Import Competition and Housing Market: Evidence From <scp>NAFTA</scp>

ABSTRACT This paper examines the impact of the North American Free Trade Agreement (NAFTA) on U.S. housing markets by exploiting regional variation in exposure to Mexican import competition. Using a newly constructed vulnerability index based on pre‐NAFTA industrial composition and Mexico's revealed comparative advantage, we implement an event‐study and difference‐in‐differences specifications across U.S. Public Use Microdata Areas (PUMAs) from 1989 to 2007. We find that regions more exposed to NAFTA‐induced import competition experienced significant and persistent declines in housing prices. Specifically, a one‐unit increase in trade vulnerability, corresponding to roughly a two‐standard‐deviation increase in exposure, led to a 6% decline in the housing price index and a $17.5K reduction in average house value (approximately 10% of the mean). In exploring potential mechanisms, we find reductions of approximately 5%–8% in income and wages, suggesting that weakened demand contributed to the downward pressure on housing prices. These effects were particularly concentrated in the manufacturing sector. Our findings highlight housing markets as an important, yet understudied, channel through which trade liberalization affects local economies.