This article introduces the labor and talent within the immigrant population as a positive factor driving California’s real estate recovery.

The old role of immigrants in the new real estate paradigm 

As the real estate market continues to recreate itself out of the ashes and jobs make a slow comeback, those brokers and agents under the banner of the new real estate paradigm will be forced to break out of the mold of long-held misconceptions and practices. Among other things, the new real estate paradigm requires a rigorous forward-looking examination of the past beliefs held about immigrant employment in California. This immigrant labor force will affect the future of the real estate industry, both in terms of construction employment and as a high-level demographic driving the creation of the jobs so badly needed for the real estate recovery. [For more information about the new real estate paradigm, see the May and June 2010 first tuesday articles, Looking through the window towards recovery: a real estate paradigm shift, Part I and Part II.]

Despite vociferous and misleading arguments to the contrary, immigrant labor increases both the long-term rate of employment and income for the U.S.-born workers, according to a study completed by economists at the Federal Reserve Bank of San Francisco (the Fed). This is the result of the difference in types of jobs taken by the two types of workers.

The less-educated, less English-proficient sector of the immigrant workers typically work in the personal service and agriculture industries performing manual labor jobs with low pay. In contrast, the less-educated U.S.-born workers are typically more English-proficient than their immigrant counterparts, and specialize in jobs requiring greater communication skills, such as are found in customer service and retail sectors, and which pay more than manual labor jobs. Thus, the less educated among us do not compete with one another based on their immigrant- versus U.S.-born status.

The split between types of jobs does not restrict itself to less-educated workers. More-educated U.S.-born workers tend to be managers, teachers and nurses (occupations requiring better communication skills), while more-educated immigrant workers tend to work as engineers, scientists and doctors.

Thus, despite popular prejudice, immigrants do not take jobs from the U.S.-born workers; the two types of workers exist in two separate spheres of labor. These spheres, rather than being in competition with one another, actually support and contribute to each other’s growth; they are complimentary.

Having a readily-available labor base is a good thing for California. Over time, the increased labor force available through the influx of immigrants allows businesses to increase productivity without crowding out the U.S.-born population. In turn, business expansion creates additional communication-based job opportunities (i.e., management or supervisory positions), as well as other job opportunities. Job growth in the private sector is the result, and will not come a moment too late for California since government at all levels has been allowed to downsize employment at exactly the moment more jobs are needed to keep the economy from slipping backwards.

Demographically, California’s powerhouse economy (which will again take its place again among the world’s top economies, post-recovery) has grown in large part due to the constant presence of its young, ready and willing labor force, of which immigrants make up a crucial part.

The greater productivity in employment translates to more money in the California economy. Both immigrant and U.S-born workers contribute to the economy by using this money on consumer goods and services, further fueling growth in productivity and employment: all part of a virtuous cycle now getting a foothold.

Despite popular prejudice, immigrants do not take jobs from the U.S.-born workers.

Consider also the positive effects of the type of individual who comes to California to improve their economic and social situations. They are risk-takers. The entrepreneurial spirit which led them to California is the same spirit that fathers innovation and new businesses which will grow to employ thousands. Immigrants provide great value to our state’s economy and inject a much-needed demand for goods and services, as well as dynamism to the labor force which allows the overall economy to expand more rapidly than in xenophobic states.

The expanded economy creates demand for real estate

The benefits of high levels of immigration do not stop with growth in the labor market alone. As jobs grow more plentiful and better-paying, the ability of all workers to purchase or rent more and better housing increases. For example, a person from the Generation Y (Gen Y) demographic who has a college degree but cannot find employment allowing him to support himself financially may live with his parents while there are no jobs available befitting his education. Thus, the real estate market takes a loss for the lack of a suitable job.

