Household Formation

One of Jim Cramer’s comments caught my eye:

There’s a tremendous amount of household formation, 800,000 every year, Cramer said. Four million babies born each year, divorces, 2.5 million new citizens…

One of the most fundamentals drivers of demand for housing is household formation. When you go from 200 million Americans to 300 million Americans, it creates a lot of new households, each of which has to live somewhere.

In tough economic times, people tend to put off forming households. They live longer at home with parents, or put off marriage. Blanche Evans writes:

Between the birth rate and immigration, legal and illegal, the U.S. should be adding about 1.2 to 1.5 million households annually. In 2007, we added half that number. What does household growth mean to housing?

Household growth is a good indicator of the economy. When money’s tight, people tend to double up. More grown children fail to launch and stay put in their parents’ basements, more renters sign new leases, fewer first-time homebuyers come to the table, which stifles move-up buyers, and the final result is that homebuying stagnates.

The National Association of Realtors argues that there’s a lot of pent-up demand on the sideline:

Since 2005, household formation has jumped back above the historic norm to 1.38 million units per year, with 1.63 of them coming in 2007. However, sales levels have fallen to their lowest levels in nearly 10 years. This recent trend suggests two things. First, a reserve of pent-up demand is being built up. Second, there is some factor precluding these would-be buyers from entering the market. With the economy slowing, employment and income fears may be weighing on potential buyers. Financing has improved at the lower price-range of the market, but jumbo rates are artificially high, and lending standards have tightened. Uncertainty over both issues as well as the foreclosure situation has likely created much consternation. Regardless of the reason, would-be buyers are sitting on the side-lines, but the steady march of an expanding demand base will not allow them to rest there for long. This pent-up demand will begin to strain the relatively tight rental market, forcing up rents until households opt to reconsider their confidence, reevaluate their affordability, and decide to jump back into the market.

Here’s another perspective, from January:

The always-thoughtful Tony Crescenzi of Miller Tabak, in a note this morning, says that the slide in new home inventory “is still more than 1.5 million above normal, but improvements are occurring. The inventory figure is foremost in terms of what is next for prices.”

He further points out: “The amount of new dwellings needed each year is roughly 1.1 million or 1.2 million because of increases in household formation related to population growth. This means that the amount of new construction is running about 400k to 500k below the level of household formation, an amount that will take a significant bite out of the level of excess inventory.

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