Where have all the households gone?

Current economic forecasts, including those from the Mortgage Bankers Association, suggest that unemployment is expected to fall very slowly over the next two years. Additionally, many households have lost substantial portions of their wealth through this recession, which will make it more difficult for members to venture out on their own or come up with a down payment for a home purchase. While the recession is likely over, the model developed in this paper suggests that normal rates of household formation will not return until unemployment levels return to close to normal rates. Current economic forecasts suggest that unemployment rates should fall by a little more than 2 percentage points by the end of 2012. If this is correct, then the model suggests household formation should increase by about 2 percentage points from current levels by 2012, as people find jobs and recession-induced anxieties abate. That would imply that by 2012, normal rates of household formation should reappear (roughly 1–1.5 million new households per year), but it will take even longer before the U.S. completely recovers from the deficit in household formation caused by the severe recession.

These results have important implications for both public policy and housing industry professionals. First, the clear implication is that there is no demographic silver bullet that will solve the supply overhang we are seeing in many housing markets around the country. Second, in this recession, the homeownership rate declined due to people losing their homes, but part of the decline was mitigated by the simultaneous drop in formation of renter households caused by the recession. Finally, mobility rates have declined, and households that have moved have been more likely to rent than to buy. It is clear that we will need this trend to reverse before the housing market can stabilize.

– From the executive summary of University of Southern California professor Gary Painter’s new report, “What Happens to Household Formation in a Recession?” (PDF), which focuses on why the number of households (“formed either when children move out of their parents’ homes, when couples separate or when unrelated individuals choose to live singly after previously sharing a residence”) are falling, even in areas that have seen an increase in population.

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