Statistical Indicators

Household Formation

Posted on Tuesday, September 21, 2010

Household Growth: Projections from The State of the Nation’s Housing Report
by Selma Lewis, Research Economist



Each year, the Joint Center for Housing Studies at Harvard University issues a report on “The State of the Nation’s Housing.” The report provides an overview of the U.S. housing market including analyses of market forces, demographic drivers, rental housing, and challenges for the future. The most recent State of the Nation’s Housing: 2010 report also presents information on projected household growth between 2010 and 2020. In this article, we look at those projections

From 2005 to 2009, household growth fell from about 1.2–1.4 million annually in the first half of the decade to less than 1.0 million per year. The decrease was due primarily to a significant drop in immigration. Immigration, including that of undocumented entrants, fell sharply in response to broad job losses that resulted from the recent economic recession. The Office of Immigration Statistics at the Department of Homeland Security estimates that the number of unauthorized immigrants living in the United States declined by 1.0 million between January 2007 and 2009 compared with a net gain of 1.3 million from 2005 to 2007.

Another contributor to lower household growth has been the drop in household headship rates caused by “doubling up.” In other words, some people combined households to save money during difficult financial times or possibly due to loss of their home by foreclosure. Headship rates, a measure of the ratio of independent households to population, have declined across all metropolitan areas and across both native-born and immigrant households. The impacts have been smaller in the smaller metro areas.

These declines have been greater among native-born households, although the rates for immigrant households have fallen as well.

Household headship rates for all age groups have also fallen since 2005, especially among those under age 35. The American Community Survey 2005-2008 data shows that formation of native-born households in 80 of the largest metropolitan areas has fallen by about 3 percentage points overall and by nearly 4 percentage points in the largest immigrant gateway metropolitan areas. This suggests a reduction of nearly 1.2 million households nationwide during a time when the population in these metropolitan areas grew by 3.4 million.

What is going to happen to headship rates in the future is uncertain. If economic conditions and the foreclosure crisis do not improve, rates may continue to fall. But given the improved affordability conditions, employed workers may form households and thus boost headship rates. In most cases, doubling up is only a temporary solution for people. They will eventually want to find their own places to live.

The uncertainties about the future, including the economy, immigration and headship rates, make it difficult to predict what is going to happen to household growth in the future. Still, the Joint Center projects total household growth at about 12.5 million to 14.8 million over the next 10 years. If immigration slows to about half the pace in the Census Bureau’s current projections, and if headship rates by age and race/ethnicity hold at their 2008 levels, household growth in 2010–20 will come in at about 12.5 million. If immigration reaches the Census Bureau’s estimate, however, household growth could climb closer to 14.8 million over the next 10 years.

What does this mean for REALTORS?
The Joint Center suggests that the “echo-boom” generation—those born between 1986 and 2005—will have a tremendous impact on starter homes over the next 15 years. The echo-boom generation, currently at 80.8 million, is even larger than the baby-boom generation. It is projected to grow to 92.9 million by 2025. Meanwhile, baby boomers will boost demand for senior housing.

While there are increasingly more single females, single males and unmarried couples purchasing homes, six out of ten home purchases are made by married couples. But naturally, the decision to form a household is most frequently influenced by economic circumstances. During recessions, young adults continue living with their parents and postpone entry into the housing market. Also, other people may decide to combine households. This can lead to overcrowded dwellings. Both of these reduce household formation rates as was the case in the past several years.

For household formation to return to normal rates, improvement in the unemployment rate is critical. One study estimates that if unemployment rates fall by a little more than 2 percentage points by the end of 2012, household formation would increase by about 2 percentage points from current levels by 2012.* That would mean that by 2012, normal rates of household formation should come back – roughly around 1 to 1.5 million new households per year.

For more information, visit the web site for the Joint Center for Housing Studies at www.jchs.harvard.edu. You can download a copy of the full State of the Nation’s Housing 2010 report.

*Gary Painter, “What Happens to Household Formation in a Recession?” (Washington, DC: Research Institute for Housing America, 2010).


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