Lower home price appreciation in socioeconomic enclaves

This article comments on the perceived negative effect increased immigration density in neighborhoods has on home value growth within enclaves, and discusses the broader positive impact of migration trends on residential rentals and sales as viewed through the lens of socioeconomics.

Where California’s immigrants live

Population growth is essential to an enduring and diversified housing market. Brokers and agents who anticipate which demographic group is likely to move to and from California’s diverse counties will be better positioned to service the housing and investment needs those unique groups demand. Each has their own preferences and values when they arrive.

Immigration, both legal and illegal, is a crucial driver of population growth keeping the U.S. population young, an influence felt even more acutely in California.

A majority of immigrants to California come from Mexico, followed by the Philippines, China (including Taiwan), Vietnam and El Salvador. In 2010, 37% of California’s population was Hispanic, and this proportion has increased annually for the last twenty years. 13% was Asian and 6% was African American, per the U.S. Census Bureau (Census).

Inherent in any real estate related discussion of immigration are the questions:

• where will California’s new immigrants likely chose to live?; and
• what effect does the increase in immigrant density have on the rate of home value appreciation in the enclaves where immigrants settle?

Immigrants settle throughout the whole state of California. However, immigrants are most heavily concentrated in Santa Clara (36%), Los Angeles (36%) and San Francisco (34%). In the cities of El Monte, Daly City and Glendale, international immigrants are the majority and outnumber those born in the U.S., called native-born.

The effect of immigration on home values in enclaves, as found in a recent study, is not driven purely by the fact its neighborhoods are populated by immigrants of foreign descent. Instead, their influence is guided by a factor far broader than immigration alone: socioeconomics, of which nationality is only tangentially related, if at all. [See “Immigration and the Neighborhood,” by Albert Saiz and Susan Wachter published in the American Economic Journal.]

Socioeconomics is not governed by ethnicity or race. It is a study of data on human behavior, not human classifications. Thus, socioeconomic studies are based on one’s educational attainment level, skills, income and occupation.

The price of a property and properties in the surrounding neighborhood are directly related to the income levels of its inhabitants. In mathematical terms, the price of a property equals approximately 31% of the homeowner’s income (which sets the maximum mortgage amount the homeowner may borrow), plus the down payment.  If the level of income in a particular neighborhood (immigrant enclave or otherwise) slips, home prices will adjust downwards accordingly, with sellers having little to no choice.

Thus, the native-born reluctance to live in immigrant-dense areas is not based on the racial foreignness of the neighborhood, the human classification, but rather the attributes of the group; its socioeconomic realities. These are the differences that cause people to relocate – in or out.

Surprise! Immigrant enclaves attract immigrants

Immigrant segregation in the U.S. has been on the rise during the last three decades of the 20^th century. Neighborhoods contiguous to immigrant enclaves are more likely to become more immigrant-dense themselves, a magnet to others of the same national lineage, linguistic preferences, skill sets and level of education, and thus the same income. This migratory pattern exists as immigrants tend to spatially cluster in proximity to other immigrants, just as native-born tend to congregate with others of the same socioeconomic tier. Essentially, like attracts like.

Living in close proximity to other immigrants provides numerous advantages for those who migrate to California. Immigrants are at liberty to freely speak their native language within enclaves, retaining a significant connection to their unique ancestral roots. Fellow immigrants also function as a social and financial support network for others with a common ancestry, networking jobs and building professional connections with those who have similar employment.

Also, immigrants are attracted to purchase or rent homes in enclaves as properties in enclaves are typically less expensive than a comparable property outside an enclave. Immigrants looking to purchase a home tend to avoid areas where home values are growing faster than the average within the enclave neighborhoods. The pricing and immigrant camaraderie then naturally perpetuate the rapid population growth and increases the density of insular immigrant communities.

Home price appreciation in immigrant enclaves

Enclaves experience slower housing value appreciation when compared to the rate of housing appreciation in non-enclaves. In a neighborhood where the share of foreign-born immigrants increases from 0% to 30%, housing values are typically about 6% lower. This lower housing value exists despite the fact there is no correlation between the attributes and general quality of a property in an enclave versus a comparable property outside the enclave.

