Mortgage Meltdown -- Housing Inflation - Immigration

I've brought up some thoughts and data in postings here linking the causes of the
mortgage-meltdown to excessive immigration. Our government is in complete immigration denial and the two topics, housing and immigration, are never uttered in the same breath.

Raising the stakes in the financial debate would be the linking of mass-immigration to housing inflation and the ensuing mortgage meltdown. Linking these topics is not a hard thing to do. The final stages of desperation, is the importation of highly skilled labor -- the H-1B and L-1 visa -- these are mercenary workers who are most likely to displace a wage-earner with a performing mortgage.

The first step for curing the disease of mass-immigration is admitting you have a problem. In the decades leading up to the Great Depression, the economy was also "shocked" with mass-immigration.

Pre Great Depression Immigration rates:
1821-1830 143,439 immigrants arrive.
1831-1840 599,125 immigrants arrive.
1841-1850 1,713,251 immigrants arrive.
1851-1860 2,598,214 immigrants arrive.
1861-1870 2,314,825 immigrants arrive.
1871-1880 2,812,191 immigrants arrive.
1881-1890 5,246,613 immigrants arrive.
1891-1900 3,687,564 immigrants arrive.

Pre 1900 Total 19,115,132 (80 years)


1901-1910 8,795,386 immigrants arrive.
1911-1920 5,735,811 immigrants arrive.
1921-1930 4,107,209 immigrants arrive.
1931-1940 532,431 immigrants arrive.

Post 1900 Total 19,170,840 (40 years)

http://ocp.hul.harvard.edu/immigration/dates.html


To illustrate how important housing is to the economy, home ownership rates declined only 4.2% during the Great Depression (47.8% in 1930, to 43.6% in 1940).
http://www.census.gov/hhes/www/housing/census/historic/owner.html

Currently, home ownership rates have already declined 1.7% in 4 years, (69.2% 4th Qtr. 2004, to 67.5% in the 4th Qtr. 2008).
http://www.census.gov/hhes/www/housing/hvs/historic/files/histtab14.xls


Next we look at the housing availability in recent times.

Percent Change in House Prices Period Ended June 30, 2007
(United States) Since 1980 = 309.4%
http://www.ofheo.gov/media/pdf/2q07hpi.pdf


Then, we have the tiny Rental Housing growth compared to growth in the labor force.
1993 through 2007

Growth Rental Housing (Occupied Plus Vacant for rent) = 1,002,000
BLS Growth Civ NonInstitutionalized Labor Force (16 and over) = 39,372,000
http://www.census.gov/hhes/www/housing/hvs/historic/files/histtab7.xls

Our immigration policy has tried to cram 39 people (immigrants and our children) into each new rental housing unit in 15 a year period -- it is no wonder the housing market hyper-inflated. The flattening of wages and the ever declining population of wage-earners who could qualify for a traditional Prime mortgage caused the banking industry to create EZ and No-Doc loans out of self-preservation -- these mortgages were repackages and sold to unsuspecting foreigners -- they didn't become toxic assets, they were always toxic, the banks refused to hold them.

Housing data from Harvard displays the decline of the qualified mortgage customers.

Data from: Table A-1. Income and Housing Costs, US Totals: 1975-2007
In 2007 Dollars.

Increase Home Owner income = 13%
Increase in Home Price = 74%

Even with lower interest rates, the after tax mortgage payment is 49% higher than 1975.

Increase in renter income = (-3%)
Increase in Renter cost gross rent = 10%

http://www.jchs.harvard.edu/publications/markets/son2008/son2008_appendix_tables.xls

The solution:

The key is to present a solution that make financial sense, especially to banks and investors, taking into account ALL of the causes of the problem.

First, control immigration and reduce the numbers of new immigrants until "dryfoot" illegal immigrants and guest-workers can be investigated and brought into some sort of naturalized status -- frauds and criminals deported. The honorable migrants already have jobs and housing and cannot damage the economy as much as newly arriving immigrants who shock the economy with wage declines.

Second, "Nationalism" of banks and creation of a "Bad Bank" to hold toxic assets are both incorrect terminology. In the Insurance Industry, a temporary "nationalization" is called a Conservation and the "Bad Bank" is called a Trust.

The so called Toxic Assets have not matured yet, even if though some are in default. MBS and CDO investments are largely long term investments and the capital is only lost when the asset is liquidated in a foreclosure sale.

If we are to allow a Conservation of these MBS/CDO investments, to conserve the paper value of the capital investment, we need time for the assets to recover in value. Nationalization and bailouts are undesirable. A Conservation is a favor to the investor and the banker, the rules are suspended to preserve the paper capital, but in return for this favor they must agree to our terms. The alternative is that we can simply allow Mark to Market rules devalue the paper value of the capital investment.