As the demand for workers in communication-based service industries and more manual-intensive labor industries increases with the real estate recovery, these job openings are filled by those in the economy with the requisite skills — a labor force consisting of both immigrant and U.S.-born workers. As these workers grow in number to meet the demands of the recovered state economy, the need for other service workers and management-types is created. Thus, a job for our erstwhile unemployed Gen Y-er is created, allowing him to earn enough money to move out of the parental nest into a place of his own (which will most likely be rented in the short-term while he saves up the money needed to become a homeowner). [For more information on the coming wave of Generation Y homebuyers, see the November 2010 first tuesday article, The demographics forging California’s real estate market: a study of forthcoming trends and opportunities Part I.]

In addition, the workers who support the existence of the Gen Y-ers’ employment (among them, the immigrant population) also need housing. In fact, adult immigrants create an immediate demand for housing when they arrive in California (as opposed to the U.S.-born population which must grow into their role), whether they be immigrants from other states or other countries, as they are all new consumers of California housing and goods. They provide a much-needed injection of residential users while the housing market for both rentals and owner-occupied units is struggling to create users. [For more discussion of the role of immigration in bringing down the vacancy rates in California, see the December 2010 first tuesday article, Nobody’s home: California residential vacancy rates; for more information about the role immigration plays in the recovery of California’s economy, see the November 2010 first tuesday article, Economic Forecast Conference points to a long period of recovery for California’s real estate market.]

Real estate’s gray industry

Immigrants who enter the country for jobs end up becoming users of real estate by necessity; they require shelter. However, the complex process of buying a home is especially daunting to members of immigrant communities who do not understand written English, the prevailing language in most housing-related agreements and disclosures. Thus, they are often vulnerable to the phenomenon of asymmetry of information due to their inability to understand first-hand that which they are signing or agreeing to, except as they are told by those who represent them.

Editor’s note — The California legislation has made some progress in bridging this gap in information. Effective July 2010, loan agreements for mortgages secured by real estate are required to be translated into the language in which negotiations were completed. [For more information about the requirement to translate loan agreements, see the February 2010 first tuesday Legislative Watch.]

Because of the insular nature of the all-important immigrant enclaves and their specific language-based dependency on others who speak the same native language as they do, immigrants are often the targets of unscrupulous unlicensed individuals who hold themselves out to be real estate professionals. These shady individuals bilk money from immigrants and do so with impunity, avoiding detection by playing on the fear uninformed immigrants have of being harassed by the authorities. Even unlicensed individuals who do not purposefully set out to fleece immigrants can pose a financial hazard to immigrants through their ignorance of the laws and real estate procedures.

This type of housing abuse is not only unconscionable, but it also creates neighborhood blight. Without the ability to obtain decent housing (either through renting or buying) through competent real estate professionals, immigrants often become relegated to low-income, low-mobility communities. Without proper licensing and regulation of all practitioners of real estate, regardless of the characterization of the practitioner, housing abuse in immigrant communities will continue. Ferreting out these unlicensed inside operators will require better reporting to Department of Real Estate (DRE) by licensed individuals who encounter these operators, and stealth audits by the DRE focused on enclave activity rather than the activity of reported or known unlicensed operators. [For more information on the legislation proscribed by first tuesday, see the first tuesday feature, Change the Law.]

Immigrants and homeownership

All persons within the United States, regardless of their residency status (legal or illegal as many choose to say) have the right to make and enforce contracts (purchase agreements, leases, trust deeds, etc.). Without such a law, the unscrupulous would flourish with impunity and financial commitments to buy, sell, rent or borrow would become suddenly worthless. Nobody entering into a purchase agreement today need have any concern that the other party (or themselves) are without residency — that is, legal or illegal. Individuals in the country are free to buy and sell, and enforce agreements to do so. Real estate licensees are not in the business of policing immigration, a responsibility left solely to the federal government. [42 United States Code §1981(a)]

However, despite their need for housing and the potential for capable and fair-dealing brokers and agents gatekeepers to bring their expertise to immigrant communities, the process of providing homes and real estate related services to immigrants is always noisy with unnecessary and undisciplined political gravamen.

