It is looking more likely that the comprehensive immigration bill the Senate passed last month will end up stalling in the GOP-controlled House. Although Republican partisans probably don't realize it, killing immigration reform could do serious collateral damage to the housing recovery.
Most economists believe that bringing 11 million undocumented immigrants out of the shadows would be a boon to the economy, and boost tax revenues in the bargain. It could also put as many as three million legalized immigrants in the market for a home, according to the National Association of Hispanic Real Estate Professionals.
The housing market has seen such a sharp and furious rebound in the last year that many experts are now wondering if we are repeating the crazy go–go days of 2007. That's not likely with rates still at historic lows thanks to the Federal Reserve. We could see some corrections, but nothing like the sickening 30 to 40 percent plunge housing prices took when the bubble burst last time.
One troubling sign, however, is the dearth of first–time homebuyers. In normal times, first–time homebuyers account for about 40 percent of new home sales. In May, that number fell to just 28 percent, down from 36 percent two years ago. The decline was due to cash–heavy investors, a tepid job recovery and tighter credit. That number won't sustain growth in housing.
Whether the decline proves to be a reflection on current market conditions or a true paradigm shift away from homeownership remains to be seen. But if there aren't enough first-time buyers to buy starter homes from others, current homebuyers can't move up to more expensive homes, and the homeownership ladder starts to calcify. Three million new homebuyers would change the calculus substantially.
NAHREP estimates that over a five–year period, three million newly legalized immigrants would pursue homeownership. The economic impact of the buyer influx? $500 billion in home purchases and new mortgages, not to mention more than $180 billion in downstream activity associated with buying a house.
These factors are extremely relevant when you look at the housing market, which accounts for 20 percent of our GDP. Investors with deep pockets are squeezing out potential buyers right now. But that won't last forever. As home prices rise and rates increase, the opportunities for juicy returns start to diminish.
Credit will also prove to be more expensive, not just from rising rates, but also from reforms Congress is mulling for the Federal Housing Authority. As a result, down payments will increase and rates will rise on first-time homebuyers in the lower-income community.
Then there is the uncertain fate of the mortgage companies in federal conservatorship, Fannie Mae and Freddie Mac. The two mortgage giants provide the bulk of middle-class credit in the country, and Congress seems in no hurry to decide their future.
Of course, the core issues in immigration reform are the rule of law and the fate of illegal immigrants embedded in the U.S. economy. Still, lawmakers shouldn't be oblivious to the economic implications of the choices they make – or fail to make – in revamping immigration laws. An influx of new citizens means new homebuyers, and they could help bring stability to our volatile housing markets.
Jason R. Gold is director of the Progressive Policy Institute's "Rebuilding Middle Class Wealth Project" and senior fellow for financial services policy. Keep up with his work at PPI here and follow him on Twitter at @PPI_JGold.