Saturday, November 10, 2018

Housing: Part 329 - Construction Hiring

I happened upon an interesting post by Jason Smith at "Information Transfer Economics".  He suggests that a crackdown on immigration in 2006 was a causal factor in the housing bust and recession.  This echoes speculation from Scott Sumner.

I think there is something to what they both are saying.  There definitely has been a downshift in immigration, and as Smith points out, there was some anti-immigrant legislation passed in 2006.  But, I don't think there is much to it.  Smith tries to argue that this is a causal factor in the housing bust.  But, he's stretching quite a bit to come to that conclusion.  Here's the case he tries to build:
Again, this is speculative. However it is not implausible that the anti-immigrant sentiment of the mid-2000s ended the "housing bubble". Employers continued to look for workers in construction, but suddenly were unable to hire as many starting in 2006 due to declining immigration
That it "is not implausible" puts it on par with many other proposed causes of the crisis, and as with most of the others, that is probably the most you can say for it.  Smith points to construction-specific JOLTS data.
Source

When Mexican immigration slows in 2006, he notes that hires decline while openings remain strong.  But, those shifts are pretty minor.  There is some early decline in construction employment, relative to other employment but, as I have shown, the shifts in construction employment were mostly very late.  Here is JOLTS data for total employment:
Source

So, there is a small dip in construction hiring in 2006, and there is an earlier decline in construction employment growth in 2007 compared to total employment.  But, here we can see the late factors too.  First, the spike in layoffs in construction come after the September 2008 crisis.  And, hiring and quits decline in late 2008 and don't really recover.  Those measures for total employment are back to highs, but in construction, they remain basically where they were in 2008.

Even though Mexican immigration declined along with the bust, domestic migration also declined in the Contagion cities.  In Phoenix, for instance, migration from both the Closed Access cities and the rest of the country peaked in 2005 and continued to fall sharply through the crisis.  Domestic outmigration from Phoenix was increasing at the same time.  It seems more plausible that all of those trends in migration are due to declining sentiment, the end of the "inferior good" boom of Closed Access households moving away to lower costs, declining employment growth and production in general, the inability of Phoenix to meet housing demand during the migration event, and the eventual collapse in sentiment and demand that reduced the Closed Access tactical outmigration.  As with domestic migration, international migration seems like more an outcome than a cause here, though it may have played some small role.

Furthermore, housing starts were declining, and by 2006, homebuilders were facing many cancellations, leaving empty homes to sell.  It seems unlikely that by mid-2006 labor constraints in construction were the driving force in the collapsing markets.

One thing the decline in immigration might be a factor in explaining is how 12 month employment growth in Phoenix could have gone from 6% in 2005 down to 1.4% by August 2007, yet the unemployment rate dropped from 3.9% to 3.1% during that time.

Oddly, Smith is basically making a supply side argument here - that a lack of construction labor triggered the end of the housing boom, and even agrees that the debt crisis was more of an outcome than a cause of the contraction.  But, he dismisses my supply side explanation out of hand.  Scott's immigration story is more of a demand side story, that there are millions of households who would have needed homes today if immigration had continued at previous levels.  And, again, while that is a reasonable inference, it depends on the notion that the decline in construction activity was due to an oversupply of homes.  But, the decline in activity has been due to mortgage suppression.  There are many households who are "overconsuming" housing today because they live in homes they would not qualify to buy, and they would likely downsize if they had to be tenants in today's housing regime.  Certainly, if a few million additional immigrants had come here, there would be added pressure on rents, and it would have had some effect on construction markets.  The question is, given mortgage markets as they exist today, how much would that added demand just put more pressure on rent inflation and how much would it trigger new supply.  I suspect it would have done more of the former than the latter.  Especially in low tier markets, prices are still below replacement cost, so many markets, especially in entry level housing, need quite a bit more rent inflation before the price ceiling for new supply (discounted value of future rents) moves back above the price floor (construction costs). Mortgage suppression has created this outcome by raising the discount rate, lowering the value of future rents.

7 comments:

  1. Well, the word "plausible" certainly becomes elastic when applied to Jason Smith's reasoning regarding the post 2008 decline in house prices--which happened in many nations, not just the US.

    The immigration issue, unfortunately, excites passions, both in the sacralization of immigrants, and in xenophobia. Macroeconomists tend to be "pro-immigration" and thus look for negative effects of limiting immigration.

    I am not sure about Scott Sumner's longer-run view that an altered US immigration picture is affecting house prices now. Prices are topping out in regions that are very expensive, such as the West Coast and NYC. The illegal immigrants are no longer crowding into Manhattan or Bel-Air?

    xhttp://www.castle-avenue.com/foreign-buyer-guide-to-investing-in-new-york-property-2018-update.html

    This guy is a NYC Manhattan broker, and cites Chinese capital controls, and the US mortgage income tax deduction, for cooling off the high end.

    And this Fed study finds current-account trade deficits line up with house-price explosions, in many nations, not just the US.

    https://www.newyorkfed.org/medialibrary/media/research/staff_reports/sr541.pdf

    The IMF says US current-account trade deficits are fueling higher asset prices in the US, which I suppose include housing.

    https://www.imf.org/en/Publications/ESR/Issues/2018/07/19/2018-external-sector-report

    I think the "trade deficits are ballooning US asset prices" story will get short shrift in the US, as it is not the sort of take the US macroeconomic community likes. Especially now--free trade is sacred, and under attack. This story line will get suffocated, whether true or not

    I think the "real story" is mostly what you have said: Restricted housing supplies (property zoning) in the same cities where growth industries have located. Exacerbating this has been immigration and international capital inflows.

    Reducing immigration might play a minor role in cooling off house prices. But the US is building net about one million units a year. Housing is getting tighter as we speak.



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  2. Interesting thought: Scott Sumner seems open to the idea that levels of immigration could impact housing prices.

    Yet I suspect Scott Sumner would militate against the idea that China capital controls, or foreign capital inflows, could impact the price of US housing.

    Yet how do even physical immigrants express their demand for housing? Through money. They have to pay the rent.

    Suppose there is a supply of financial immigrants? They may only visit the US but they have purchased housing here.

    What makes the demand for housing from financial immigrants any more or any less important than the demand from physical immigrants? Both groups pay money for housing.

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  3. Reduction in construction labor reduces housing supply while increasing the cost of new houses and that's supposed to lead to a bust in housing prices? That's implausible in and of itself (ie, that could never explain any housing price bust let alone the one we had).

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  4. Add on: if we posit the reduction in illegal immigration resulted in a house price decline and even a "bust" around and after 2008, then we must also posit that illegal immigration caused the house price surge before 2008. And we must also except that financial immigrants will play a role in domestic house prices.

    In many ways this "immigration caused the house price explosion" argument holds water, as the supply of housing is notoriously rigid. More demand for a fixed supply.

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  5. - Nonsense. Contrary to common believe, the US already entered the "Great recession" in the first quarter of ........ 2005. And NOT - as the NBER proclaims - in november/december 2007. That's why reduced immigration can't be the cause of the recession.
    - Why the 1st quarter of 2005 ? Because then the growth (!!!) of credit started to shrink (slightly) and kept shrinking. Source: Steve Keen.

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