Why pay attention to household formation and housing starts?

Why pay attention to household formation and housing starts? (Part 1 of 5)

Why household formation matters to homebuilder companies

Low household formation numbers over the past five years will drive homebuilder demand going forward

One of the biggest reasons why this recovery has been so intractable has been the complete collapse of housing construction. Historically, housing has led economies out of recessions, but that has not happened this time around. The housing bubble is a major factor in this, but there is more going on, and this series will focus on it.

Household formation vs Housing StartsEnlarge Graph

The missing piece of the puzzle for the homebuilders like Lennar (LEN), KB Home (KBH), Standard Pacific (SPF), PulteGroup (PHM), and Toll Brothers (TOL) has been low demand for housing. In particular, the first-time homebuyer has been more or less absent from the housing market.

Since the financial crisis began, demand for new construction has fallen, as household formation numbers have dropped. The low household formation numbers have been driven by a poor economy—not by demographics. This represents pent-up demand that must be satisfied in the future.

This series will discuss household formation numbers historically and over the past few years. We’ll compare those numbers with housing starts and show that there’s tremendous pent-up demand for housing, which will drive homebuilder earnings for years to come. We’ll also discuss which homebuilders are best positioned to take advantage of the turn in household formation, which will definitely happen.

The Realist Discussions

  • IndependentEddie

    It would be good if ‘household formation’ was better defined in this article. Also I think a big market that could be exploited is ‘Baby Boomer’ type residences. We are retired and live in a high maintenance 2 story house with all the bedrooms on the second floor and know that, even though I am handy and in good shape for my age, eventually I will not be able to maintain the house or property. We also have a home in Florida, a small detached villa with all living space on one floor. I think there is a big market for these elsewhere; detached ranch-type houses or homes with a first floor master suite, ones with open floor plans and reasonable size since people buying them will be selling paid off big houses and will not want to move to a shoe box. We live in Mass near the NH border. NH is better at these types of places but Mass is not. Partly this is because land is tight but there is space in the exburbs. Having either non condos but similar grouped housing or condo associations with reasonable association fees is important. For many you pay more for condo fees that typically pay for little, than you do in taxes. Price is also a consideration. For many you pay the same price for a smaller place. Don’t get greedy. Perhaps these are many of these elsewhere in the country but not in the north east.