Anyone who thought the housing market couldn't get any hotter received a surprise on Nov. 25, when the National Association of Realtors reported existing home sales had risen 6.1% in October, while the national median existing home price shot up 9.8% from October, 2001. That was the largest yearly price gain since July, 1987. The next day, government figures showed that new home sales had slipped a bit in October, but were still at a blistering pace of more than 1 million units sold.
So where are all these buyers coming from? With the economy still weak, consumer spending sluggish, and personal-income growth stalled, the anecdotal evidence suggests that just about everyone who can afford to buy a house already has. Since housing remains a linchpin of economic growth, economists and homeowners alike are trying to determine where the next round of new first-time home buyers are going to come from.
Part of the answer lies an overlooked factor: immigration. The phenomenon isn't even mentioned in recent releases on October's housing data. But Federal Reserve Chairman Alan Greenspan is well aware of its impact. He told Congress on Nov. 13, "The underlying demand for new housing units has received support from an expanding population, in part resulting from high levels of immigration."
RISING WAVE. In fact, say experts, an explosion of immigrants into the U.S. in the late 1980s and early 1990s is having the most impact on the housing market. That's because it takes an average of 10 years to 11 years from when a family arrives in the U.S until it has saved enough to purchase a home, explains Rachel Drew, a research analyst for the Joint Center for Housing Studies (JCHS) at Harvard University.
Almost 9.1 million people -- the vast majority from Latin America and Asia -- entered the U.S. legally between 1991-2000, vs. 7.3 million from 1981-90, and 4.5 million from 1971-80, according to the Census Bureau. In fact, about 75% of all population growth in the U.S. is attributable to immigration, says Steve Camarota, an analyst for the Center for Immigration Studies. "As the new immigrants that arrived during the 1990s enter their prime phase for becoming new homeowners, the impact will play a vital role in supporting the housing market," Drew predicts.
According to Drew, foreign-born households comprise only 8% of total homeowners in the U.S., but they account for 10% of national housing wealth and 14% of recent first-time homebuyers. Drew estimates that 20% to 33% of the 25 million new households created in the next 20 years will be comprised of immigrants.
URBAN CLUSTERS. What sets foreign-born workers apart from U.S. natives in pursuing home ownership? Truth is, this wave was no richer or better off than other recent influxes, according to experts. Some economists believe immigrants associate buying a home with achieving the American Dream. Immigrants tend to save more of their money than native-born workers -- and they put away savings with the singular purpose of building enough wealth for a downpayment on a home, says Drew. In fact, children of immigrant parents have a slightly higher home-ownership rate than children of native-born parents, according to a study by Harvard's JCHS.
Immigration seems to be playing a particularly strong role in the housing boom around major cities. Immigrant families tend to cluster in densely populated areas where jobs are plentiful. But a combination of limited developable space and tough zoning rules has prevented the supply of housing from keeping pace with job creation in big cities. "The lack of supply has put upward pressure on home prices nationwide," says John Lonski, senior economist at Moody's Investors Service.
New York, Southern California, and South Florida have taken the largest share of new immigrants, but many more cities and their suburbs have experienced a rapidly growing housing market due to immigration, says Robert Reid, executive director of the National Housing Conference. Moreover, a larger share of foreign-born, first-time homebuyers are purchasing more expensive homes than native-born, first-time buyers, most likely because they are buying property in densely populated cities and suburbs, Harvard's study found. "If you invest in real estate, the immigrant wave should create more value for your property," says Camarota.
INCOME GAP. There are plenty of challenges ahead for the housing industry, immigrant wave or no immigrant wave. The economy could weaken from here if corporations remain in cost-cutting mode, unemployment rises, and consumers retrench. Economic malaise is always hardest on lower-income segments of the population. And, according to George Borjas, an immigration economist at Harvard, a large gap exists in wages, skills, and education between immigrant and native-born workers that could widen further. Overall, the average immigrant worker earned 23% less in 1998 than American-born workers, Borjas says.
Moreover, people in lower income brackets (not just immigrants) are spending a larger percentage of their total income on housing costs, according to a recent study by the National Housing Conference. While immigrants made major strides during the boom years of the 1990s, some of them may not be able to hold onto their homes if the economic recovery loses steam.
In the near term, however, a continuing influx in immigration could bolster demand for homes while continuing to put pressure on supply. While this may not prevent an eventual correction of the housing market, it could help keep home sales brisk for several more years. By David Shook in New York