housing bust is certainly not good for the economy as a whole, I don't see why it would necessarily spill over elsewhere. Personally, I have always been leerie of looking at one industry and drawing macro conclusions. In other words, you maybe right that housing nailed illegals or maybe housing only nailed housing and the rest of the economy is doing fine.
I have personally been quite skeptical of the doom and gloom being drawn on the economy as a result of housing. First, I think that the bust will create new industries and prop up others. I think plenty of entrepeneurs will take advantage of the plethora of foreclosures and make money buying those properties. If I am right, the housing bust won't necessarily spill into other areas.
In conclusion, I think your theory is interesting. I don't know how you would go about proving it, and ultimately I have an alternate theory that I think would be easier to prove.
Also, the fed weighed in on the mortgage mess and their plan is no better than any other, and here is how I wrote about it.
The Provocateur