JCHS: Pent-Up Demand for Additional Household Formation is Fraught with Uncertainties

by George Masnick

Fellow

In early 2011, economists at the National Association of Home Builders (NAHB) reported that the slowdown in household formation that started in 2007 with the advent of the Great Recession had produced a 2.1 million household formation shortfall by 2010. The authors concluded that the demand for new housing should accelerate dramatically once the economic recovery releases this “pent-up” demand. Another pent-up demand calculation, by Jed Kolko at Trulia, estimated 2.6 million “missing households” in 2010. After three additional years in which the economy has improved on many fronts – albeit at a slow pace – the 2013 Trulia deficit in the household count was still estimated at 2.4 million. But how solid are these estimates and how likely is it that household formation rates will return to pre-recession levels?

 

One difficulty in making these calculations is that actual household growth estimates since 2007 vary considerably from year to year and are inconsistent among data sets (Figure 1). There is good reason to believe that the most widely used data to track household growth, the Housing Vacancy Survey (HVS, used in the NAHB calculation), has seriously underestimated the number of US households – and as a result household growth – since a revision in methodology in 2003.  The HVS’s average annual estimate of household growth since 2007 of 550-600,000 contrasts with the American Community Survey’s (ACS) estimate of 700-800,000 new households annually and the higher Current Population Survey (CPS) growth numbers of over 1 million new households annually since 2010. Without agreement on actual levels of household growth since 2007, it is quite impossible to gauge the shortfall in growth, and therefore the probable level of pent-up demand.

052114_masnick_figure1


Notes: 2013 ACS not available.  2010-2013 growth for the ACS a two-year average of 2010-2011 and 2011-2012 data.

 

The method used to estimate the “normal” level of household growth also matters. The NAHB number was based on a simple difference between “actual” household growth estimates for the 2007-2010 period, and a straight line trending of HVS household growth prior to 2007. Over the very short run this approach may be appropriate, but would not be expected to hold up over a longer period.

 

Kolko’s calculations are more sophisticated. Using CPS data, he computes the change in age-specific headship rates (the share of persons in an age group that head an independent household) from the average 2000-07 pre-recession levels. This change, when multiplied by the official annual population estimates for each year, gives the deficit in number of household formations in each age group due to changes in the propensity to form households. This method corrects for the effects on household formation of simple changes in the size and age structure of the adult population, which the NAHB method does not take into account. But what Kolko’s calculation does not control for is the increasing share of minorities in the population. And since Hispanics and Asians have lower headship rates than non-Hispanic whites this oversight is not trivial (Figure 2). In fact, a certain amount of the decline in household formation is due to the changing race/Hispanic origin composition of the population and not to the recent economic downturn.

 

This issue is exacerbated by an undercounting of growth in Hispanics and Asians over the past decade, as revealed by the results of the 2010 Census. The underestimating of Hispanic and Asian shares of the population in the CPS during the 2000s also means that pre-2010 CPS headship values are biased upward by overcounting the white share, due to incorrect population weights in the CPS survey, making the 2000-2007 benchmark headship rates too high, and exaggerating the decline in age-specific headship pre-versus-post recession.

 

Even controlling for both age and race/Hispanic origin in the different surveys, we know that household formations have slowed relative to pre-recession levels, we just do not know by how much given concerns just discussed. We also know that the slowdown is likely a consequence of the recession. But, we are uncertain about whether the reduced level of household formation has been primarily driven by economic factors, or whether it is the result of more fundamental changes in attitudes and behavior regarding independent living by today’s young adults that might be partly recession-driven, but may also have deeper roots.

 

Lower rates of labor force participation, lower incomes of those in the labor force, rising rents, greater student loan debt and tight mortgage lending conditions are economic factors that could partly explain low levels of independent household formation. But we do not know whether these effects are likely to be short-term or long-term as an improving economy and governmental initiatives could reverse many of these factors quite quickly.

