When thinking about the housing sector, we can think about the short, medium, and longer term. In the short-term, we receive a wide variety of indicators, such as the data released today on housing starts and permits (both rose in May and the April data were revised upwards). In the medium-term (say the next year or so), a variety of factors will be at play, including the improving job market. In the longer-term, the key driver will be changes in the numbers of households. Given that “household formation” isn’t often discussed, we thought it might be useful today to go into a little more detail about what is a household and what has recently been happening on the household formation front.
Our statistical agencies define a household as any single person or group of persons residing in a single housing unit. Housing units generally are defined as separate living quarters with direct access. So, a house, apartment, group of rooms, or even a single room intended for occupancy as separate living quarters can be a housing unit. For instance, if you rent out an apartment above your garage (say to someone called “Fonzie”), then the folks who occupy that apartment would be considered a separate household.
What’s happening to the number of households in the U.S.? In first quarter 2011, there were an estimated 112.2 million households [1] in the U.S., but household formation has slowed drastically over the last few years. And though the slowdown in household formation coincided with the recession, as the economic recovery began and strengthened last year, household formation has yet to pick up.
For this slowdown to occur, overall population growth has to slow and/or the number of persons living in the average household has to increase. We have seen a fair amount of the former and a tiny bit of the latter. Between 2007 and 2010, the civilian non-institutional population age 16 and over (younger persons and the institutionalized would not presumably head a household) grew by 2.6 percent, down from the 3.8-percent growth over the three years prior to the recession and, in fact, the slowest growth in over half a century. The slowdown reflects a sharp drop-off in net migration. The foreign-born population age 16 and over increased by 3.3 million persons or 10.2 percent from 2004 to 2007, but just 0.9 million or 2.4 percent from 2007 to 2010. Contrast that with the native-born population, whose growth ticked down from 5.3 million to 5.1 million over those two time periods. Average household size edged up a tad from 2.56 persons per household to 2.59 from 2007 to 2010 after having been essentially unchanged for several years. This slowdown in household formation certainly has not helped the housing industry recover from its woes.
Going forward, two factors should lead to renewed growth in household formation and bolster new home construction. Continued economic expansion and job growth will allow some people to branch out on their own and create their own households. Simple demographics also tell us that new households will form. Macroeconomic Advisers (MA), a private forecasting firm, recently examined Census Bureau population projections and “headship rates” (the share of people that head a household in various age groups) and projected that 13.7 million new households will form in the decade ending 2020. Given vacancy rates and the size and age of the current housing stock, MA forecasts that these 13.7 million households are likely to spur the construction of 15.9 million units over that 10-year period. Given the protracted housing slump, it can seem Pollyannaish to talk about renewed strength in the housing market. But it would be naïve to deny the role demographics play and the strong signals they are sending about the future need for new homes.
But what about “families”? The difference between households and families is not just semantics, and while they follow many of the same trends, families merit a separate discussion in a future blog. My friends Mike and Carol Brady (Sister Sledge’s chorus) will be on hand to help us understand the difference between households and families.
~Mark Doms, Chief Economist, U.S. Department of Commerce
June 16, 2011
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