Housing: 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.

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:

 

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.