 

But trends in college and graduate school enrollment, the structure of the labor force, the timing of marriage and childbearing, and attitudes about co-residence might lead millennials to form independent households according to a different timetable than the generations that preceded them, regardless of economic conditions. Going back to school for retraining is becoming increasingly necessary for technology oriented jobs in a rapidly changing economy. Employment in start-ups, freelance work, and spells of temporarily working long hours in different jobs and on various projects, followed by periods of downtime, are increasingly common. The timing and sequence of important life-course decisions such as co-habitation, marriage, and childbearing have become more fluid. Intergenerational interdependency at various life-course stages has also changed, with parents playing a larger role in financially supporting their children as young adults, in helping to raise grandchildren, and in opening their homes for spells of co-residence when their children ask. These factors may have inertia that will make them less responsive to economic changes.

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Source: Joint Center tabulations of CPS data.  Average of 2011, 2012 and 2013 values.

 

And even if market forces are the primary reasons for depressed rates of household formation, geographic variations in job and income growth and housing costs and availability mean that the magnitude and pace with which pent-up household formation is released should vary in different parts of the country. For all these reasons calculations about the extent of pent-up demand for housing and speculation about its causes, when demand will be released, and what kind of housing will be required to meet future demand are fraught with uncertainties. The latest Joint Center household projections hold household formation rates constant at average 2011-2013 levels, making no allowance for the future release of pent-up demand, and should therefore be considered conservative.

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BFRI: Residential Remodeling in March 2014 is DOWN 7%

Residential remodels authorized by building permits in the United States in March were at a seasonally-adjusted annual rate of 2,771,000. This is down 7% from the revised February rate of 2,994,000 and is down 2% from the March 2013 estimate of 2,841,000.

Regional Residential Remodeling

Seasonally-adjusted annual rates of remodeling across the country in March 2014 are estimated as follows: Northeast, 578,000 (up 8% from February and down 5% from March 2013); South, 1,398,000 (down 2% from February and up 18% from March 2013); Midwest, 399,000 (down 3% from February and down 30% from March 2013); West, 697,000 (down 7% from February and down 6% from March 2013).

About the BuildFax Remodeling Index

The BuildFax Remodeling Index (BFRI) is based on construction permits for residential remodeling projects filed with local building departments across the country. The index estimates the number of properties permitted. The national and regional indexes are based upon a subset of representative building departments in the U.S. and population estimates from the U.S. Census. The BFRI is seasonally-adjusted using the X12 procedure.

Historical Values and Subscription Information

The BuildFax Remodeling Index is available as a monthly email with an Excel spreadsheet attachment. Each month’s release contains the full list of historical values for the country and each of the four regions, going back to August of 2004. When you subscribe, you will receive the most recent release within one business day. Click here to subscribe for $150/year. You can also subscribe to the free data release mailing list, which delivers the information you see on this page by email each month.

About BuildFax

BuildFax is the creator of the first and only national database of historical building permit data. Headquartered in Asheville, North Carolina, BuildFax has created a proprietary property intelligence engine that contains building and permitting information from 5,000+ cities and counties throughout the country. As the best and only source of a structure’s “life story,” the BuildFax database continues to grow, currently covering over 60 percent of the U.S. commercial and residential building stock with over 6 billion data points.

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JCHS: How Can Remodeling Companies Achieve the Benefits of Scale?

by Abbe Will

Research Analyst
The residential remodeling industry faces many obstacles to scale economies, including low barriers to entry, volatile business cycles, highly customized work, and difficulty attracting capital. For this reason, the industry continues to be highly fragmented, with the vast majority of remodeling companies operating as relatively small, single-location businesses that likely will not experience any significant growth over their life-cycles. According to data from the U.S. Census Bureau, the average size of remodeling contractors with payrolls, in terms of annual revenue, is significantly smaller than in other major sectors of the economy: about one-third the size of firms in the broader construction sector, one-fifth the size of retailers and about one-tenth the size of wood product manufacturers (Figure 1). Indeed, residential remodeling contractors are even smaller in scale than the typical business in the fractured restaurant and hospitality industry.

Notes: Depending on the sector, average size is calculated using employer value of sales, shipments, receipts, revenue or business done. * FIRE denotes the finance, insurance and real estate sectors. Building material dealers are a subsector of the broader retail trade sector. Residential remodeling contractors are defined as general and special trade establishments with more than 50% of receipts from remodeling activity including maintenance and repair, and are a subset of the overall construction sector. Source: JCHS tabulations of published and unpublished data from the U.S. Census Bureau’s 2007 Economic Census of Construction.
 