Similar to the effect immigrants have on employment, the effect immigrants have on the mortgage market is often misunderstood and misrepresented.  The data shows immigrants who were ineligible to receive social security numbers (SSNs) and the attendant benefits, but who paid income taxes through the use of an Individual Taxpayer Identification Number (ITIN), were able to obtain mortgages totaling around $1 to $2 billion as of 2008. When the Great Recession hit and foreclosures began to crop up like locusts across an over-ripe field, less than 1% of ITIN loans went into foreclosure, compared with the 1.2% of SSN prime loans and 11% of SSN subprime loans. [For more information about mortgage lending in immigrant communities, see the Ohio State University paper, Mortgage Lending and Foreclosures in Immigrant Communities: Expanding Fair Housing and Fair Lending Opportunity Among Low-Income and Undocumented Immigrants and the Pew Research article, Through Boom and Bust: Minorities, Immigrants and Homeownership.]

Editor’s note — Ironically, part of the reason why these ITIN mortgages performed so well had to do with the more stringent underwriting rubrics used for these untraditional mortgage products. Had the industry generally been as diligent in their efforts at policing the other untraditional mortgage products (namely adjustable rate mortgages (ARMs)) given to SSN borrowers, how many fewer foreclosures would there be now?

Brokers need to identify areas of interest to immigrant communities and recruit talented new agents who are socially connected in those respective communities.

This is not to suggest lenders had the foresight to predict the performance of ITIN loans (indeed, their ability to predict the performance of any loan is circumspect as no one ever accused institutional lenders of being particularly bright). However, the general prejudice among lenders against making loans to strangers is unfounded; the data does not show ITIN loans were any riskier than loans given to SSN borrowers.

Yet, larger hurdles existed for ITIN borrowers than for SSN borrowers: no secondary market exists to purchase these loans, thus lenders are less willing to extend them. Even at the height of the Millennium Boom, neither Fannie Mae nor Freddie Mac purchased loans extended to borrowers without SSNs, further embedding prejudices. Lenders who made these loans were responsible for keeping them on their in-house books — anathema during the cash-flush Boom years when loans were no sooner made than the risk was sold off to less informed investors.

ITIN loans mostly died out with the end of the Millennium Boom, unwarranted casualties in the backlash against untraditional mortgages. Lenders (mostly smaller community banks) still exist who will make such loans, but they are few and far between; it takes a diligent broker to search out these increasingly hard-to-find niche banks.

Servicing the underserved

Unfortunately, any discussion of immigration in California is unnecessarily fraught with the love/hate political noise which interferes with significant change, despite the pragmatic social and commercial need both for open access to housing and regulation of gray market real estate services. Still, brokers and agents have a market to establish in this niche:

  • for those brokers and agents who have the language skills, by actively blazing a trail to provide these services; and
  • as grass-roots advocates for widening the entry to California’s real estate industry, both to their fellow gatekeepers and their legislative representatives.

Licensed agents and brokers who have the language skills and the social initiative to change the status quo will have a ripe and underserved population to assist. Brokers need to identify areas of interest to immigrant communities (and this is more and more becoming the inland “affordable” suburbs) and recruit talented new agents who are socially connected in these respective immigrant communities to broaden their scope of practice. It is the classic win-win: real estate mobility on the one hand and well-deserved fees on the other.

Immigrants alone are not a deus ex machina come to rescue the California real estate market from decay. They are, however, a vital force behind change in California, both through their impact on and participation in California’s labor force and their push on the California real estate recovery. Brokers and agents looking to the future should take note: as the state’s population ages and retires, immigrants are and will remain one of the state’s great forces driving the growth of the real estate industry. [For more information on the impact California’s retirees will have on California’s real estate industry, see the July 2010 first tuesday article, Boomers retire and California trembles; for more information on the need for prime-age California workers to rejuvenate the real estate market, see the November 2010 first tuesday article, The demographics forging California’s real estate market: a study of forthcoming trends and opportunities — Part II.]