Economy Watch: Some Hope for Household Formation?

Household formation is an important driver of not only the residential real estate market but also the wider economy.

Dees Stribling, Contributing Editor

Household formation is an important driver of not only the residential real estate market, but also the wider economy, and it took quite a hit during the recession. According to Federal Reserve Bank of Cleveland, compared to the previous 10 years, the growth rate in the number of U.S. households was cut by two-thirds between 2007 and 2010. This slowing in household formation reflected the overall weak economy, but it has also meant a weak housing market, as lower household formation rates reduce housing demand, especially in the for-sale segment. The sluggish rate of household formation wasn’t the only drag on the residential market, but it was an imporant one. Things got better in the year after 2010, but nothing that could be called robust.

Over the past year, however, the creation of new households has accelerated, according to a recent report by CoreLogic. Over the first six months of 2015, the number of new households has grown by 1.7 million compared with the same period a year earlier. That’s the largest annual growth in a decade. Much of the growth is because of the recovery in the job market. The recession forced many young potential householders to either live with family or double up with other people. CoreLogic expects that the pent-up desire of young workers to live on their own will help sustain household growth of about 1.2 million per year, on average, for several years.

But that’s not the only factor driving household formation. The Joint Center for Housing Studies at Harvard University has projected an increase of 11 to 13 million households over the next decade, partly as a function of the population bulge that is the Millennials, who are getting older. Not all of them have recovered from the recession, but many have (or will), and it’s such a large population that they will drive household formation more briskly than at any time since the large Baby Boom cohort did the same thing in 1970s and ’80s.

Household formation also depends in part on the pace of immigration into the U.S. Barring the unlikely event that extreme nativist sentiment somehow makes it into law, immigrants will keep coming. In recent years, they’ve helped to support the housing recovery by forming households, either renting or buying homes, and thus supporting home values in many hard-hit housing markets, noted CoreLogic. Taken together, immigant and native-born household formation will probably provide the catalyst for stronger gains in new home construction in the coming years, aiding the overall housing recovery.