U.S. Household Formation Is Down Sharply

This sharp decline in the household formation rate explains why we have a housing glut despite the sharp contraction in housing starts during the past-three-and-a-half years. Indeed, the gross vacancy rate (the proportion of vacant housing units as a share of the housing stock) stood at 14.5% at the end of the third quarter, just below the 14.6% record high set in the first quarter of 2009. This despite housing starts setting record lows in 2008 and then again in 2009 (the 2009 number is a projection, since December's figures are yet to be determined).

Nearly all of the increase in households last year took place in the West South Central Census Division (Arkansas, Oklahoma, Louisiana, and Texas). The Mid-Atlantic Division (New York, Pennsylvania, and New Jersey) saw the biggest drop (102,000). By region, households fell by 42,000 in the Northeast, but increased by 61,000 in the West, 16,000 in the Midwest, and 361,000 in the South.

By age category, householders (the person who owns or rents the housing unit) aged 15–24 years fell by 197,000, by 277,000 for those aged 35–44, and by 26,000 for those aged 55–64. On the other hand, householders aged 65 and over increased by 721,000.

The decline was particularly sharp for those who live alone. The number of women living alone declined by 398,000, while the number of men living alone fell by 112,000.

These estimates, we should note, are subject to sampling errors. Every month, the CPS interviews about 60,000 households, containing about 112,000 persons aged 15 years and over. The interviews are designed to collect information to estimate unemployment rates. The survey is also used to track demographic trends. The top-line household number is a credible estimate, but many subcategories are not estimated well because their sample sizes are too small.

The recession is behind the slowdown in household formation. Hard times have forced many of those who have lost their jobs, their homes, or both to move in with family or friends. In addition to this, immigration is down. As a result, the number of persons per household, which had been dropping in recent decades, increased in both 2007 and 2008.

The decline in household formation suggests that once the economy gets back on track, and job growth resumes, housing markets could tighten quickly as the formation rate increases, and housing starts could take off. This might happen as soon as next year.

November was a good month for building homes. Housing starts and permits posted solid gains. On top of this, residential construction jobs fell by just 3,200 in November, the smallest drop in 32 months. The recovery in starts, which began in February, has legs. In 2010, job growth, low inventory levels of new homes (currently at their lowest point since May 1971), and improving household formation should result in sustained increases in housing starts.

by Patrick Newport