Tag Archives: Housing Vacancy Survey

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.

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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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The Resurrection of Household Growth: The Missing Link in the Housing Recovery

The Resurrection of Household Growth: The Missing Link in the Housing Recovery

by Chris Herbert
Research Director
New survey data released by the Census Bureau last week provides more strong evidence that the nascent housing recovery is being built on a solid foundation.  The latest Housing Vacancy Survey (HVS) (which provides quarterly updates on the number of households as well as vacancy and homeownership rates) indicates that as of the third quarter of this year U.S. households were increasing at a rate of just over 900,000 per year, giving a strong boost to overall housing demand.  This represents a substantial increase from 2011 when the same survey found that the country only added about 635,000 households.  While still well below the rate of 1.18 million per year that the Joint Center estimates the U.S. is likely to average over the 2010-2020 decade, the upturn in 2012 indicates that the moderate but steady pace of economic growth is finally translating into increased demand for housing, which bodes well for a sustained recovery.Much of the attention on housing market woes has focused on the supply side. Certainly, as the housing bubble was bursting at the end of 2006 the excess supply of housing was a significant contributor.  As of that time, the U.S. had added more new homes over the previous 10 year period than at any other point going back to the early 1970s when record keeping for housing completions and mobile home placements began. But after five straight years of housing starts below 1 million units a year—a level last seen in 1945 when World War II was ending—it is hard to argue that the housing market is still suffering the after effects of overbuilding. In fact, by the end of 2011 the total amount of new housing put in place over the previous 10 years was the lowest since record keeping began.

Note: Available data go back to 1974.  Source: JCHS calculations of US Census Bureau data

 

Instead, the lagging recovery in the housing market has been more attributable to anemic growth in the demand for housing as indicated by weak household growth.  According to the HVS, household growth fell sharply in 2007 as the housing bubble collapsed.  (See Figure 2.)  After averaging 1.35 million from 2000 through 2006, over the next 5 years annual household growth barely exceeded 600,000.  Given the trends of the last five years, the spurt in household growth to an annual rate of 900,000 through the first three quarters of this year is notable.  If the upward trend in household growth continues, housing should see a sustained recovery in 2013.

Note: 2012 is an estimate of annual average growth based on trends through the third quarter of 2012. JCHS low projection assumes that immigration in 2010-20 is half that in the US Census Bureau’s 2008 middle-series (preferred) population projection. Sources: US Census Bureau, Housing Vacancy Survey; JCHS 2010 household growth projections

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