However, prices cannot be lower in one area versus the prices in a comparable area unless a perceived negative compensating factor exists – an offset. Without the negative compensating factor, native-born citizens eyeing a pricing opportunity will move into the lower cost areas, eventually leveling the price discrepancy. This known phenomena prompts these neighborhoods to change, the “good old times” becoming history and giving way to more pricey housing and a different style of new inhabitants.

Native-born homebuyers are willing to pay more for living in predominantly “native” areas, their own enclaves of sorts. The higher price a native-born citizen is willing to pay for a comparable home outside an enclave is known as a premium.

But why are some native-born homeowners willing to pay a premium in the form of higher purchase prices to live outside a predominately foreign-born enclave?

Immigrant neighborhoods typically contain a higher share of less-educated individuals with lower-skilled employment and commensurate pay. In a sample of immigrant-dense metropolitan areas, the number of adults with less than a high-school diploma as a percentage of the number of foreign-born immigrants was 49%. As prices of property within a neighborhood are directly tied to the income levels of its inhabitants, home prices in an area occupied by owners with a lower level of education and  income (read: enclaves) will correspondingly be lower. [For age and education data on some of California’s largest and most dynamic counties, see the October 2011 first tuesday article, Age and education in the golden state.]

Nationally, the skill level of immigrants trend towards the two extremes. In California, 35% of immigrants in the labor market do not have high school diplomas, versus 7% of the native-born. 26% of immigrants in the labor market have a bachelor’s degree, versus 35% of natives, according to data published by the Public Policy Institute of California.

Thus, immigrant workers typically have either lower or higher levels of skills than those who are native-born. Thus, they typically do not compete for jobs sought by the native-born.  More frequently in California, immigrants have a greater likelihood of working in physical, manual-based occupations than the native-born. In 2009, 30% of immigrants without a high school diploma were employed in the construction and manufacturing sectors.

Editor’s note – Immigrants are also more likely to have high-skilled employment requiring advance cognitive abilities than those who are native-born, employed in fields such as engineering and science. Look no further than California’s Silicon Valley and university campuses for proof.

The basic skill levels of native-born and foreign-born citizens in the 100 largest metropolitan areas of the nation were recently analyzed in a report by the Brooking Institute. Skill levels were determined by educational achievement, job training and experience, physical aptitude and communication/language skills. Five of the ten metropolitan statistical areas with the lowest skill ratio among the foreign-born are within California, more specifically:

• 38.6 in Riverside-San Bernardino (meaning for every 100 low-skilled immigrant employee there are 38 high-skilled immigrant employees);
• 32.6 in Stockton;
• 22.5 in Fresno;
• 21.3 in Modesto; and
• 13.3 in Bakersfield.

Thus, these areas with a lower skill ratio need to have cheaper housing available, such as apartments and single family residence (SFR) rentals, commensurate with lower incomes. Similarly, local agents must be equipped to service these particular needs.

Native-born flight results in immigrant density

Immigrant enclaves, over time, become more densely populated by immigrants of a similar socioeconomic background. However, the growth and density of enclaves is also fueled by the native flight phenomena occurring when native-born homeowners sell their homes and leave a neighborhood if they believe it is becoming too predominantly populated by a particular immigrant population.

Thus, growth in the proportion of foreign-born homeowners who occupy property in an area implies a proportional decline in the share of native-born who populate the same area. These native-born homeowners who flee areas evolving as enclaves typically relocate to areas populated by other native-born homeowners – their own enclave and the very reason for their relocating.

Just as immigrants, guided by the invisible hand of socioeconomics, frequently choose to live with other immigrants of a similar financial and educational background, native-born homeowners also relocate to areas populated with other native-born residents, the social motivations of both being identical.

Licensee response to socioeconomic trends

The practice of brokers and agents pandering to this socioeconomic sensitivity is called blockbusting, an unlawful conduct.

