As young people, specifically Millennials, age into their thirties, the pace of household formation is ready to take off
Times have changed, and it is no longer as common to see young people setting up their own household and purchasing a home. As MarketWatch reports, for 50 years before the housing crisis and the recession, the pace of the number of new households created on an annual basis exceeded population growth by an average of about 0.2 percentage points each year. Since 2007, however, that number has dropped drastically to -0.5 percentage points per year.
It isn’t exactly a welcome sight, especially considering the need for new household formation to maintain a healthy housing market. But it might not all be as doom and gloom as it seems. In a new paper from the San Francisco Fed titled “Household Formation Among Young Adults," economist Fred Furlong writes that young people do not appear to be missing out on homeownership completely, they are merely delayed.
Over a five-year period from March 2011 to March 2016 two cohorts of people were tracked. In 2011, the cohort aged 30-34 had a headship rate of 51 percent, while those in the younger cohort comprised of individuals aged 25 to 29 had a rate of 45 percent. In March 2016, the younger group had reached the same headship rate as the 30 to 34 cohort from five years prior. So, while it may be delayed, the same numbers are being reached.
What this means is that, thanks to population growth, the economy should be on the precipice of a household formation boom. In the paper, Furlong projects household formation to average about 1.4 million to 1.5 million per year through 2020. For the past five years household formation has sat right around 900,000 per year.
However, even with the possibility of more household formation, many analysts believe the homeownership rate is likely to remain right around the 63.5 percent it was in the first quarter of 2016, due in large part to an increasing number of people who are making the decision to rent instead of buy.
Regardless, whether people buy or continue to rent, more housing is going to be needed to accommodate all of the newly formed households, which means even more construction is going to be necessary to prevent an even more acute shortage of housing stock.