The liquidity problem is the absence of the circulation of currency, with this in mind, mortgage workouts and cramdowns should be negotiated to the traditional 30% income level. Lender who wish to remain predatory mortgage providers should be punished, unprotected in the open market. In the case that the house is foreclosed, and standing empty, it must be introduced into the rental housing market to generate dividends for the MBS/CDO investor and property taxes paid. The homes must be occupied and productive to be included in the Conservation.

The circulation of currency is the key to our fractional reserve banking system, we must somehow generate currency flow in order to put the 1 to 9 leveraged lending rations back to work.

There were 35,147,000 renters in the U.S. in 2007. Flooding the rental housing market with currently vacant homes would reduce the housing costs of renters. A $200.00 savings in rental cost per renter would inject $7,029,400,000.00 per month of disposable income into the consumer markets without a wage increase. Some of the $7 billion monthly would circulate through the banks and improve lending reserves at the $1 to $9 fractional reserve leveraged rate. Theoretically, this $7 billion could be leveraged to $63 billion per month.

Similarly, cramdowns will also generate billions of dollars in disposable income and stimulate our fractional reserve lending system by the circulation of currency. Stable housing costs will stabilize labor costs -- the temptation to move overseas will be reduced -- keeping housing costs affordable in the U.S. is the key to global competitiveness.

Final note:
I suspect that both the immigration oversubscription and the property valuation problem will take about a decade to recover. The MBS/CDO investors are going to have to be patient if they want to preserve their capital. If we publicly provide a comprehensive solution that addresses immigration, I think they will be patient.

Housing foreclosures & Immigration

Some people have a hard time comprehending that immigration levels and the housing crisis are related. After all, immigrants do not come here in motor homes. Some immigration is necessary in an expanding economy, but immigration becomes excessive when adequate housing and employment opportunities (sustenance) are not being created, or employment is being outsourced overseas.

Total BLS employed reached 145,583,000 in Nov. 2006 and is 145,891,000 for June 2008. Employment has grown by 308,000 while the Civilian Labor Force Level grew by 1,987,000 during this period.

Most new immigrants initially become renters, increased rental housing demand is caused by immigration, this demand forces more established residents into dubious mortgages on hyper-inflated housing. Wages also languish during periods of oversupply of (immigrant plus domestic) labor and cannot maintain the pace of hyper-inflating real-estate.

In Table 1, I've used DHS supplied data for Legal Permanent Resident awards as a proxy for immigration levels per State (includes District of Columbia.) Table 1 compares the immigration levels with the number of RealtyTrac housing foreclosure filings for March 2008. I've added columns for foreclosure rankings and immigration rankings on a State by State basis.

Table 1 shows that the States with higher "immigration rankings" in most cases also have higher foreclosure (filing) rankings.

Table 1 (click on image to enlarge)






RealtyTrac housing foreclosure filings data also includes a 1 to (number of households) ratio for each State. Using this data, I created Table 2. Table 2, compares the lowest foreclosure ratings (ratio foreclosure filings to number of units) to the States with lowest immigration levels.

Table 2 (click on image to enlarge)


It is obvious to me that America's immigration policy has created a housing market where most would borrow against their homes (even before purchasing) instead of creating employment opportunities where borrowing against one's home would be a last resort.
The sub-prime bubble burst (investors pulled the plug) at about the same time the Comprehensive Immigration Reform legislation was defeated.
Comprehensive Immigration Reform Act of 2006
The sponsor of the Bill, Senator Arlen Specter, introduced it on April 7, 2006. It was passed on May 25, 2006, by a vote of 62-36. Cloture was invoked, which limited debate to a 30 hour period. The parallel House Bill H.R. 4437 would have dealt with immigration differently. Neither bill became law because they failed to pass the conference committee. The end of the 109th Congress (January 3, 2007) marked the death of both bills.
Comprehensive Immigration Reform Act of 2007
The bill [Comprehensive Immigration Reform] also received heated criticism from both sides of the immigration debate. The bill was introduced in the United States Senate on May 9, 2007, but was never voted on, though a series of votes on amendments and cloture took place. The last vote on cloture, on June 7, 2007, 11:59 AM, failed 34-61 effectively ending the bill's chances. A related bill S. 1639, on June 28, 2007, 11:04 AM, also failed 46-53.
Subprime mortgage industry collapse
"In March 2007, the United States' subprime mortgage industry collapsed..."




Data:
Foreclosures by State:
http://www.usatoday.com/money/economy/housing/2008-04-15-foreclosure-filings-march_N.htm#chart
Yearbook of Immigration Statistics: 2007
http://www.dhs.gov/xlibrary/assets/statistics/yearbook/2007/table04.xls

Excessive immigration and the sub-prime meltdown

Note: This post addresses Immigration Policy in the U.S., this is not a piece to scapegoat the immigrant. This post attempts to go beyond the social-cost and wage depression statistics to evaluate the basic supply and demand involved with nomadic worker's effect on home-equity. Equity of the common man is eventually destroyed on both sides of the excessive immigration equation. The nomadic worker forgoes home equity to undercut the earning power of the established worker, neither worker is then capable of servicing a traditional mortgage. Excessive immigration makes it progressively harder for citizens and immigrants to maintain standards of credit-worthiness due to housing inflation.