A licensed broker or sales agent, whether acting as an agent or as a principal, may not induce or attempt to induce an owner to sell or rent a residence by representing that the entry of certain classes of people into the neighborhood will have an adverse economic effect on property values or rental rates. [42 United States Code §3604(e)]

Examples of blockbusting activities include:

• actions which convey the neighborhood is undergoing, or is about to undergo, a change in the race, color, religion, sex, handicap, familial status or national origin of its residents in order to encourage an owner to offer a dwelling for sale or rent; or

• encouraging an owner to sell or rent a dwelling by making the assertion the entry of persons of a particular race, color, religion, sex, familial status, handicap or national origin will result in undesirable consequences for the neighborhood or community such as a lowering of property values, an increase in criminal activity or a decline in the schools and other facilities. [24 Code of Federal Regulations §100.85(c)]

Additionally, a licensee may not induce panic selling due to price movement based on the classification of others of a particular race, color or religion coming into the neighborhood. [Calif. Business and Professions Code §10177(I)]

Panic selling is an attempt to influence sales or rentals of real estate through representations about a change in the ethnic makeup of a neighborhood and the consequences of the economic impact brought about by the change.

Of course, such blatantly discriminatory practices are not as common now as they once were.

The focus now is on implicit discrimination — practices which are not openly discriminatory, but which have discriminatory effects. Therefore, brokers and their agents must be careful in their dealings, in order to avoid actions with discriminatory effects.

Consider a seller whose agent received an offer to purchase a listed property from a prospective homebuyer who was a member of a protected group.

The price offered in the purchase agreement was greater than the listed price, but the financing was structured as an installment sale calling for the seller to carry back a trust deed note in a no-down payment, cash-back transaction without additional collateral.

The seller’s agent, who was not a member of a protected group, rejected the offer by informing the homebuyer that the seller was not interested in a carryback note or a kickback of cash. Later, the seller sold the property for less than the listed price in an all cash transaction to an individual who was not a member of a protected group.

The prospective homebuyer sued the seller’s agent for illegal discrimination against a member of a protected group, claiming the seller’s agent had unfairly prevented him from obtaining housing since the seller’s agent had failed to submit his offer to the seller.

The seller’s agent claimed he had not discriminated against the prospective homebuyer since the carryback financing in lieu of cash and the cash kickback made the offer less desirable than an all cash price.

Here, the seller’s agent’s behavior presented no unlawful discrimination since the only discrimination practiced by the seller’s agent was over the distinction between two offers with dramatically dissimilar financial consequences for his client the seller. [McDonald v. Coldwell Banker (2008) 543 F3d 498]

Editor’s note — The seller’s agent failed to advise his client, the seller, of the existence of the offer. The offer was never submitted to the seller for acceptance or rejection. Without the seller’s written rejection to re­turn to the prospective homebuyer, the seller’s agent unnecessarily exposed himself to claims of discrimination.

Life-cycle of a neighborhood – immigration outside of enclaves

Similar to reincarnation, neighborhoods have an observable life-cycle which develops from youth to maturity then cycles back to begin again with different generations of homebuyers.

Young neighborhoods feature lower purchase –prices which attract first-time homebuyers who intend to purchase a starter home. These first-time homebuyers are typically of a similar age and socioeconomic background and frequently have children around the same time. The large population of young children in the neighborhood triggers public schools to be built (or reopened/renovated) in close proximity to the neighborhood to service the increased population of school-aged children. The generation of young children comes of age in the neighborhood and moves through schooling at the same pace as other children in their neighborhood.

Over time, the initial generation of first-time homebuyers acquires additional education and skills, along with the increased income received for an improved skill-set. These first-time homebuyers, now capable of migrating from one socioeconomic tier to another, are positioned to upgrade to a different property.  That move to a replacement home will likely be a relocation to another neighborhood more reflective of their higher social aspirations.

