Household Formation Is Affecting Economic Growth

by: Steven Hansen

Summary

Residential sales rate of growth seems to have slowed recently.

The easiest dynamic to visualize is the rate of household formation which affects residential sales.

Both the residential sector and the economy in general are constrained by lower household formation rates than seen in the past.

The housing sector, both new and used homes, is well below peaks from before the Great Recession. Is this an effect of weak economic growth or simply reflecting demographic change?

Existing home sales appear to be plateauing roughly 2/3's to 3/4's of the pre-recession peak.

New one family homes sold (not including multifamily structures) is less than half of the pre-recession peak (multifamily housing is currently the strength in this series).

And new home sales contribution to GDP is only 2/3's the pre-recession peak (existing home sales are not included in GDP).

There are many dynamics which are affecting home sales - especially the changing tastes of the generations. The boomers generally are downsizing.

The majority of Generation X have formed their households. Millennials seems to have urban tastes with a higher propensity to rent than the previous generations.

Generation Name Births Starting Births Ending
Baby Boomer Generation 1945 1964
Generation X 1961 1981
Generation Y - The Millennials - Gen Next 1975 1995
Generation Z 1995 2015

Consider that the most significant dynamic impacting home sales is household formation which is nearly half the rate seen in the 70's and early 80's.

Household formation data used in the above graph is from US Census and includes UNMARRIED and same sex people living together.

My take on economic relevance

Household formation has been trending up recently. I used 5 year rolling averages for the data to smooth out this fairly volatile data so that trends would be more obvious. If the current trends continue, household formation rates will recover in 10 to 15 years. Whether this happens or not is beyond my capability to analyze.

Much of consumer spending is household driven - especially for home purchase or renting a home.

A major contributor to the USA's (and the advance economies in general) weak economic growth relates to household formation. New households spend a lot more money than established households. Much of the significant economic growth seen in the 70's and 80's was a direct result of increased spending resulting from household formation.

My usual weekly wrap is in my instablog.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.

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