Global competitiveness is dependent upon the wage-earner's salary requirement. The largest contributing factor to the wage-earner's salary requirement is the cost of housing.

Home equity appreciation is an often used, politically correct term, but in reality, home equity appreciation has become hyper-inflation. Housing costs have inflated 309% in 27 years, while four-fifths of America's wage-earners (80%) have averaged (after tax) income increases of only 18.25% in 24 years.

Percent Change in House Prices Period Ended June 30, 2007 (United States)
5 year = 50.76%
Since 1980 = 309.4%
http://www.ofheo.gov/media/pdf/2q07hpi.pdf

http://www.cbpp.org/1-23-07inc.htm

Excessive immigration defers cost of living raises while increasing demand for housing. Hyper-competitive labor, resulting from excessive immigration, decreases the pool of wage-earners who are able to afford the purchase of a home. The rental housing market is similarly inflated and many wage-earners make purchasing decisions based upon sheltering income through tax deductible home mortgage interest.

The sub-prime mortgage was created to offset the decline in the levels of qualified borrowers by eliminating the traditional financial qualifications. Prior to the sub-prime mortgage, the debt service coverage ratio (DSCR) determined the fair market value of the housing market. The DSCR ensures that unqualified borrowers are rejected; if the population at large cannot afford to purchase a home, the loan terms, or housing valuation must be adjusted to accomplish the sale. Current housing valuation is inflated by an oversupply of easy credit and demand caused by excessive immigration.


Sub-prime borrowers assumed that the 2001 recession would abate, but didn't realize that the Bush administration was considering doubling legal immigration, while ignoring illegal immigration -- eliminating the possibility of commensurate cost of living increases.

"Fankly, the study hypothetical dealing with the relationship of both increasing immigration from 1 million to 2 million (per year) and entitlement costs, must be revisited with offsetting economics from both homeownership from new and existing immigrant family members, and increased subprime homeownership.
Professor Richard Ivar Rydstrom, Esq.
STATEMENT FOR THE RECORD BEFORE THE
House Ways and Means Committee, Chairman Charles B. Rangel
Hearing on Economic Challenges Facing Middle Class Families

Recently, Alan Greenspsan has made some comments concerning high-skilled immigration and the housing market.

"Greenspan said the economy will continue to erode until there is a stabilization of U.S. housing prices." [Link]

"…he [Greenspan] expects the mortgage problem to persist until housing prices stabilize. And that won't likely happen until the inventory of new homes dries up." [Link]

Home builders describe the inventory of unsold units as their problem.

"Falling prices tend to keep potential buyers on the sideline. That’s especially bad news for home builders who are stuck with nearly 500,000 unsold homes, or about 10 months worth of demand." [Link]

We have a housing inventory of nearly 500,000 new unsold homes, but there is a much larger hazard in the potential of inventories in the housing market. The Census Bureau provides housing vacancy data. [Link]

Housing Vacancies 2007
Northeast -- Held off market……… 921,000
Midwest -- Held off market……… 1,205,000
South -- Held off market……… 2,911,000
West -- Held off market……… 1,143,000
Total Vacancies – Held off market ……. 6,180,000 (Year-round vacant)

It's my opinion that these year-round vacant homes are the result of the "second home mortgage interest deduction act."

Another comment made by Alan Greenspan suggests that America should adjust "income inequality" by attacking upper wage earners with high-skill immigrant competition.

Greenspan: One thing the country could do to improve things speaking to recession] is to allow more immigration of skilled workers... "Significantly opening up immigration to skilled workers solves two problems," he said. The companies could hire the educated workers they need. And those workers would compete with high-income people, driving more income equality, he said. [Link]

While I agree that housing prices must be allowed to decline to reflect competitive levels, I suggest that re-introducing the 6 million second homes into the "for sale" inventory would be devastating to the U.S. economy. These "high-income people" will sell second homes to reduce the cash drain, the second home interest deduction is not required in lower income brackets.

The Greenspan and Rydstrom statements indicate that the administration has been using excessive immigration as a wage control. Now that the sub-prime bubble has burst, we find that financial instability has spread from the immigrant community to the domestic population.

Emancipation age children account for about 13,568,057 of this century’s population growth, when subtracting the population losses (CDC deaths). The Civilian noninstitutional population has grown by 23,784,000 while employment has grown by only 11,767,656.

MBIA and the New York Times have made accusations ranging from irresponsible borrowers to irresponsible hedge funds for the failure of the sup-prime mortgage. Who is more irresponsible, the citizen who is pressured into purchasing an over-inflated home, or an immigrant who abandons her home?

In truth, income inequality exists between nations not within. Luring highly skilled and low skilled persons to migrate away from their home retards the advancement of prosperity in both nations.