'Missing households' represent big source of pent-up demand

Household formation, especially among young adults between 18 and 34 years old, lags far behind historical norms but will bounce back slowly in the years ahead, according to a recent analysis by Trulia Chief Economist Jed Kolko.

Before the housing bust, an average of 1.1 million households — defined as one or more people who live in the same home — were formed each year in the U.S.

The reduced rate of household formation during the bust — about 450,000 households formed each year from the first quarter of 2008 to the first quarter of 2011 — helped create an estimated backlog of 2.4 million households that should be factored into forecasts for the coming years, Kolko said.

“Household formation is the most important indicator of the housing recovery that isn’t doing well,” Kolko told Inman News.

Number of U.S. “missing households” by year as estimated by Trulia

Note: “Missing households” were calculated by multiplying the difference between the percentage of adults who were heads of a household between 2013 and the 2000-2007 average and the estimated number of adults in both time periods. Estimates take into account changes in the age distribution of the population. Source: Trulia

The demand created by new households is a catalyst for new housing construction. While housing construction is on the upswing, the annual rate of 591,000 single-family housing starts in June is still well below the historical norm of about 1 million a year.

“Missing households are the pent-up demand for housing that we’ve been talking about throughout the recession,” Kolko said.

Underwater homeowners who have been unable to buy or sell are another source of pent-up demand that could be unleashed by rising home prices in many markets. But rising prices could also make homes less affordable to younger buyers looking to purchase their first home.

Still living with mom and dad

Analyzing data from the U.S. Census Bureau’s Current Population Survey, the basis of the U.S. Bureau of Labor Statistics’ monthly unemployment reports and the Census Bureau’s quarterly homeownership rates, Kolko concluded that a majority of the “missing households” are young adults who haven’t left the parental nest yet.

Before the housing recession, 27 percent of Americans ages 18 to 34 lived with their parents. Today, 31 percent of people in that age group haven’t left the nest, Kolko noted.

One reason young adults are less likely to have moved out of mom and dad’s is unemployment — 44 percent of those without jobs live with their parents, he noted, compared to 25 percent with jobs. At 66.8 percent, overall employment for this group is still low, Kolko said.

A recent study by USA Today showed that from 2006 to 2011, the homeownership rate for 25- to 34-year-olds dropped 7 percentage points, to 39.7 percent, the largest drop of any age group in the study. The homeownership rate for Americans of all ages dropped by 2.7 percentage points, to 64.6 percent.

Outlook

In its annual “State of the Nation’s Housing” report, Harvard University’s Joint Center for Housing Studies estimated that after remaining near 600,000 for the previous five years, the rate of household growth picked up to almost 1 million in 2012.

The report concluded that demographic drivers support household growth of approximately 1.2 million a year for the rest of the decade — about where it was for most of the 1990s and the years before the housing bust.

Since household formation typically involves several steps — first comes a job, then an apartment, and then a home — Kolko says that the return of missing households will take a number of years.

“It’s likely to be a long, slow process,” Kolko said.

Patrick Stone, president and CEO of the title and real estate services firm Williston Financial Group, has a similar take. Stone thinks an equilibrium of housing supply and demand, driven by increasing household formation and new construction, is at least a couple of years away.

But the industry shouldn’t worry too much if homeownership rates remain below historical trends while they climb slowly upward in the next few years, Kolko said. Growing the population of renters “is a necessary step in the housing recovery for young adults.”

Besides, there’s a place for agents and technology in the rental process. More agent Realtors — 6 percent — are specializing in rentals in 2013 than they have in the last 15 years, according to the National Association of Realtors’ 2013 member survey.

And a slow, steady trickle of increasing demand might not be a bad thing for the housing industry, Kolko said.

Like other listing portals, Trulia has branched out into rentals. Since rolling out rental search capabilities in 2010, Trulia has unleashed a suite of rental-focused mobile apps, and entered into a partnership with Rent.com and ApartmentGuide.com operator Primedia Inc. to be the exclusive provider of multifamily listings on Trulia.com.