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. 


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:

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.

How about expanding Optional Practical Training (post-degree visaless work permit) from one year to three?

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?

Illegal residents but responsible homeowners,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.

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.

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

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?

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.

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.

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 . . . .

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?

"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.

"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.

One thing we clearly don't need is more unskilled immigrants, legal or not, qualifying for welfare, food stamps, Medicaid, etc., etc. getting mortgages based on welfare payments and sending money back to their home country while whining to the government to bail them out of their ridiculous mortgages. That LA Times story has been widely debunked.

As someone who is a first time homebuyer who might be on the market soon, I think it is great that housing prices are low! There is no right to having the value of your house appreciate every year.

I know that Alex is arguing that stabilizing home prices would help stabilize the current financial crisis. It is just annoying how most people (who already own a house) think that falling housing prices are the end of the world without considering how much this helps relatively poor first-time home buyers.

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?

A bit off topic, but:

What about the argument that the successful capitalists and people with high-demand skills don't really pay taxes, in terms of giving up a real share of the goods and services they would have consumed? They simply raise the price of their goods and services to account for the increased taxes, and the tax burden gets passed on to folks lower on the economic food chain - Hence, no economic collapse during Reagan and Clinton years, simply increased poverty/misery for lowest rungs of the working class.

Some people might argue that there is no such thing as taxing the rich unless you are rationing the goods and services that they consume. That is completely aside from the more conventional argument that by taking a bigger slice of pie from the rich you are shrinking the pie.

And more on topic:

But, are there jobs waiting for these new immigrants?

The idea is that immigrants create jobs... they need homes, cars, food, medical treatment, etc., and create demand for it.

And in many U.S. inner cities, it seems like the only prosperous and thriving neighborhoods you find are in fact full of immigrants.

We can only hope that if Obama is elected he will ignore what he has said he will do. How will increased tariffs help, increased corporate taxes (at a time company are dealing with credit problems and higher material costs), increased mandates (really helped the auto industry), increased regulation of the Democratic kind (experiments in social enginering). etc.

President Clinton was lucky that falling oil prices offset much of his tax increases. Plus Clinton is much more conservative then Obama.

President Reagan had a decrease in regulation and less complexity in the tax code to spur growth (how you write the tax codes matter as much as the tax rates).

Immigration will not solve the affordability issue. Until homes come in line with historical norms, we will not see a bottom. Unless you think these immigrants will be bringing suitcases full of gold.

More immigration? That's what a drunk calls a hair of the dog that bit him cure for his hangover.

Haven't you noticed that 50% of the defaults (and probably about 75% of the dollar value of the defaults) are in just four states, all with huge numbers of Hispanic immigrants: California, Nevada, Arizona, and Florida.

That's not a coincidence.

Why not auction immigrations slots to the highest bidder?

I like the idea of increasing immigration as a way of increasing demand for housing to support housing prices. If immigration policy favors prime-age workers, it could also put off the day of reckoning for Social Security imbalances.

Moreover, if immigration policy favors health care professionals (doctors, nurses, etc.), they could help provide the growing number of health care providers that will be needed to deal with universal health care provision, not to mention a growing elderly population on Medicare.

(As I understand it, Massachusetts' move to compulsory health insurance for all has succeeded in increasing the number of people who are covered, but this has resulted in places where there are long waits for medical appointments.)

I went to graduate school at the University of Chicago, and almost half of my classmates were from foreign countries (India, China, Peru, Brazil, Argentina, and Europe). I would say most of the decamped to either Asia (Hong Kong, Shanghai, etc.) or Europe (London), and many who chose to stay in the US were unable to get visas past their initial one year of OPT. I'm talking about alumni from the World Bank, McKinsey, Goldman, etc. - really top tier folks. Missing out on the H1B lottery literally turned their lives upside down. Then, it takes many years at one employer and tons of paperwork to get a green card. Staying in one place is not feasible given the volatility of today's economy. Getting laid off on an H1B means you have to exit the country IMMEDIATELY. How can anyone expect to have a strong and stable career and family under these conditions??? Many had to move their families for a year of work and then relocate AGAIN back to their home countries, or places where immigration was much easier. This is also common in the engineering/science disciplines where 1/2 are from out of country.

The immigration policy in the US is draconian and outdated, and the politicians don't do anything about it. Too much pressure from anti-immigrant groups. Well look where this has landed us. Crappy, overpriced talent, and a weak economy. The US succeeded for a long time since the best and brightest came here to build a future. Now, we say "You're not welcome here", even though many of the most successful people in society moved here from abroad. Immigrants have a deep drive and desire to succeed and we throw them out of the country. We need to extend OPT, and make permanent residency easy to get with no employer sponsorship for students at top graduate programs. The UK did this and it has reinvigorated their economy. As far as I'm concerned, the immigration issue is just one more sign that America's best days are well in the past - the empire is crumbling, write your congressional representative!

Let me second (third? fourth?) it: to hell with propping up house prices. As a young working man who can't afford a home, I have little sympathy for those who want their values to perpetually rise. If prices fall, what's the worst that can happen--you have to live in the home you own instead of trading up again? Boo-hoo.


It's time for your shift at the wall. I'll supply the beef jerky.

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