Yet, evidence suggests that remodeling firms able to overcome these obstacles enjoy significant benefits from scale. Better understanding of the ways in which remodeling companies are overcoming the many hurdles to scale, as well as how industry manufacturers, distributors, and franchisors are supporting scaling and consolidation efforts within the industry, can provide insight into how the industry is likely to continue evolving over the next several decades.

My new Joint Center working paper documents key findings on this topic gleaned from in-depth interviews with dozens of industry leaders who have either successfully established larger-scale companies or are otherwise supporting scaling and consolidation efforts within the industry. A few key themes emerged:

Specialty Remodeling Businesses are Generally Easier to Scale than Full-Service Firms

Most of the largest remodeling companies today are specialty firms: replacement roofing, siding, windows, doors, flooring, or painting businesses, for example. Specialization allows companies to develop greater efficiencies in their operations and obtain more favorable pricing on materials compared to full-service remodeling firms. Specialty projects also tend to be relatively straightforward and less labor intensive for scheduling and installation, which means shorter job cycles and higher margins. Specialty firms have been pursuing scale in the remodeling industry by heavily focusing on corporate sales and marketing strategies and by integrating vertically (i.e. the company owns the supply chain).

Manufacturers & Distributors are Playing a Significant Role in Supporting Contractor Scaling

Manufacturers and distributors, including retailers, arguably have the greatest motivation and investment capabilities for influencing scaling and consolidation in the industry through their installed sales and preferred contractor programs. Such programs encourage further specialization of remodelers and offer training and expertise in professional marketing, sales, installation, and business systems to help contractors improve their operations. Installed sales and preferred contractor programs push industry standards by requiring licensing, insurance, minimum years in business, and good business and customer satisfaction practices of participating contractors. Manufacturers and big box retailers will surely continue to leverage their national trust and brand recognition to further expand installation services to consumers, though it is unclear whether they will move further into this space through in-house expansion or through acquisition of established contractor companies. Either way, manufacturers and distributors will likely be a formidable force behind ongoing consolidation in the industry.

Franchising and Licensing are Proven Strategies for Growing a Remodeling Business 

Franchising, licensing, and similar business models have already been successful strategies for growing a remodeling business toward a national presence. Such models allow a business to quickly expand its brand recognition and market reach without investing significant capital in acquiring new locations or managing each independently-owned and operated franchise, dealer, or affiliate. Through such agreements, franchisee companies gain a recognized brand name, proven business systems, training and marketing support, and access to a peer network of other franchisees for best practices advice. Overall, franchising and related efforts in the remodeling industry tend to be more successful with specialty businesses because of their streamlined operations. Also, since installation is relatively simple and systematic, specialty firms tend to focus strongly on sales and marketing for achieving scale.

The home remodeling industry will likely always include some amount of fragmentation due to low barriers to entry and other challenges to scale. While the industry may never reach the same level of concentration as other industries in the broader construction sector, the sheer size of the home remodeling market—which the Joint Center estimates at $300 billion annually—and its continued fragmentation present major opportunities for companies that are organized, differentiated, and focused on brand-building.

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BFRI: Residential Remodeling in February 2014 is DOWN 3%

Data Release: April 16, 2014

Residential remodels authorized by building permits in the United States in February were at a seasonally-adjusted annual rate of 3,020,000. This is 3% down from the revised January rate of 3,118,000 and is down 3% from the February 2013 estimate of 3,108,000.

Regional Residential Remodeling

Seasonally-adjusted annual rates of remodeling across the country in February 2014 are estimated as follows: Northeast, 524,000 (down 10% from January and down 22% from February 2013); South, 1,423,000 (down 2% from January and up 20% from February 2013); Midwest, 408,000 (up 1% from January and down 42% from February 2013); West, 760,000 (down 4% from January and down 1% from February 2013).

About the BuildFax Remodeling Index

The BuildFax Remodeling Index (BFRI) is based on construction permits for residential remodeling projects filed with local building departments across the country. The index estimates the number of properties permitted. The national and regional indexes are based upon a subset of representative building departments in the U.S. and population estimates from the U.S. Census. The BFRI is seasonally-adjusted using the X12 procedure.

