Comment: Immigrants Could Buoy Market in Coming Decades

Demographic factors, which include immigration, are important long-term forces for the housing industry and will have a large impact on the size, amount, and type of housing demanded.

A slowdown in growth of the population 25 and older began after the last of the baby boomers reached adulthood. In consequence, the average annual increase in the adult population has fallen from 2.6 million during the 1980s to roughly two million during the early 1990s.

The age distribution of the population has shifted, as well. Baby boomers swelled the ranks of the 25-to-34-year-olds in the early 1970s. At the beginning of the 1980s, the oldest baby boomers had moved into the 35- 44 age bracket. Now, the oldest baby boomers are in their middle to late 40s.

Especially important for forecasting housing demand is the drop in the number of Americans 25 to 34 years old as the baby boom generation has vacated this age bracket starting in the early 1990s. It is in this age group that people are most likely to form new households and buy or rent a first home.

The new census figures show less decline in this age group than previously.

I did some research with another economist, Kent Hill, regarding the effect that these population changes would have on the housing industry. We set out to measure the importance of these population shifts for housing demand.

In addition to looking at population effects, we also ran side experiments. One of these was to see whether a change in immigration policy might offset the expected slowdown in the housing industry.

Net housing investment can be thought of as the amount of housing demand added each year. Our results show that, based on population changes alone, net housing investment will fall roughly 22% from the mid-1990s through 2004 before turning favorable again.

The population slowdown does not bring about a decline in total housing demand. Net housing investment remains positive over the forecast period. Thus, the demographics simply reduce the rate of growth.

On a percentage basis, the population slowdown is most important for multifamily housing. Net investment in multifamily units is expected to decline significantly during this period. However, demographics also reduce single-family investment throughout the 1990s and into the first half of the next decade.

Our prediction that net housing investment will fall over the next two decades is made on the basis of a projected decline in the growth rate of the U.S. adult population. We can be pretty confident about the growth of the domestic population. The major risk in the forecast is usually immigration.

Immigration affects the demand for housing in two very important ways. First, it increases the size of the population, and second, it affects the population's age structure.

Relative to the general population, immigrants tend to be at a prime working age and prime homebuying age.

We decided to run an experiment to see how much more open U.S. immigration policy would have to be if it were to offset the projected decline in net housing investment.

As you would expect, housing investment rises uniformly with each successive increase in immigration limits. Immigrant flow of about 700,000 a year would have only a modest effect on housing investment. But larger increases suggest the possibility of offsetting some of the slowdown in total housing demand caused by the aging of the baby boomers.

The new census projections assume annual net immigration of 880,000 per year.

What this tells us is that immigration will have an important impact on housing demand in the next two decades. Although the aging of the baby boom generation will still slow overall housing demand, rising immigration can be expected to offset a major portion of that.

This article is adapted from a talk given by Ms. Petersen at a recent session of the Housing Roundtable.

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