Household Formation Drives Housing Demand

Some preliminary data and analysis

Recently we’ve seen strong demand for both owner occupied and rental units. We can see this demand in rapidly rising home prices and in rents. This suggests a significant increase in household formation in 2021 (demand is increasing faster than supply).

Just today, Zillow reported on house prices and rents: Housing Market Easing From White Hot to Merely Red Hot (August 2021 Market Report)

Monthly home value appreciation has been faster than the month before in every month since January, but finally eased in August, slowing from 1.97% month-over-month growth in July to 1.75% in August. But while the slowdown is a notable change, August’s 1.75% monthly growth still represents the third-fastest monthly pace in more than 20 years of Zillow data.  …

Like the for-sale market, month-over-month rent growth had been accelerating since January before cooling in August, slowing  to 1.7% from a record high 2% in July. But again like the for-sale market, annual growth hit new highs, rising 11.5% year-over-year, the fastest in Zillow records dating to 2015. emphasis added

As I noted in 2015, in the 2020s, a large cohort has been moving into the 30 to 39 age group (a key for ownership). (See: Housing and Demographics: The Next Big Shift). However, the aging of Millennials suggests a preference for homeownership over renting, and not total demand for housing!

So what is driving demand for both homeownership and rentals? Household formation!

If we look at the Historical Households Tables (based on the Current Population Survey), we see that from 2010 to 2019, about 1.1 million additional households were formed each year. However, in 2020 due to the pandemic, the number of households declined by over 100 thousand.

If all those missing households from 2020 were formed in 2021, we’d expect about 2.3 million additional households formed this year!

Some of those additional households are from young adults moving out of their parent’s homes. There was a report last year from Pew Research that showed A majority of young adults in the U.S. live with their parents for the first time since the Great Depression

In July, 52% of young adults resided with one or both of their parents, up from 47% in February, according to a new Pew Research Center analysis of monthly Census Bureau data. The number living with parents grew to 26.6 million, an increase of 2.6 million from February.

There is also probably demand from roommates separating as their incomes increase (think Friends Joey and Chandler moving into their own apartments). And possible demand from more separations and divorces in 2021 (divorce data is released with a lag).

Here is a graph of People per Household through 2021 (data from Census).

The number of people per household has been trending down (but up slightly in 2020). There was a steep drop in the number of people per household from the mid-’60s to the mid-’80s as the baby boomers moved out of their parents’ homes. There wasn’t a similar decline for the Millennials, however we might see a further decline as some Millennial roommates form single person households, and as some Boomer’s divorce - forming two single person households. Those trends are probably happening in 2021.

Population didn’t increase significantly in 2020, and population growth will probably be sluggish in 2021 too - but it appears household formation has increased sharply recently - and I’ll be posting updates on household formation.