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Household Formation Has Accelerated After Eight Years at Low Levels

home-protectionA missing ingredient needed to bolster the housing recovery has been a stronger pace of household formation—which is beginning to pick up after eight years of running at low levels, according to CoreLogic Chief Economist Frank Nothaft in the company’s recently released September MarketPulse.

The two primary drivers of household formation over time are demographic and economic factors, according to Nothaft. For example, household growth averaged about 2 percent annually from the mid-1960s until the early 1980s when baby boomers were at the prime household formation age, but household formation rates halved from 1990 until the mid-2000s when the population of those born in the 1970s, a much smaller birth cohort, reached their 20s.

As an example of the economy affecting household formation rates occurred during the Great Recession of 2008, when job layoffs or employment losses caused many young adults (and others) to either move in with relatives or share housing with roommates rather than get their own home, Nothaft said. As a result, household formation rates fell to their lowest level since the end of World War II.

That trend might be reversing, Nothaft said. In the first half of 2015, the number of new households grew by 1.7 million from the same period in 2014, the largest growth experienced in a decade. Labor market improvements have also played a role in the recent acceleration in household formation, according to Nothaft.

10-16 CoreLogic Graph 2

“As the job market has improved, many millennials now have the financial independence to form their own household, and we anticipate that the pent-up desire of young workers to live on their own will sustain household growth of about 1.2 million per year, on average, for several years,” Nothaft said, citing a report from the Joint Center for Housing Studies at Harvard University that forecasted new household growth of between 11 million and 13 million over the next decade depending on the pace of immigration in the United States.

Immigration, while not the primary driver of household formation, has been an important factor, Nothaft said. The region that has produced the largest number of legal immigrants to the United States in the last decade has been Asia. More legal immigrants settle in the most populous state, California; 20 percent of all the nation’s legal immigrants live in the Golden state, and half of those were born in Asia, according to the U.S. Department of Homeland Security.

“In the U.S., immigrants have helped to support the housing recovery by forming households, renting or buying homes, and thus supporting home values in many hard-hit housing markets,” Nothaft said. “With household formation now rising among the native-born population, the higher level of formations may provide the catalyst for more substantive gains in new home construction in the coming year, aiding the overall housing recovery.”

About Author: Brian Honea

Brian Honea's writing and editing career spans nearly two decades across many forms of media. He served as sports editor for two suburban newspaper chains in the DFW area and has freelanced for such publications as the Yahoo! Contributor Network, Dallas Home Improvement magazine, and the Dallas Morning News. He has written four non-fiction sports books, the latest of which, The Life of Coach Chuck Curtis, was published by the TCU Press in December 2014. A lifelong Texan, Brian received his master's degree from Amberton University in Garland.

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