To get a sense of what the demand pipeline will be going forward, apartment executives often look at household formation trends. Because household formations are largely driven by demographics and business cycles, it’s hardly surprising that recent household formations have lagged historical levels given the severity of the Great Recession and the slow economic rebound. When times are tough, people often economize by taking on roommates or holding off on moving out on their own, temporarily delaying some new household formation.
However, the problem, according to a panel of experts at the 2014 NMHC Research Forum, is that the economy is improving but today’s household formation trends have yet to reverse in any meaningful way. This is a remarkable deviation from historical patterns and one that has a deep effect on housing demand. It’s estimated that as many as three million households are effectively missing from the demand equation.
“We are well beyond the normal cyclical dynamics,” explained Calvin Schnure, senior economist and vice president of research and industry information at the National Association of Real Estate Investment Trusts (NAREIT).
From 2007 to 2011, headship rates-the number of heads of household per 100 people within an age group-fell significantly for younger people, particularly those in the 18-to-24-year-old and 25-34-year-old age groups. This makes sense because these age groups also bore the brunt of the employment declines during the recession. However, since then, 18-to-24-year-olds and 25-to-34-year-olds have seen the biggest increases in employment rates. And yet, despite this improved job picture, household formations have continued to lag, with 18-to-34-year-olds accounting for almost two-thirds of the so-called “missing” or “phantom” households.
“If [younger people] aren’t setting up their own households that has a lot of implications not only for the nation’s realtors and landlords, but also cable companies, furniture stores, home improvement stores,” said Richard Fry, senior economist at the Pew Research Center, during a session on Millennial finances. “We can’t have a robust recovery in the nation’s housing market without the younger generations setting up their own households.”
However, also contributing to the dislocation of household formation trends is the foreclosure crisis, which has caused some significant declines in the single-family ownership market. Presumably many foreclosure victims ended up in the single-family rental market; however, that’s not the whole story. Additional analysis showed that metro markets with the biggest drops in single-family ownership also had the largest number of phantom households.
While these are noteworthy shifts, Schnure said the facts lead to little insight or conclusion as to where and when this pent-up demand comes on line. Moreover, it’s difficult to tell for sure whether today’s trends reflect a lingering hangover from the economic recession or a more fundamental shift in attitudes toward housing, he said.
“We’re seeing job market improvements and more confidence,” he said. “But that could mean a very rapid change or a very long, sustained change [in household formations and demand].”