ObjectiveWe aim to examine the relationship between immigrant residential segregation and immigrants’ satisfaction with the neighborhood.MethodsWe use individual‐level data from the German Socio‐Economic Panel for the years 1986 and 1994. In a first step, we use the data as a pooled cross‐section including an extensive set of household and individual characteristics such as household income and quality of the dwelling. In a second step we use a fixed effects model to account for unobserved time‐invariant influences.ResultsBoth the cross‐sectional and the fixed effects estimates show that immigrants living in ethnically segregated areas are less satisfied with the neighborhood. This is consistent with the hypothesis that housing discrimination rather than self‐selection plays an important role in immigrant residential segregation.ConclusionsOur findings indicate that rental market discrimination rather than self‐selection is the reason for immigrants living in segregated areas. This has important policy implications since ethnic residential segregation may hamper immigrants’ integration and may in turn trigger negative attitudes toward immigrants by Germans.