Must-know update: The new home sales crater in March

Part 3
Must-know update: The new home sales crater in March (Part 3 of 3)

When will the Millennial generation begin to invest in homes?

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 recession, 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.

Household formationEnlarge Graph

During the Great Recession, household formation dipped below 500,000 for 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 Millennial 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 Millennials will begin to form new households. While credit is tight, the buy-versus-rent decision still highly skews toward buying. Despite the recent rise in interest rates, mortgage rates are still extremely low by historical standards. The Fed is forecasting that unemployment will average 6.4% in 2014. It’s forecasting under 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 that the market can be hitting big numbers for household formation. This is the secular story that will drive homebuilders like Lennar (LEN), PulteGroup (PHM), D.R. Horton (DHI), Toll Brothers (TOL), and KB Home (KBH).

To learn more about important releases that affect your real estate investments, check out Market Realist’s Real Estate page.

The Realist Discussions