But if I knew how to manage my portfolio safer and smarter than most hedge fund managers, I could realistically grow my wealth.
Household formation has dipped during the recession
Prior to the Great Recession, household formation numbers were coming in well over 1 million a year. While the number can be volatile due to recessions, it has typically stayed in a range of 1 million to 1.5 million per year. This range takes into account population growth through births and immigration and demographic changes in the number of new adults. The Census Bureau keeps the data.
During the Great Recession, household formation dipped below 500,ooo two years in a row (2009 and 2010). Prior to that, we had only seen one year below 500,000, and that was during the early 1980s, as the 1981–1982 recession was ending. While a drop in immigration explains part of the fall, the main driver was a lousy job market—especially for the first-time homebuyer. With credit extremely tight during these years, many of those new households became renters, not homeowners.
The important point to remember is that these low household formation numbers weren’t the result of any major demographic shift (the population has been increasing at a steady rate). This means that we’ve deferred housing demand to the future. In other words, it’s pent-up demand. This state of affairs doesn’t last forever—even in difficult economic times, people still get married, have children, move out of their parents’ house, and ditch the roommates.
As the economy recovers, more and more young adults will begin to form new households. While credit is tight, the buy-versus-rent decision still highly skews towards buying. Despite the recent rise in interest rates, mortgage rates are still extremely low by historical standards. The Fed is forecasting that unemployment will drop to 7.25% by the end of 2013, and will average 6.65% in 2014. It’s forecasting 6% unemployment for 2015. When you think of a normal run rate of something like 1 million new households per year, and add to it a shortfall of close to 2 million since the recession began, you can see we could be hitting big numbers for household formation. While not all new households will be homeowners (some will rent), many will purchase their first home. In Part 4, we’ll talk about housing supply.
This analysis continues in Why household formation drives homebuilder demand (Part 4).
© 2013 Market Realist, Inc.