Historical Values and Subscription Information

The BuildFax Remodeling Index is available as a monthly email with an Excel spreadsheet attachment. Each month’s release contains the full list of historical values for the country and each of the four regions, going back to August of 2004. When you subscribe, you will receive the most recent release within one business day. Click here to subscribe for $150/year. You can also subscribe to the free data release mailing list, which delivers the information you see on this page by email each month.

About BuildFax

BuildFax is the creator of the first and only national database of historical building permit data. Headquartered in Asheville, North Carolina, BuildFax has created a proprietary property intelligence engine that contains building and permitting information from 5,000+ cities and counties throughout the country. As the best and only source of a structure’s “life story,” the BuildFax database continues to grow, currently covering over 60 percent of the U.S. commercial and residential building stock with over 6 billion data points.

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JCHS Releases New Household Projections

by Dan McCue

Research Manager
Today, the Joint Center for Housing Studies posted its latest household projections. These new projections incorporate several updates to data that were made since our last projections in 2010. The 2013 projections use the Census Bureau 2012 Population Projections (released in late 2012 and early 2013), and also use more recent data to derive headship rates (ratios of households per person), specifically using data from the 2011-2013 Current Population Estimates and Current Population Survey March Supplements.
Aside from the new data, the JCHS projection methodology remains largely unchanged from that used to create the 2010 series. The most notable change is that unlike in 2010 we do not make any adjustment to the Census Bureau’s population projections, as our concerns about what seemed to be overly high estimates of future immigration levels have now been addressed in the latest projections from Census. Since we are using the 2012 Census population projections as published, the 2013 JCHS household projections now contain high, middle, and low series, whereas the 2010 projections only had a high and a low series. The projections are also carried out an additional ten years, and so now extend to 2035.
The 2013 JCHS household projections are consistent with those from 2010.  In the near term (2015-2025), they call for annual household growth rates ranging from 1.16 million in the low series to 1.32 million in the high series, not far from the span of 1.15–1.36 million per year in our 2010 projections.  Differences between the 2013 and 2010 series largely follow differences in the underlying population projections (Figure 1).  Some difference is also due to updated headship rates, which are calculated for every 5-year age group by race and averaged across the years 2011, 2012, and 2013.  These are now slightly lower overall than those from 2007, 2008, and 2009 used in the 2010 projections (Figure 2).  (Click to enlarge.)

032714_mccue_figure1_sm
Sources: 2008 and 2012 Census Bureau Population Projections and 2010 JCHS Household Projections.
Note: Adult headship rates use CPS/ASEC household counts and Census July 1 Estimates of the population age 15 and older.  Source: JCHS tabulations of Census Bureau data.032714_mccue_figure2_sm
Like the 2010 projections, our 2013 household projections also anticipate substantial growth in minority, senior, and single-person households in the coming decades (Figure 3).  In the 2015-2025 period for instance, minorities are projected to account for just over 76 percent of all household growth in each of the low-, middle-, and high- projections, with Hispanics alone accounting for 40 percent of total household growth. Additionally, growth in the number of households age 65 or older during this period is also expected to be 91 percent of the net change in households under the low projection and 81 percent in the high projection. As a result of the growth in senior households, single-person (4.4-4.7 million) and married-without-children households (4.0-4.3 million), two of the largest groups that comprise senior households, will together comprise nearly three quarters of all household growth in 2015-2025, but the number of married with children households will also see some growth as millennials age.
032714_mccue_figure3_sm

Source: 2013 JCHS Household Projections.

Tenure Scenarios Presented as Well
The report also includes a simple homeowner and renter projection scenario.  Under a steady-state scenario of constant homeownership rates by age, race, and household type, this analysis offers one look at how demographic changes in the composition of households may influence future homeownership rates. In this scenario, changing demographics are expected to be a positive influence on the overall homeownership rate through about 2025 (Figure 4).  After that time, the upward influence of the aging of the population gives way to greater downward pressure from young adult and minority household growth.  Figure 4 shows how downward pressure on homeownership rates is steepest in the high projections which, unlike the middle- and low-projections, expects no demographically driven growth in homeownership rates through 2025.
032714_mccue_figure4_sm
Note: Homeownership rates by age, race/ethnicity, and household-type are held constant. 
Source: Joint Center for Housing Studies tabulations of 2013 JCHS Household Projections.
Users of these estimates are cautioned that that they should be considered baseline projections and not a growth forecast. Actual household growth could deviate dramatically over short periods of time, as the projections reflect long-run, demographically driven trends and do not allow for any adjustments either upward or downward in response to changing economic conditions or cyclical factors.  Indeed, favorable economic conditions could increase headship rates above levels assumed in the projection and increase household growth, while a variety of factors could weigh down economic opportunities and result in lower household formation rates that depress future household growth.  

