🏠 Immigration and housing

Are incoming immigrants driving up home prices and rents? Vice presidential candidate JD Vance made that case in Tuesday's debate. Today, we look at the evidence. 🤔

Situational awareness: The Institute for Supply Management's service sector index rose to 54.9%, the highest in more than a year, as new orders surged. The employment sub-index was weak, however.

• Meanwhile, filings for unemployment increased by 6,000 to 225,000 last week, still historically low and reflecting modest layoffs.

Today's newsletter, edited by Kate Marino and copy edited by Katie Lewis, is 768 words, a 3-minute read.

With Americans groaning under the weight of high rents and home prices, the Republican vice presidential nominee sees a primary culprit: immigrants, who he says are pushing up housing costs. It's certainly a plausible story, but a more complicated one than Vance suggested.

The big picture: Some academic work points to immigration inflows increasing housing prices, and a top Federal Reserve official has raised the possibility that it is a factor at play in rising rents. But the recent home price surge's timing and geography don't align with a tidy immigration-driven story.

• Moreover, immigration simultaneously increases demand for housing and supply, because many immigrants become construction workers. That makes the long-term impact of immigration on housing more ambiguous.

Driving the news: "Twenty-five million illegal aliens competing with Americans for scarce homes is one of the most significant drivers of home prices in the country," Vance said in Tuesday night's debate.

State of play: There is no doubt that a surge of people entering the U.S. in the last two years — including both those entering the country illegally and those with various forms of legal status — increased demand for housing.

• "Given the current low inventory of affordable housing, the inflow of new immigrants to some geographic areas could result in upward pressure on rents, as additional housing supply may take time to materialize," Fed governor Michelle Bowman said in August.
• A 2007 paper by MIT professor Albert Saiz, then at the University of Pennsylvania, found that an inflow of immigrants of 1% of a city's population was associated with a 1% increase in average rents and housing values. A 2014 paper by three economists reached similar conclusions.

Yes, but: There is reason to doubt that immigration flows are the primary driver of housing unaffordability. For one, the timing does not line up — the steepest rises in rents and home prices came before the recent surge of immigration.

• According to Congressional Budget Office estimates, there were net immigration inflows of 1.17 million people in 2021, which is similar to the previous two decades' average. The rates then soared in 2022 and reached 3.3 million in 2023.
• Rents surged 12% in 2021, per CoreLogic, when immigration inflows were modest, then decelerated to 2.8% in 2023, when inflows were high. A similar story is evident with home purchase prices, which exploded in 2021 and grew more slowly (even dipping briefly) in 2022 and 2023.
• At a minimum, those patterns point to factors like long-term housing supply, pandemic-induced demand, and fiscal and monetary policies being bigger drivers of home prices than immigration flows.

Of note: Also pointing against immigration as a major cause of recent price increases, Ernie Tedeschi of the Yale Budget Lab did a back-of-the-envelope analysis that showed no meaningful correlation between the metro areas that saw the largest inflows of immigrants since 2019 and those with the largest home price gains.

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A central idea in macroeconomics — maybe the central idea — is that everyone is both a producer and a consumer. This is also important for understanding the economics of immigration.

Zoom out: Incoming migrants increase demand for housing. But they also will impact local economies in many other ways as they start working, paying taxes and shopping at local stores.

• There is evidence that America's persistently low housing supply may be fueled in part by a shortage of construction workers — in other words, work disproportionately done by immigrants in their role as producers, as opposed to consumers.

Zoom in: "Housing supply in the United States has been starkly lower than average for most of the past two decades," write economists Troup Howard, Mengqi Wang and Dayin Zhang in a paper published earlier this year.

• The paper finds evidence that construction labor shortages have been a significant factor. By analyzing the staggered rollout of more aggressive immigration law enforcement, the researchers find that deportations contributed to those labor shortages.
• Employment in the residential construction industry, 951,000 in August, remains well below its 2006 levels of above 1 million, per Labor Department data.

Between the lines: It can both be true that immigration inflows raise housing costs in the near term due to higher demand, and that they help moderate them in the long term by contributing to supply.

• The details may depend, in any given locality, on whether the supply of construction labor or local zoning laws is the binding factor in building new housing.

The bottom line: Economics is complicated. The first-order, simple analysis of how X affects Y rarely captures the whole picture. And with the economics of immigration, that is particularly true.

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