The Household Mystery

Looking back at People per Household in the '70s

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).

It is no surprise that demand for homeownership has increased recently. As I noted in 2015, in the 2020s, a large cohort would be moving into the 30 to 39 age group (a key age 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? It must be household formation!

Estimating household formation is difficult. Housing economist Tom Lawler recently discussed the “the lack of timely and reliable estimates of the number of and characteristics of US households”. (See: The “Household Conundrum”). Meanwhile, Lawler also discussed the dismal population growth over the last two years (Lawler: Updates on Key Drivers of US Population Growth).

It appears we are seeing significant household formation with little population growth. That must mean a decline in the number of people per household.

As I’ve discussed earlier, 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). Notice the sharp decline in people per household from about 1968 to 1979. This was due to baby boomers moving out and forming new smaller households.

Using the Census Bureau data, we can calculate the impact the number of households needed in the 1970s due to 1) population growth, and 2) changes in household size:

Over those 12 years, the US needed an additional 950 thousand housing units per year due to the changes in household size. However, the US only needed about 550 thousand housing units per year due to population growth. Because of the changes in household size, the U.S. needed far more additional housing units in the '70s than in recent years with the number of persons per household relatively stable.

Over the last two years - in 2020 and 2021 - the US needed very few new housing units due to population growth, so the demand for homeownership and rentals must be coming mostly from smaller household size. (NOTE: There was also significant 2nd home buying and other reasons).

Is something similar happening now to household size with the millennials? It probably is, and unfortunately household data is not timely or reliable.