Lusk Center: Household Formation Rates On Rise

A new study from the University of Southern California Lusk Center for Real Estate reveals that after the job losses that followed the recession, new household formation has recovered.
Gary Painter

Gary Painter, Lusk Center 

A new study from the University of Southern California Lusk Center for Real Estate reveals that after the job losses that followed the recession, new household formation has recovered, keeping in line with the three-year pattern of housing demand that historically follows major economic losses.

“Household formation, even when the economy doesn’t recover, will recover at some point, but depending on the size of the economic shock, it can take three to five years to catch up to where you were before,” Gary Painter, Lusk Center’s director of research, told Commercial Property Executive. “The reasoning is pretty simple. The biggest group of people who are not going to be entering the housing market when there is an economic shock are young adults. They are the ones most vulnerable.”

Once the job market improves and the young adults gain some stability, the study shows that they are ready to move out, improving the growth of household formations.

Painter authored the report along with doctoral candidate Jung Hyun Chio. Their findings show that while it was always known that negative economic shocks reduce household formations, no data ever looked at the timeframe of the declines.

The study shows that household formations consistently fall in the first quarter after an increase in unemployment, but return to their previous levels within about three years, whether jobs have returned or not.

According to Painter, even a permanent increase in the unemployment rate will not have a permanent impact on housing formation, so policymakers and industry practitioners have a new level of predictability when it comes to how economic crises impact the rate of new households.

The study reviewed quarterly data from 1975-2011 and discovered that three-year recoveries in household formation were typical for all major employment shocks to the economy over the last three decades.

Looking at the years 2008-2010, the study shows household formations fell to nearly zero but three years later, household formations recovered to their pre-recession levels of 1 million per year.

“Essentially, what happened is there were three years of no household formation, then it started to look up and become sort of normal and in 2013 it kind of dipped and in 2014 it started to really accelerate to play catch up,” Painter added. “We’re getting close to catching up, but we’re still about a million or two down, but if we continue at the rate of last year, we should catch up this year or early 2016.”

Painter concluded that the data suggests a similar year in 2014, which could lead to another 2 million households formed.