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BFRI: Residential Remodeling in January 2014 is UP 6%

Residential Remodeling in January 2014
Data Release: March 20, 2014

Residential remodels authorized by building permits in the United States in January were at a seasonally-adjusted annual rate of 3,240,000. This is 6% up from the revised December rate of 3,048,000 and is down 1% from the January 2013 estimate of 3,276,000.

Regional Residential Remodeling

Seasonally-adjusted annual rates of remodeling across the country in January 2013 are estimated as follows: Northeast, 603,000 (up 5% from December and down 21% from January 2013); South, 1,496,000 (up 27% from December and up 22% from January 2013); Midwest, 406,000 (down 29% from December and down 58% from January 2013); West, 894,000 (up 6% from December and up 15% from January 2013).

About the BuildFax Remodeling Index

The BuildFax Remodeling Index (BFRI) is based on construction permits for residential remodeling projects filed with local building departments across the country. The index estimates the number of properties permitted. The national and regional indexes are based upon a subset of representative building departments in the U.S. and population estimates from the U.S. Census. The BFRI is seasonally-adjusted using the X12 procedure.

Historical Values and Subscription Information

The BuildFax Remodeling Index is available as a monthly email with an Excel spreadsheet attachment. Each month’s release contains the full list of historical values for the country and each of the four regions, going back to August of 2004. When you subscribe, you will receive the most recent release within one business day. Click here to subscribe for $150/year. You can also subscribe to the free data release mailing list, which delivers the information you see on this page by email each month.

About BuildFax

BuildFax is the creator of the first and only national database of historical building permit data. Headquartered in Asheville, North Carolina, BuildFax has created a proprietary property intelligence engine that contains building and permitting information from 5,000+ cities and counties throughout the country. As the best and only source of a structure’s “life story,” the BuildFax database continues to grow, currently covering over 60 percent of the U.S. commercial and residential building stock with over 6 billion data points.

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BFRI: Residential Remodeling in December 2013 is UP 1%

Residential Remodeling in December 2013

Data Release: February 18, 2014

Residential remodels authorized by building permits in the United States in December were at a seasonally-adjusted annual rate of 2,937,000. This is 1% up from the revised November rate of 2,900,000 and is 9 percent above the December 2012 estimate of 2,704,000.

Regional Residential Remodeling

Seasonally-adjusted annual rates of remodeling across the country in December 2013 are estimated as follows: Northeast, 570,000 (down 7% from November and down 27% from December 2012); South, 1,188,000 (up 1% from November and up 14% from December 2012); Midwest, 548,000 (down 10% from November and down 3% from December 2012); West, 837,000 (up 13% from November and up 16% from December 2012).

Viewing the Economic Recovery Through Remodels

“Except for the Northeast, all regions (and the nation as a whole) saw increases in residential remodeling activity in 2013 over 2012″ said Joe Emison, Chief Technology Officer at BuildFax.

About the BuildFax Remodeling Index

The BuildFax Remodeling Index (BFRI) is based on construction permits for residential remodeling projects filed with local building departments across the country. The index estimates the number of properties permitted. The national and regional indexes are based upon a subset of representative building departments in the U.S. and population estimates from the U.S. Census. The BFRI is seasonally-adjusted using the X12 procedure.

About BuildFax

BuildFax is the creator of the first and only national database of historical building permit data. Headquartered in Asheville, North Carolina, BuildFax has created a proprietary property intelligence engine that contains building and permitting information from 5,000+ cities and counties throughout the country. As the best and only source of a structure’s “life story,” the BuildFax database continues to grow, currently covering over 60 percent of the U.S. commercial and residential building stock with over 6 billion data points.

Leave a comment

Filed under Residential Remodeling