Thus, the population of the local school ebbs and flows with the life-cycle of the neighborhood – flush with students when the initial wave of first-time homebuyers move in, then desolate when the children of the first-time homebuyers all graduate from the school in  near unison – until the relocation of most of the parents takes place and the cycle begins anew.

After the first generation of children leave school, the neighborhood has matured and is primed for a new batch of homebuyers.

But who replaces this mass exodus of first-time homebuyers on maturity of a neighborhood?

Immigrant first-time homebuyers are the ideal candidate to occupy this newly vacated space in lower-price communities. As immigrant parents fill the void created by properties empty at the right price, the immigrant’s children refill the depleted school rosters (advantageously lowering the age of the population). This restarts the life-cycle of the neighborhood, ushering in a new generation of first-time homebuyers.

Agents can cater to this contingent of homebuyers by becoming conversant in the language of the immigrant population and becoming familiar with their basic social, if not religious, etiquette. Similarly, an agent would be wise to arm himself with an intimate knowledge of the local amenities which are relevant to the life-stage the neighborhood, such as proximity to schools, shopping and places of religious observance for young families, and proximity to medical facilities for mature neighborhoods featuring older residents. [See first tuesday Form 320-2]

Immigration’s net positive result – the long picture

As immigration affects the quality of locally provided public goods or services, it is occasionally disparaged in political rhetoric. Opinion-surveys conducted nationally frequently reveal that native-born homeowners consider a growing immigrant population as contributing to and increasing the rate of crime, a negative effect if it is a fact. However, there is no verifying data to buttress this widely-held misconception.

Another commonly held public opinion which is equally ignorant of facts holds that immigration’s (specifically illegal immigration’s) effect on California yields a negative result based on the belief immigrants compete with native-born citizens for the same jobs. However, the Federal Reserve Bank of San Francisco (FRBSF) recently reported that competition for employment between legal workers and illegal immigrants is far less prevalent a problem than is generally believed. [For further study on the effects of illegal immigration, see the January 2011 first tuesday article, Immigration’s impact on the housing market.]

Slower home price appreciation in enclaves is not a direct result of immigration. Rather, it is a manifestation of socioeconomics at work, not classifications biased by birth or origin. Thus, immigration is not the villain it is too often cast as.

Instead, immigration yields a positive net result for California real estate, a condition to be encouraged, not demonized. In economic practice, both legal and illegal immigrants have an equally positive effect on the housing market. They have the legal and financial power to buy and sell property, pay property and income taxes and contribute to all forms of economic activity as do the native-born.

Additionally, immigrants, both legal and illegal, fill job vacancies integral to the functioning of our society which native-born citizens are most generally unwilling to take for reasons of low pay and exhausting work. The result: increased wealth across the state.

As for the commonly held misconception that immigrants do not pay income taxes, it is to be noted that the bottom 40% of reporting taxpayers – the poorly paid – pay no income taxes, only social insurance premiums. However, keep in mind that it’s the employer who is legally obligated to withhold and pay any income taxes due on the pay given to immigrants they employ, not the immigrant (or any other employee in the low-income brackets), as many politicians who hire legal or illegal immigrants have been taught by their opponents.

Editor’s note – For perspective regarding the importance of illegal immigrants’ role in the California real estate market, California has the highest portion of the nation’s illegal immigrants, with an estimated 2,550,000 illegal immigrants in March 2010. [For further commentary on demographic trends, see the June 2011 first tuesday article, Golden State population trends.]

Immigrants are also a vital source of innovation, which itself is a catalyst for economic growth. They are an adventurous group; they had the energy and enthusiasm to leave home to improve themselves. The rise in the share of immigrants with a college-education between 1990 and 2000 corresponded with a 21% increase in patents issued per capita in the U.S., as noted by economists Jennifer Hunt and Morjolaine Gauthier-Loiselle.

Due to the continued demographic necessity of lower-skilled employment in California, immigrant enclaves will continue to be a vital component of the California real estate market. It best be well-understood by California agents and brokers who intend to specialize in these dynamic niche markets.